Spring Clean your business
10 Areas of your business you can review right now to improve it.
Cashflow Management (Working Capital)
1. Review your business stock levels and identify slow moving stock or obsolete stock. Have a stock clearance sale to convert slow moving stock into cash that can be reinvested into your business. A large inventory level can tie up valuable cash or working capital. Ideally, stock should be turned over regularly and kept to a minimum to lower the level of cash tied up in stock. You can measure how many times your stock turnsover using a simple calculation:
Cost of Goods Sold divided by Average Stock.
Cost of Goods = Opening Stock + Purchases - Closing Stock
Average Stock = (Opening Stock + Closing Stock) divided by 2.
The higher this number is shows your stock is turning over regularly and for a retail business it is a good sign of a healthy business. However, there are some businesses who sell only a few items of stock a year and other financial calculations may be more appropriate for service based businesses, for example Gross Profit as a % of Sales.
2. Review your work in progress (jobs). How long on average does it take to complete a job? Do I have a workflow management system?
A workflow management system can help you manage your jobs so the work is spread out over the whole year and doesn't all fall due at the same time. It also enables you to highlight which jobs are on track and which ones are falling behind and require further work.
How long does it take me to bill the customer? What are the roadblocks or obstacles that prevent me from being able to bill promptly? A workflow management system can take all of your job information and invoice out of this system straight to the customer. Talk to James about Workflowmax, a job management system that integrates and works well with Xero.
3. Review my accounts receivable (people who owe you money). Are any of the unpaid accounts unlikely to be paid? If the answer is "yes", they need to be written off as bad debts now in your current business year. Check your payment terms. Is there a "gap" between when you receive money from your customers and when you pay out the money to your employees, suppliers and Inland Revenue. Download our free tip sheet on payment terms to see how reducing your payment terms can help you get paid sooner and help you reduce the "gap".
4. Review your business goals set this year for your business. For example, you may have a sales goal as a target. What sales target did you set for your business? Has this been achieved? Why or why not? What marketing tools or techniques have you used to help develop customers and increase sales to your business? Are you able to measure the success of your marketing campaign?
Being able to measure your marketing campaigns will help you to target your marketing or advertising budget effectively and lead to campaigns that give you the best bang for buck. A good exercise is to work out how much sales income a customer will bring over the lifetime of the relationship.
Owner's investment and Capital
5. How much money has been invested by you, in my business this year? What return have you received from your investment? These questions determine if the money you have invested in the business would be better invested elsewhere or help identify what level of return your business needs to achieve to maintain or grow the business. We can help you to maximise your business investment or assist you with selling the business.
6. Are my business cash withdrawals (or drawings) more than the business can sustain? Do you have a personal budget? If you take out more cash than the business can sustain, it is likely you will starve your business of the cash (or lifeblood) that is needed to help maintain or grow the business.
7. Are my business fixed assets (for example: motor vehicle, computer, plant and equipment) capable of meeting all of my current and future business needs? Are there some surplus assets that are no longer used by the business that could be sold to return valuable working capital to the business? When a business has more fixed assets than it needs there is an over investment and this may result in cash being tied up in assets that are not adding value to the business.
8. If you were unable to work tomorrow could the business operate without you? What steps are you taking to enable the business to operate without you? Having a business plan., business operating procedure manuals and trained staff will enable a business to operate without its business owner and allow you time to spend on strategies to boost sales, increase profits and grow your business.
9. Who are your top ten customers? What % of sales does this represent? How can you sell more or repeat business to these customers? Pareto found that 20% of resources employed produced 80% of the income. What is the % in your business?
10. Review your business expenditure. Are there any business expenses that are not adding value to the business? Are there any products or services that you offer that actually cost you money? Using Xero's Dashboard watchlist you can monitor any income or expenditure items to see how they are tracking in relation to a budget.
If you need help with any of the issues I have discussed today please contact me for a free one hour chat to see how we can add value to your business.