Cashflow management is a critical issue for many business owners.
Typically, your cashflow comes under strain in the following circumstances (not an exhaustive list):
- your business is growing
- stock levels increase (eg: lead-up to Christmas for retailers)
- bringing on new staff
- increasing production capacity
- diversifying your business activities
Each of these things can be a “cash thief”.
Let’s consider the issue of inventory(stock) management. The more stock you have on hand, the more cash you have tied up. I explain this in more detail here, here and here. By reducing your stock levels, you free up a lot of cash, however you need to balance out the level of stock you need. You cannot sell what you don’t have! Effective stock management makes a huge difference to your cashflow.
Cashflow management can also be impacted by increasing production capacity. Being able to make a lot more “stuff” requires you to have the raw materials, equipment and people to do this. All this costs. Your wages come in each week, your suppliers need to be paid each month and the equipment needs to be purchased/financed. All this robs cash from the business – and you haven’t yet produced anything you can sell. By building your capacity, you will be able to (hopefully) generate more sales and/or better margins. But you have to spend first. This is where your cashflow management needs to be carefully curated.
A number of our customers have pretty regular sales. They use this to reduce their margins (sometimes!) to generate additional sales and hence cashflow. You find that there is a very clear cycle for this.
One of my favourite fishing tackle stores is in Melbourne. They have a great range of products, know what they are on about and provide great service. Over the past year or so, I have noticed that they are having regular sales in the sixth week after the end of each quarter. This is because they have the Tax Office commitments to meet. They need to free up cash to pay our friends in Canberra. Knowing this, you, as a customer, can manage your time for purchasing gear.
The same thing occurs in a lot of businesses (especially retail). Have a look at the sales cycles and you will see a trend. The margin is better in your pocket than the retailer’s!
Any time you look at the cashflow in your business, get behind the issue to find out what is driving it. Sales too low? Margins being squeezed? Inventory too high? Expanding? Diversifying? Any and all of these can have a significant impact on your cash reserves.
Cashflow management can be difficult. But when you look behind the numbers and develop your understanding of what drives your cashflow, you will be in a far better position to make the decisions and changes needed to improve things.
We have access to some really powerful cashflow modelling tools that will enable you to see the real picture – going forward. If you would like to have a chat with us about how we can help you get a better handle on your cashflow management, give us a call!
Budgets, don’t we love them?
In your small business, what approach do you use for your budgeting? Most budgets I see are based on the thinking of “last year plus 5%”. I have also seen budgets done by some pretty large franchise businesses that are, to put it bluntly, crap.
A budget needs to be approached from the aspect of “is it realistic, is it achievable, is it based on solid assumptions?” It also needs to take note of the environment within which the business operates. Over the past couple of decades, we have seen budgeting and planning programs proliferate. Search “Budget template” on Google and you will get 108 million results. Like anything, having a tool and knowing how to use it are two completely different things.
When you’re looking at your budgets, the issues you need to consider need to be delved into in some detail. Here are some examples (and the questions aren’t extensive):
- Increased sales (everyone works on this assumption) – where are they going to come from? Who are we selling to? Do we offer what they need? Can we supply the additional product/service and at what cost? Is the market being disrupted? Can we divert focus in to one or two high margin products that will deliver a better result?
- Profit margins – what do we need to do to improve them? What options do we have with pricing? What product mix works to deliver the best margins? Does our marketing support our pricing to deliver the margins? Does our sales team understand the impact of margins (hint: most don’t)? What are our competitors doing and where do we see them going?
- Operating overheads- what are we doing to ensure we are getting “bang for our buck” on expenses? What is happening with regard to our overheads and the potential to replace old approaches with new ones (esp software applications)? What control do our people have over the costs incurred in operating the business?
- Staffing – What do our team understand about the expectations and accountabilities of their roles? What additional training and support would enable them to flourish? What is the ideal team mix for a business such as where ours is moving?
- Capital expenditure – do we have the right gear, in the right condition, to enable us to deliver what is needed to support our team and customers? Do we need to invest in additional equipment to save costs over the medium/long term? What is the best utilisation of our capital to deliver strong, sustainable results over the medium/long term?
As stated, the list above is only a “taster” for the questions that need to be asked prior to even thinking about what the budget looks like. More often than not, where these types of questions are asked, they are asked after the budget has been done. This is like putting the cart before the horse.
Once you have done your overall budget, I strongly recommend that you do a cashflow budget that ties in to it. The assumptions you make in this should also be assessed to ensure you are making the right qualitative decisions for your business. For example, we have been dealing with one of our customers relating to one of their major debtors. Sure, the debtor (owes money to our guys) is a big customer. But the margins they make on the work they do for them are really small. Then, the debtor takes nearly four months to pay their account. Is he really a customer that they want? By the time they do the work, spend three months chasing payment (including heavy involvement from the Directors who could be better utilised building the business), the profit from doing the work has disappeared. Is that really what you’re wanting in your business? Maybe you already have it!
Doing the cashflow budget may cause you to go back and revisit your operating budget. The assumptions made might be called into question. This is a really powerful process to go through as you are considering all aspects of the performance of the business.
