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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.