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Jun 22

The fifth cause of poor cashflow - Gross profit margins are too low

Posted by James Burn on Saturday, June 22, 2019

Your gross profit margin is what is left from your income after your direct or cost of sales costs are deducted.


Say for example, you have a retail shop and your sales for the year are $400,000 and the cost of the goods you sell for the year are $260,000, then your gross profit margin is $140,000, or 35%.


In the above example, if you implement some strategies to improve the margin from 35% to 39%, your gross profit will improve from $140,000 to $156,000. That’s an increase in profit of $16,000. You may need to increase your overheads a little to get that increase, however if you get the results, it will be well worth your investment and energy.


There are many ways to lift gross profit. Some will be appropriate for your business, and some won’t.


For example, if you’re a retailer, you could focus on reducing stock shrinkage, theft, avoiding some discounting, and making sure that you minimise stock becoming obsolete.


If you’re a contractor, such as a painter you might focus on rework and wastage, making sure all work and materials on jobs gets billed, and improve team member productivity.


We can help you to determine the best strategies to lift your margins. We can then run your figures through our ‘Growth Equation’ calculator, to show you the impact of seemingly small changes and then help you wrap those goals into your annual Business Plan.


Don’t let poor margins destroy your cashflow and working capital. Get some help from us to make a better plan. See more strategies at our  SMART Cash Management in your business seminar coming up on Thursday 11 July 2019.  Limited seats available. 

Jun 15

The fourth cause of poor cashflow - Your debt or capital structure

Posted by James Burn on Saturday, June 15, 2019

Often a reduction in your bank interest expense as well as significant cashflow improvements can be achieved with a regular review of your existing debt.


A good place to start is to list all your bank loans, mortgages, finance company loans, hire purchases, credit card debts, and any other debts (don’t include amounts owed to suppliers in this list). Add columns to cover:


  • The amount of the debt owed
  • The interest rate being charged
  • Whether the interest is charged on a fixed or floating rate basis
  • Repayment terms (the number of years the debt is to be repaid over)


Perhaps your debt can be consolidated, financed by one lender and paid off over a longer term. This will help retain more cash in your business which is vital for growth (or even just to cover expenses and your personal costs (drawings).


OK, now here’s an important action that you might find a little confronting.


Is the cash or drawings you take out of the business for personal expenses placing pressure on the business cashflow? If so, that might mean that we need to look at strategies to lift the profitability of your business. It might mean that your drawings are just too high for the business to support right now. The business may need an injection of capital to fund its growth.


Here’s a really interesting exercise for you to do. List out your annual expenditure in detailed categories; everything from rent, to childcare, groceries and takeaways. You may need to prepare yourself for a shock. If you’re serious about this, we have a personal spending worksheet that you can use to make life easier. Contact us now to get access to this worksheet.


Getting your debt and capital structure right makes a big difference to the cashflow in your business. This is a subject that we have a lot of experience in. The first step is to prepare a Cashflow Plan (a forecast) and to measure the extra cash the business will have as a result of making some simple changes. Doing a forecast for the first time seems scary, but once you’ve done this, you’ll realise that it’s one of the most essential business tools you’ll ever put in place. We’ll do the forecast with you. You’ll sleep better for it!


Jun 08

The third cause of poor cashflow - Your stock turn

Posted by James Burn on Saturday, June 08, 2019

Carrying stock for too long means full shelves but an empty bank account. Similarly, if you’re a service provider and are taking forever to invoice your services, then you’re carrying too much stock in the form of work in progress (WIP). Consider that work in progress as a form of virtual stock.


You can calculate your ‘stock turn’ by taking your cost of sales from your financial statements and dividing it by your average inventory. Most clients need some help from us to work that out, so don’t worry if you don’t understand this; we’ll show you. Expected stock turn rates vary from industry to industry so it’s important you don’t compare your stock turn to other types of businesses.


