February, 2015

Business Cash Flow in Perth

Improve Cash Flow & Strengthen Your Balance Sheet

Your balance sheet (now more correctly called a Statement of Financial Position) reveals a great deal about your business cash flow in Perth, including the total value of your assets (the things you own), your liabilities (how much you owe to others) and the level of your solvency.

These three aspects will be studied carefully by lenders, investors and buyers if you intend to sell your business to see what your business cash flow in Perth looks like.  But they should also be important to you, because it’s important to be solvent at all times.  In other words, you need to have more assets than liabilities available to pay your debts.

If you can’t pay bills when they fall due, your business may be technically insolvent. Fortunately two simple tests can quickly reveal your solvency.

  1. The Current Ratio Test

This test simply involves dividing your current assets by your current liabilities (you should find both figures on the balance sheet).  For example, if a business has assets of $435,000 and liabilities of $180,000, the current ratio is $435,000 divided by $180,000 = 2.42.

In other words, the business has $2.42 in assets for every $1 of debt.  On the face of it, the business is solvent as the minimum ratio most banks would regard as acceptable is $2 for every $1 of debt.

But wait a minute.  Your assets include stock (your inventory) so what’s your stock really worth?  If you had to sell it all tomorrow to pay off your debts, would you realise the full amount shown on the balance sheet?

  1. The Quick Ratio Test

Let’s try a tougher test, this time leaving out your stock.  The aim here is to find out if your business has enough ready cash to pay your bills if your creditors demanded payment tomorrow.  Let’s say the business has $325,000 in stock.  Subtract this from the assets figure of $435,000 and the assets reduce to $110,000.

Now for the quick ratio:  $110,000 divided by $180,000 = 0.61.

Hmmm… the picture is no longer so rosy.  The business has only 61 cents in ready cash for every dollar of debt, meaning it could not immediately pay its debts.

Your aim should be to have at least $1 in assets available in ready cash for every $1 of debt - a ratio of 1:1.  You’ll sleep better, and so will your bank manager.

Strengthening your balance sheet

A positive step to strengthening your balance sheet is to take a closer look at the quality of your inventory.  If you had to sell all your stock in the next week or month to pay your debts, would you realise the full amount shown on the balance sheet?  In many businesses, the answer would be no.

If you know you have obsolete or slow-moving stock sitting on your shelves, talk to us about ways to get rid of it.  We can discuss options such as:

  • Holding a sale.
  • Bundling unwanted stock with more popular items to sell as a ‘special offer’.
  • Choosing the most advantageous time of year to write it off, if necessary.

We can also show you how to measure the stock turnover rate in your business to improve stock management and profitability.  In broad terms, the faster you turn over your stock, the more efficient your business.  A fast turnover rate can also reflect more efficient inventory management.

Closing tips

  1. Many business people find a balance sheet more difficult to read than a profit and loss account.  If this applies to you, we can help you understand it better so you can gain more from the figures.
  2. Preparing a balance sheet just once a year is certainly not enough!  A balance sheet offers important insights into your business and with the right accounting software you can generate one whenever you need it.

If you need help to improve your business cash flow in Perth, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which assists our clients to improve their business cash flow in Perth.

Download our free guide: Calculating Your Break Even Point.  Enter your details below and we will email the guide to you.

Captcha
captcha

Improve Your Business Cash Flow in Perth

Insights from your Profit and Loss Account – come to grips with your numbers and Improve Your Business Cash Flow in Perth

Most small business people would agree that their Profit and Loss account (now more correctly called a Statement of Financial Performance) is one of the easier – if not the easiest – financial documents to understand.  It’s typically presented in two parts.  To improve your business cash flow in Perth, it is essential that you understand your Statement of Financial Performance.

One part of the statement reveals the various sources of income the business has received for the period covered, such as a quarter, half year or full financial year.  After subtracting the cost of producing your goods or services, it shows your gross profit figure.

Another part of the statement lists all the relatively fixed running costs (business overheads) such as rent, power and communication costs you need to pay each month regardless of sales levels.  When these costs are subtracted from the gross profit the result is a net profit figure (before tax).

So far it’s simple, but you can learn more.

How well is the business performing?

The gross profit and net profit figures enable you to work out two key performance indicators (KPIs) that offer important insights into how your business is performing and help improve your business cash flow in Perth.