Remember that a budget is a forecast of what your results are going to look like. Doing your budget with the approach that your inputs will drive your results will give you a far more robust, realistic and achievable plan than doing it “the old way”.
By approaching the process in a way that allows you to develop solid, detailed and explainable budgets, you will actually be in a position where you are in far greater control of your business and you will be able to use those budgets to make better decisions along the way through the year. This moves you from working “in” the business to “on” the business.
Establishing budgets can be a time-consuming process. Yet it is be very valuable. The emphasis should be on qualitative questions to drive the quantitative outputs. By just focusing on the quantitative aspects of budgeting, you are missing out on a great opportunity to maximise your return. And isn’t this what you, as a business owner, should be looking to do?
If you want to (metaphorically) fall in love with your budgets once again, take the time to approach the process in a way which will enable you to get the reward and return you’re seeking. Last year plus 5% doesn’t work.
If you want to discuss how we can assist you in developing a really solid budget (and cashflow budget) for your business in the lead up to the end of financial year, please get in touch. Our first meeting is at no cost to you and is designed to provide you with significant value. It just might lead to you achieving the results you’ve always wanted.
The purpose of a business is to make a profit – so have uttered many business sages over the years. As one of my mates states “Profit is the applause you get from your customers”.
Whichever way you look at it, we need to understand that improving profit is a goal that all businesses should strive for.
You may recall that some time ago, I posted about the results one of our favourite customers had realised from appointing someone they would not have previously considered to the role of Manager of one of their remote sites.
Well, we now have the full year results in and – they’re even better than I had previously reported.
For the previous financial year, the site in question had generated an EBITDA loss of $13,000. Yep, a loss.
The results this year? Well, the EBITDA result for this site has come in at comfortable number in excess of $155,000. That represents a $170,000 turnaround. Bottom line.
In a highly competitive market, with lots of challenges. How? By getting the right person in the job, giving them the opportunity to thrive, providing them with the support they needed in the way they needed it and, otherwise, keeping out of their way.
How many people in your organisation are you not setting free to do their best? What would happen if you did have some absolute stars who you could enable to be of their best for and with you?
It happens. Wouldn’t it be great if it could happen in your business? If you would like to find out how you might be able to sleep better at night, give us a call.
After all, it’s only profit you’re missing out on.
This month’s edition of “Charter” magazine includes an article written by yours truly on the issue of getting rid of timesheets. I expect a number of my colleagues around Australia will be tightening the bows and sharpening the arrows!
If you are interested, you can have a read here.
One of the things that amazes me is that many people in business don’t really understand the “ins and outs” of a profit and loss or balance sheet. And that is before we get to issues surrounding cashflow.
I’ve had some interesting meetings with people over the past week where it has become apparent that there is a significant lack of understanding of basic financial concepts. Please be aware that I am not necessarily saying this is a bad thing – it’s more of an opportunity.
Where business people don’t appreciate the information that we provide to them, it is incumbent on us as accountants and advisors to help them to learn and provide them with a financial education. I know of one accounting firm in the UK which provides an education process for their customers (and others) where they teach the basics of reading financial reports. I believe there is a terrific opportunity for us accountants to provide this sort of service to business people – it will really assist them in making better business decisions.
A year or so ago I presented to a business group in Ballarat on the topic of business margins and mark-ups. Many of the attendees did not understand the difference in the two and certainly did not appreciate the impact of discounts. The feedback I received after this presentation was terrific.
As a consequence of this, and following from our strategic planning work, we’ve now appointed a firm to assist us in putting together some video presentations which we’ll post on youtube. These will discuss the topics that business people need to know in simple and understandable ways which will help anyone wanting to develop their understanding of basic financial reporting. In some ways it will be a community service – if we assist a number of business owners to make better business decisions then that will be a terrific outcome.
I’ll let you know when the posts are available on youtube – hopefully you will get something from them and I would appreciate any feedback you wish to give on the topics as presented.
Well? What DO you REALLYwant? A lot of people out here in the real world have some vague concept as to what they want, but they never get any real clarity about it. They pay lip service to goals and aspirations, but make no concrete plans to move themselves towards those goals.
In our meetings and discussions with businesses all around Australia, we find that a lot of businesses (and especially business owners) really have no idea as to what they’re wanting to do or achieve. They get caught up in the day-to-day processes of running their business, family and life. Their activities are all operational and none of them strategic and none of them actually propelling them to where they want to be.
This is a real tragedy as, with a few changes, they will be able to make a significant change to their lives by, firstly, getting clarity as to what they want. This is often seen as a difficult and confronting process – but having been through it, I can attest to the fact that it’s absolutely liberating!
To really succeed, you need to be able to describe what success looks like. Many people we talk to can’t even answer the simplest question “How much money do you want to earn?” If they can’t answer this, they’re not going to be able to design their activities, let alone their business, to deliver what they’re wanting.
The clarifying of goals and aspirations is vital as, once they are clear in your mind, you will be able to design your approaches to create what you’re wanting. In many respects it come down to whether you are at cause or at effect in your life.
Once you know what you really want, you’ll be at cause and you will start to behave and perform in ways that will deliver the results that you’re after.
The other side of this is that if you don’t do the planning etc, you will more than likely end up with what you DON’T want!