The key is to convert stock to into cash faster. Ask yourself these five questions, just for starters:


  1. Do you have a stocking strategy? Do you determine safety stock, desired stock levels, and re-order points for each stock category?
  2. What software do you use to measure how much stock you have on hand at any given point in time?
  3. What clear policies do you have to ensure you have no slow moving stock items?
  4. How much is stock shrinkage (theft, damage) costing your business?
  5. Do you have a formal stock ordering system so that stock levels don’t blow out?


These are just some of the ways to improve your stock turn. We can’t do justice to the detail in this short article, so if you think your stock levels might be stifling cashflow in your business, make a time to see us.  Consider coming along to our  SMART cash management in your business Seminar next month click on the link below.

Jun 04

The second cause of poor cashflow

Posted by James Burn on Tuesday, June 04, 2019

The second cause of poor cashflow - Your accounts payable process

The second cause of poor cashflow relates to when and how money is spent in your business, including your terms of trade with suppliers.


Do you have spending budgets in place?


It’s best practice to prepare a budget every year, usually before the start of a new financial year. It’s also best practice to make sure that team members who have authority to purchase products or service are doing so within an agreed budget, and that controls are in place to ensure that spending budgets are not exceeded.


Now is a good time to review (and document) your accounts payable process, from ordering right through to making payment.


When was the last time you reviewed your suppliers’ terms of trade and prices?


Terms such as payment expectations, discounts for early payment, late payment implications, insurance, and warranties are all worthy of a closer look. What controls are in place to ensure supplier payments are made on time and discounts for prompt payment are maximised?


Have you recently evaluated the pricing of your current suppliers and compared this with competitors’ prices? Your evaluation should include delivery charges, payment terms, and discounts.


There are many more strategies you can employ to minimise the risk of fraud and human error.


Talk to us about your plans to maximise cashflow. We can help you to distil your goals and ideas into a concise, simple plan that will keep you focused on what’s important.

May 26

The first cause of poor cashflow - Your cash lockup

Posted by James Burn on Sunday, May 26, 2019

There’s a massive difference between profit and cashflow. Profit increases when you create an invoice for work you’ve done or goods you’ve sold; cashflow only increases when you actually bank the money.

Your lockup equals the cash that isn’t in your bank account because it’s either in work in progress  (you’ve done some work but you haven’t yet billed for it) or you have invoiced your customer but are still waiting to be paid.

There are two key processes that need improvement to reduce cash that is stuck in lockup. Within each of these two processes, there are many  strategies that can be implemented to put more cash in your account.

The earlier you invoice a customer, the faster you’ll get paid. How quickly after delivery of a product or service do you bill? Do you carry large work in progress because your service spans weeks or even months? If so, maybe consider progress billing on a regular basis? Interim billing may in fact be best practice in your industry.

You’ve done the work, you’ve invoiced your customer, now it’s time to get paid.

Do your customers have clear Terms of Trade with you and do you set clear expectations as to when you expect to be paid? Is that 14 days after invoice? 7 days? Shorten up that timeframe and your cash lockup will go down significantly.

How easy do you make it for customers to pay you? Your invoices and statements should clearly show all the information that will speed up payments, such as bank account details, due date, and status (current or overdue. Don't show 90, 60, 30 days!).

Do you provide multiple payment methods to customers? For example, direct debit and credit, credit card, Eftpos, debtor finance (where appropriate). Having options is known as the choice of ‘yeses’. Do you offer a small discount for prompt payment? Customers love discounts.

These are just some of the changes you can consider to reduce cash lockup. There are dozens more. Talk to us about creating a Cashflow Management Plan. We’ll show you what’s possible, in cold hard cash of course!

May 20

Cashflow Freedom - The 7 causes of Poor Cashflow

Posted by James Burn on Monday, May 20, 2019

Cash is King in any business. In fact, even profitable businesses can fail because of poor cashflow.

What’s important is that you understand your key cashflow drivers. Improving cashflow is often all about changing your business processes. Processes such as how and when you order stock and pay for it, when you bill for your products and services, and how you make sure you get paid by your customers.