Your gross profit margin is the gross profit expressed as a percentage of sales.

To work this out (if your accounting software does not do this automatically), you divide the gross profit figure by the sales total and multiply it by 100 to get the percentage.

Here’s an example:

Gross profit: $80,000

Sales: $400,000

GP %: 80,000 divided by 400,000 = 0.2 x 100 = 20%

Multiplying by 100 allows you to study the gross profit margin as a percentage, so you can easily compare this result with previous margins, irrespective of fluctuating costs or sales levels.  Has the margin improved?  If not, it’s time to investigate the causes.  For instance, has there been an increase in the cost of materials or production labour?

You can now compare your gross profit margin to similar businesses, because turning the result into a percentage overcomes any differences in size. Regardless of whether they are smaller or much larger businesses, it’s the gross profit percentage (GP%) that tells the performance story.

Depending on which sector you operate in, we can help find the average GP% for your industry and help improve business cash flow in Perth.  Your aim should then be to at least equal the industry average, and preferably do even better.  You can also aim to improve on your previous gross profit margin results.

 How profitable is your business?

The net profit margin reveals how profitable your business is when your overhead costs are deducted from the gross profit.  It’s worked out using a similar formula, for example:

Net profit: $50,000

Sales: 300,000

NP %: 50,000 divided by 300,000 = 0.166 x 100 = 17%

This KPI empowers you to spot trends before they become disasters.  If your net profit margin has fallen, you need to find the causes.  For example, you may find your marketing costs have blown out with no increase in sales.  The lesson here would be to measure your marketing and advertising to see what is actually working so you can drop any unproductive tactics.

Three tips

  1. Use your gross profit and net profit margins as benchmarks to set improvement goals.  Try to improve both on internal benchmarks (your current performance against previous results) and external benchmarks (the average for your industry type).
  2. Don’t rely on just an annual profit and loss account.  You can’t effectively drive your business forward using a rear view mirror that reflects dated data – you need more up-to-date figures.  Use your accounting software to generate more frequent profit and loss accounts such as monthly or quarterly statements.  These enable you to take prompt action to fix any negative trends before they do serious damage to the business.
  3. Remember that you can always get in touch with us to interpret trends in your results so you can take corrective action.

Ask your accountant to assist you with cost saving initiatives or brainstorm ideas.

If you need help to improve your business cash flow in Perth, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which assists our clients to improve their business cash flow in Perth.

Download our free guide: Calculating Your Break Even Point.  Enter your details below and we will email the guide to you.

Captcha
captcha

Cash Flow Cost Reduction Tactics in Perth

Cash Flow Cost Reduction Tactics in Perth

Cutting costs can be a quick and easy way to improve the profitability of your business.  Introducing cash flow cost reduction tactics in Perth into your cost control measures can bring immediate savings and ensure you remain profitable in the long term.

But it’s important that your cash flow cost reduction tactics in Perth are carefully managed.  Eliminating errant expenses is clearly beneficial, but indiscriminate cost cutting could lead to a drop in quality or poor morale if staff fear being made redundant or are not given the tools they need to do their job efficiently.

This risk is heavily reduced by identifying where you can safely trim costs, setting clear cost reduction targets and researching any cost saving initiatives before making changes to your business.

Planning for effective cost control

The first step towards reducing costs with cash flow cost reduction tactics in Perth is identifying your major cost centres.  These are likely to include:

  • Production
  • Purchasing
  • Sales and marketing
  • Financing
  • Administration
  • Facilities maintenance

Start by assessing your profit and loss statement for the last six months and rank all your expenses from highest to lowest, working your way down the list and identifying areas where you can reduce costs.  It’s a good idea to first focus on identifying cost saving measures in areas where you’ll see the biggest return.  For example, it’s wise to work toward saving 5% on a $200,000 expense rather than a slightly higher percentage on a lower cost expense.

Trial new ideas

You might find it difficult to anticipate savings without actually implementing new systems and processes.  Remember that any changes you make do not need to be permanent.  If you are not sure whether cash flow cost reduction tactics in Perth are suitable for your business, consider trialling it for a few months then assessing the results.  This way, you’ll soon get an idea of the real cost savings without having to commit long-term to new processes or changes.

Any new processes or changes should be benchmarked and frequently revisited to ensure they are still suitable for your business.  Consider asking staff for feedback about any changes to make sure there are no hidden problems that could be costing you more than the cost saving value.