Treating the symptoms of poor cashflow without fixing the underlying causes is time consuming and frustrating.

Poor cashflow is a symptom, NOT the cause. In order to fix these underlying causes, you need to be willing to make changes in your processes. By making these changes, you'll build a much better and valuable business, as well as improve your cashflow.

While there are many causes of poor cashflow, most of these relate to one or more of the following seven categories.

1. Your cash lockup.
By lockup, we mean the cash that isn’t in your bank account because it's tied up in work in progress (work you have done but not yet billed for) or you’ve billed your customer but are waiting for payment.

2. Your accounts payable process.
If you don’t have spending budgets in place and aren’t taking advantage of the best possible supplier terms, your cashflow will be impacted.

3. Your stock turn.
If stock is moving too slowly, it will take longer to turn the stock you have already paid for into cash.

4. The wrong debt or capital structure.
For example, if your loans are being repaid over too short a term, this will place a big strain on cash reserves.

5. Gross profit margins are too low.
Your gross profit margin is what’s left from sales value after variable costs are deducted. If it’s too low, it won’t be enough to cover fixed expenses and your drawings from the business.

6. Overheads are too high.
Every business should do a thorough review of its overheads each year.

7. Sales levels are too low.
If sales levels don’t support cash demands on the business, then sadly, the business is not currently viable.

"If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow." - Jack Welch

Sep 13

10 Tips to getting paid faster

Posted by James Burn on Thursday, September 13, 2018

Steady, reliable cash flow is crucial for the survival of any business – so taking steps to ensure your customers pay promptly should be a key priority.

When your customers consistently pay on time, you’ll avoid the dreaded “feast or famine” cycle. You’ll be able to pay your suppliers and employees on time – and not least of all, yourself.

Implement these ten tips now to start getting paid without delay.

1. Provide payment terms up front

Before you start working with any new customer, always provide your terms in writing. Clearly state your rates, payment due dates, and policies for late payment – including any fees incurred on balances owing.

2. Invoice immediately

If you’re currently preparing your invoices manually, switch over to Xero invoicing with automated billing. You’ll never forget to invoice a customer, and you’ll eliminate errors as you save time. The first time a customer is billed make sure the contact information on your invoice is complete to avoid delays with getting paid.

3. Follow up

Call your customer immediately when a payment is past due. Ask for the status of the invoice and if there’s anything you can do to speed up payment. Sometimes a simple change, like including a purchase order number on the invoice, can speed up getting paid.

4. Reduce terms

Net 30 payment terms are fairly standard in business, but there’s nothing stopping you from asking for payment sooner. Some business owners make payment due at Net 7 or 10; others stipulate payment is due upon receipt of invoice.

5. Reward early payers

Consider offering customers a 2% discount when they pay their invoice within ten days. In this scenario, a $1000 invoice would be reduced to $980 – not a huge loss for you, but an attractive cash-saving incentive for your customers.

6. Charge interest

As part of your terms, specify that if a customers’s payment is past due, a weekly fee of 2% will be added onto the total until funds are received in full.

7. Get paid upfront

Collect a partial deposit – or the entire amount in full – before you provide a product or service to your customers.

8. Go mobile

Forego invoicing altogether by having your customers pay on the spot with mobile debit and/or credit payments.

9. Suspend service

Stop your supply of products or services until you receive payment. With this tactic you’ll avoid the accumulation of an even greater loss with a consistently late or non-paying customer.

10. Stay on top of your debtors

Monitor your debtors on a weekly basis so you can act fast if a customer hasn’t paid on time. An Aged Accounts Receivables report is available in Xero  to help you easily track outstanding invoices.

Final thoughts

Perhaps the most important tip for encouraging prompt payment is excellent communication.

When you follow up on a late invoice, explain why it’s important to receive timely payment in order to run your business effectively. Ask when you can expect payment, and agree on a date.

If the money still isn’t forthcoming, offer to negotiate a payment schedule as a next-to-last option – before you have no choice but contact a collection agency.

 Contact us if you need help implementing any of the above.  What action step will you take?

Sep 04

The power of Cash flows

Posted by James Burn on Tuesday, September 04, 2018

The power of cash flow forecasts

At some point in its lifetime, every small business suffers from cash flow problems. The trick is to think ahead and figure out when these problems are going to arise, so you don't have to unexpectedly postpone a purchase or hurriedly seek out additional finance. This is where cash flow forecasts come in.

To effectively manage your cash flow, all you have to essentially do is use your income and expenses figures to calculate your cash flow figures before they happen. Then you can plan to limit the impact of a cash drought before it arrives, so you can still pay your staff, the tax man and your suppliers.

The importance of cash flow forecasts

Cash flow forecasts are used to predict your business's future financial position for the period ahead, from three months to a year in advance. Your forecast allows you to see what money you expect to be paid into the business and the amount you'll need to pay out. It's a useful tool to help you manage your business more effectively.

If you owned a typical retail shop with high sales over Christmas and Boxing Day, and then the slump after the New Year Sales, your cash flow forecasts would show high income in December and much lower income over the following two months. Your forecasts would also show stock purchased on a 60-day term ahead of the festive Christmas rush in November and December would need to be paid at the end of January and February.

If you racked up record Christmas sales, there might be a strong temptation to splash out and buy that big-ticket item you've been hankering after – but can you really afford it? A quick look at your cash flow forecast will probably tell you that you need to park the thought of a new SUV or [your latest gadget] and reduce your drawings by downgrading your request to Santa for an iPad. Otherwise, you'll have no money left to pay for the stock you sold in December.

If you're more pragmatic and less inclined to impulse spend, your forecast will also be able to tell you if you'll generate enough profit to cover the costs of refurbishing your store or any other major business decision that you planned to do.

Say your forecast sales figures for March and April will be down on previous years, as a result of continued low national economic growth, the global financial turmoil or the arrival of a new competitor in the market. You might need to arrange short-term finance to tide you over or find ways to increase sales to cover your monthly overheads and operating costs.

In summary, your cash flow forecast gives you a future view into your business finances. It helps you identify cash flow problems before they show up and allows you to make informed business decisions.

How to create a cash flow forecast

You can use Xero and  a spreadsheet program such as Excel, or download a cash flow forecast template to calculate your cash flow forecast. Xero will be able to pull up many of the figures you need to put into your forecast directly from your accounts, saving time and effort.

The hardest part of creating a cash flow forecast is working out accurate income and expense figures for the months ahead. Obviously, the more accurate these figures are, the more accurate your forecasts will be (and the business decisions you base on them).

For your forecasts to continue to be of use, you need to update them based on your actual business performance each month. Replace your forecast figures with the actual figures for the month and make adjustments to the next few months' forecast figures if it appears, based on reality, that your projections were either overly optimistic or pessimistic.

Putting your forecasts to use

Apart from giving you a fairly good indication of your likely cash position at any point in time in the year ahead and alerting you to potential cash flow problems (which enables you to act in advance, rather than react), your cash flow forecasts can be used to model your future plans.

Let's say you plan to expand the business, by employing a new staff member. You can put the additional expenses into your forecasts to see if you can afford the new staff member, and then add in the additional income you expect to receive to see the overall effect on your business.

You can run three versions of this forecast: a worst-case, best-case and middle-of-the-road scenario to see how this will affect your business finances. These forecasts will help you decide whether to employ a new staff member or not. If you're uncertain you'll achieve your best-case sales and your middle-of-the-road figures don't look that promising, you might decide to wait a year before you employ another staff member or expand the business.

Alternatively, you might discover it's better to use any surplus cash to pay off debt.

Once you have your forecasts set up, use them to model “what if” questions about your business to help you make the best decisions for your business.

If you are stuck with any of this we are only a phone call away - contact James at or 021 203 5348.

Jul 20

How to avoid 3 common profit mistakes

Posted by James Burn on Friday, July 20, 2018

How to avoid three common profit mistakes

What exactly is profit in a business?