If you are in doubt about any potential changes, consider seeking professional advice from an accountant, industry association representative or business mentor regarding cash flow cost reduction tactics.  Contact Us, we can help.

Quick savings

You might be surprised to find that significant savings can be made without having to worry about your quality and performance being affected.  Here are the most popular ways to implement cash flow cost reduction tactics in Perth to trim costs without making radical changes.

  • Eliminate unnecessary costs – start with waste reduction, heating costs and utilities charges.
  • Reduce inefficiency by identifying manual tasks that could be computerised or completed less frequently.
  • Avoid frequent, small orders that cost more than larger orders and take additional time to complete.
  • Reduce travel expenses by booking air travel earlier and using cheaper accommodation on business trips.
  • Find alternatives to high priced suppliers or negotiate better payment terms or discounts on purchased goods.
  • Revise your credit policies to encourage prompt payment.
  • Brainstorm quick cost savings ideas with your staff – they might have some useful suggestions you may have overlooked.

Significant savings

Once you have identified your major cost centres, you may want to investigate potential ways to save money and implement cash flow cost reduction tactics in Perth by changing existing processes.

Some of the most common opportunities are listed below, but before adopting any changes you should be aware of any potential damage to your core business activities.

  • Cut payroll costs by outsourcing non essential activities.
  • Redesign your existing processes to eliminate duplication and cut time wastage.
  • Make use of current technology or latest industry thinking.
  • Agree to long-term supply contracts or guarantee a minimum purchase amount to secure better terms.
  • Trim back or revise your current product offering and remove poor performing products.
  • Form strategic alliances with other businesses to buy larger volumes.
  • Consider subletting office space or relocating to a more cost efficient location.

There may also be other costs such as long-term, fixed rate business loans or fixed price contracts for raw materials that you may be able to reduce when these are up for renewal or tender.

Pitfalls to avoid

Reducing costs can have a negative effect, so you’ll need to be sure that changes will not compromise your operational performance.

Some common pitfalls include:

  • Over dependence on one supplier could put you at risk if your supplier fails.
  • Reducing your marketing budget could affect your marketing strategy.
  • Tighter control of business finances could leave you without a safety margin if cash flow becomes tight.
  • Cutting short-term costs such as training, research and development or advertising can lead to long-term weaknesses.

Employee costs

Reducing employee related costs is generally risky and counter-productive in the long-term.  Reducing costs such as staff training or meeting times could lead to poor staff morale and reduced productivity.

Changing an employee’s terms and conditions can also create legal issues in some circumstances, so it’s always a good idea to obtain expert advice before making a decision.  Making employees redundant could bring short-term costs and the risk of possible legal proceedings.  It may also contribute towards low morale.

These problems can be minimised by maintaining clear communication with employees.  Introducing cash flow cost reduction tactics in Perth through improved practices and procedures will require a degree of employee ‘buy in’ so it’s important that your employees are aware of why you are making changes. Employees may need additional training and support over these periods.

Next steps

  • Schedule a staff meeting to review your costs and brainstorm ideas about possible saving measures.
  • Commit to an ongoing cost control and monitoring process (or delegate key staff to manage the process).
  • Ask your accountant to assist you with cost saving initiatives or brainstorming ideas.

If you need help with your business or are experiencing cash flow problems in Perth, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which our clients find very valuable in tackling cash flow problems.

Download our free guide: Calculating Your Break Even Point.  Enter your details below and we will email the guide to you.

Captcha
captcha

Cash Flow Problems in Perth

Dealing with cash flow problems in Perth

Dealing with cash flow problems in Perth can affect any business no matter what their size or how long they have been operating.  Below are some suggestions for unlocking funds without affecting your operational capacity.  Keep in mind that you should always seek professional guidance before making changes to your business if you are unsure of the repercussions or potential issues dealing with cash flow problems.

Hidden sources of finance

Most business owners immediately think of the bank or loans when they’re short of money and have cash flow problems.  But there are many more resources you can tap into before you ask for that expensive overdraft or for an overdraft extension.  You can often free up funds from within your business by re-examining your business systems and these funds might, in themselves, be sufficient for your immediate needs.

To free up funds from within your business you should look closely at the following:

Assets

Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property.  Each of these is a possible source of funds.