Here’s how to avoid three common profit mistakes that can seriously affect the success of your business.

1. Sales are NOT profit

The biggest beginner mistake is assuming that sales are profit. People new to business can easily confuse sales with profit, but there is a very clear distinction between them. As the saying goes, ‘sales are vanity, profit is sanity’.

Let’s assume sales are going well in your new business. You’re in a happy mood because you have all that profit coming in. Except it may not be profit…

Your profit is actually what is left after ALL your costs have been deducted from sales.

If you haven’t calculated your selling prices correctly, the danger is that your business might seem to be thriving when it is in fact operating at a loss, or at very little profit.

It does happen.

The main point here is: NEVER set a selling price or quote a price for a job until you know ALL the costs involved.

There are two types of business costs. First are the variable costs. These are direct costs of production that vary with sales levels. They include the cost of raw materials or stock, and the direct labor costs of producing the goods or supplying a service.

Second, all businesses have fixed costs, called overheads. However much or little you sell each month, you must pay relatively fixed costs such as rent or mortgage, phones and Internet, power, vehicles, loans and leases, and other office costs. You need to include these costs, or at least a percentage of them, in your pricing.

When you start a business, it’s important to get your pricing and job costing checked by an experienced accountant, because they may well identify costs that you have overlooked.

Only when you know all your costs can you start selling with the confidence that your prices are profitable.

2. Markup is NOT profit margin

Once you have calculated all your costs, you must include the profit margin you need to sustain the business. This leads on to the second profit mistake.

Many business owners assume that if they intend to make, say, a 20% profit, they can simply add 20% on to the cost-price of a product or service. So if the item or service costs them $100, they add on 20%, making the selling price $120. They assume this will give them their desired profit margin of 20%.


Markup is not the same as profit margin. In this case, the owner may assume the business is making a 20% profit, but the profit on the actual sales price is only 16.67%.

You can use this formula to work out profit margin:

Price – Cost
Price x 100

In this example, 120 – 100 is 20, divided by 120 and multiplied by 100 (for a percentage), resulting in an actual profit margin of 16.67%.

So while the owner assumes the business is making 20% on all sales, the selling price is actually giving away 3.3% of the expected profit.

The gap between markup and profit margin keeps widening as required margins get higher. If you want to make a 50% profit margin on an item that costs $100, the correct selling price would have to be $200, since 50% of $200 is $100.

If you had instead simply added a 50% markup to the cost price of $100, the selling price would have been set at $150. Apply the formula above, and the profit margin works out to be only 33.3%. The mistake of using markup to achieve your desired ‘profit margin’ would have meant giving away nearly 17% of profit margin. You can see how dangerous this mistake can be to a business.

The point is to check your profit margins are really what you want them to be. Decide what minimum acceptable profit margin you need to sustain your business, and then get help if necessary from your financial adviser to check that your selling price will actually deliver the required profit margin.

3. Profit is NOT your salary or your personal cash

Many new business owners assume any surplus profit is what they should take out of the business as their salary or personal cash. But profit has other purposes than providing a salary.

Your salary should instead be included as part of business costs, so profit more accurately becomes any surplus money left over after you have taken your salary and paid all other costs (including tax).

All businesses need profit and its purpose is to sustain and grow your business.

Of course it may take some time for a start-up business to reach the break-even point and start making a profit. During this time you may not be able to draw much money from the business. Being thrifty during this period is a common necessity for start-up owners.

But in the medium to long term, you need to aim for a salary that is at least in line with what you could earn elsewhere as an employee – and preferably better. Otherwise, what is the point of all the risk and hard work in starting a business?

You also need to aim to make enough profit to continue growing your business and renewing the assets that help it produce the wealth. As your accountant we can help you work out a sustainable profit level for your business, and this should be reflected in your pricing.

Mar 08

Four of the common financial mistakes Small Business Make

Posted by James Burn on Tuesday, March 08, 2016

Four of the Most Common Financial Mistakes Small Businesses Make

(and how to avoid them)


Many small business owners are entrepreneurs who went into business seeking freedom, a better lifestyle, more money or simply because they wanted to run their own show. Financial acumen is rarely high amongst the skills possessed by such people. As such, it is only to be expected that business owners make financial mistakes which can jeopardize their dreams. Here are four of the most common mistakes and how business owners can avoid them.


  1. Failing to plan

Few small businesses have a working budget and cash flow forecast which is rolled over on (at least) a quarterly basis. As a result, they make decisions based on guesswork and have no idea whether their business’s actual performance is better or worse than what they expected. A solid budget requires the following information, ideally seasonalised and presented on a month by month basis:

  • Sales – not just a lump sum figure, but broken down by product or service line and calculated as number of sales multiplied by average sale value
  • Variable costs – these are costs that vary with sales and as such, should be driven by your sales forecast
  • Fixed costs – unless there are any significant changes, these can be taken from your most recent financial statements and adjusted for any known or expected increases

Once you have developed a budgeted profit and loss account, you should then create a cash flow forecast. This differs from the profit and loss budget because it is looking at the cash inflows and outflows. As such, it needs to take account of how long your customers take to pay you, how quickly you turn over inventory, how quickly you pay your suppliers, any loan repayments due and any forecasted capital expenditure that will not appear in the budget profit and loss account.

For a thorough budget that could be presented to a bank for the purpose of raising finance, you should also complete a budgeted balance sheet.


  1. Financing capital expenditure out of cash flow

As a general rule, and to the extent that it is possible, it is good practice to cash flow the lifetime of a purchase. By that we mean this: if you are buying stock to sell in the short term, then finance it out of your day to day working capital. But if you are buying a large piece of machinery with a ten year life, then you should look to finance it over ten years. Similarly, don’t fall into the trap of many small business owners where you have a good quarter and go out and buy yourself a flash new car – out of cash flow. Unless you are confident (and have evidence to back it up) that your strong sales will continue, you could find yourself in a cash flow bind if you empty the bank account to buy new assets every time you find you have a bit of surplus cash.

Form a strong relationship with a bank manager and keep them up to date with your plans. Often, the banks will be happy to lend when times are good for your business and you should take advantage of that to properly finance any capital expenditure required to expand your business. Similarly, the best time to secure an overdraft is when you don’t need it. The banks will be more willing and able to help you out and then if you hit a rough patch, you have a safety net.


  1. Cutting costs rather than driving revenue

When considering how to improve profitability, many business owners resort to hacking at costs. That’s all very well, but there is a finite limit to which expenses can be cut – zero. And then you have no business. On the other hand, the opportunities to grow revenue, assuming you manage your growth within the constraints of your cash flow, are limitless. It comes down to understanding the drivers of revenue, which in most businesses are:

  • Number of customers
  • Number of times those customers buy from you
  • The average sale you make each time a customer buys

Once you understand the drivers, you can put in place strategies to increase each of those critical measures.

Another thing to be aware of when reviewing costs, which, of course, is still a valid strategy, is knowing where to cut. For example, too often businesses cut back on marketing which can often be the last place you should be making cuts. Similarly, a knee jerk reaction to cut back on travel expenses could see an adverse reaction (a recent study conducted by Oxford Economics and commissioned by the US Travel Association found that 57% of businesses surveyed felt that cutting their travel costs during the recession in the US hurt their business.)


  1. Running your business from a spreadsheet

Quite possibly the most important to avoid of all of the mistakes listed. In this era of Cloud accounting solutions accurate management information integrated with daily bank feeds is readily available. Not to take advantage of such information is to run the business by the seat of your pants. Yet many small businesses persist in keeping their records on a spreadsheet or worse, in a shoe box!

Talk with us today if you feel that your accounting records are inaccurate, unhelpful or obsolete. In fact, we can help you avoid all four of the key financial outlined in this article, helping to set you up for more profitable days ahead.