Debtors

Are you letting some customers have the free use of your money for months?  This is a common occurrence in small businesses with cash flow problems in Perth where the owner is so busy getting the business off the ground, products out the door or services completed that they don’t pay enough attention to basic business procedures.  Many customers will take advantage of this ‘free money’, but your business should not be a free bank.

Here’s how you fix the problem:

  • Get invoices out promptly.  Become efficient at getting invoices out early – after all, this is your future cash flow.
  • Send an invoice with the goods and date the invoice from the day the service was completed rather than following the standard ‘last day of the month’ date for invoices.  The earlier the invoice date, the earlier your chances are of getting paid.
  • Consider changing the terms for some of your customers or for new customers.  Can you reduce the payment terms to 7 days or 14 days from the date of invoice?
  • Follow up promptly when invoices aren’t paid by the due date. Be polite but firm.  If you haven’t the time to do this yourself, then appoint someone to do it for you.
  • Establish the average age of your accounts receivable and set yourself the goal of reducing this age by a set target every month.
  • Consider offering a discount for prompt payment.  Discounts aren’t always a good option for low margin businesses but can be an option for high margin operations.  You have to work out whether the use of money gained earlier is worth the discount you’re offering.

Stock

Do you have excessive capital tied up in stock?  This can occur in two ways:

  • Carrying high levels of items that you could obtain from suppliers at short notice.
  • Having too many slow moving items and too few fast moving items.

You need to regularly review your stock levels, your stock turnover rates and your purchasing policies to ensure you avoid cash flow problems in Perth.  Can you free up money by reducing stock?  What about moving out of the slow moving lines or having a quick sale of the slow moving stock?  It might pay you to reduce some items quite heavily to get some money in quickly.

Can you approach suppliers to take back some excessive stock you may have ordered?  They might help you out of a temporary tight corner as a goodwill gesture if you explain you have a temporary cash flow crisis but that you do wish to build a long-term relationship with them.

If you need additional funds to purchase more stock, make sure you’re replacing slow moving stock with the faster selling lines.

Pre-paid expenses

This is another area you could look at.  Pre-paid expenses often relate to services and are a great way to alleviate cash flow problems in Perth – for example, you might have always paid your yearly insurance bill all in one hit, but could you arrange to pay small monthly amounts instead?  There might be an additional cost for doing this, but you must weigh it against the advantages of 12 small payments that your cash flow can comfortably handle versus one large annual payment.  Ask your accountant if you can pay a set amount monthly instead of facing a substantial bill once a year.

The same goes for your electricity bills.  Ask if you can average them out instead of paying relatively small bills in summer and being hit by big ones in winter.  Watch out for automatic payments too (telephone and electricity bills, etc.).  These can often throw out your cash flow projections because you’ve forgotten to include them in your cash flow forecasts.

Fixed assets

Fixed assets can often be the source of a significant amount of cash.  Do you really put all your assets to full use?  You might be able to sell off little used assets and hire suitable replacements when you require them.  You might also be able to sell vehicles and lease others instead.

Suppliers

Finally, consider your suppliers as a possible source of funds.  Ask for extended payment terms to give you the opportunity to sell the goods first before you have to pay.  If the supplier won’t budge, try splitting the order in two and offer to pay normal credit terms (30 days) on one half of the order and 90 days on the other half.  Your suppliers will be more likely to agree to this kind of arrangement if you’ve paid them promptly in the past.

Your customers

Don’t forget that your customers can be a source of business funds.  In addition to the good debt collection tactics already discussed, consider the following:

  • Ask some of your credit customers if they would be willing to use their bank credit cards for purchases from you, instead of using the account facility they have with you.  For example, if they purchased $2,500 worth of goods or services from you, they would pay for this with a business credit card. They’d still get 30 to 55 days credit before having to pay the credit card company, but you’d get your cash as soon as you send the voucher to the bank. You would have to pay the (around) 5% commission, but otherwise it’s almost as good as a cash transaction.
  • If you’re starting a new business, consider establishing it on a cash-only basis to keep the funds inside your business rather than locked up in accounts receivable.
  • If you supply goods over a period of time or if you’re a service business, ask if you can invoice for progress payments.  This is a common method of ensuring you get some cash flow during a project, instead of waiting until the end of a project or delivery period to invoice, and then waiting at least another 30 days for payment.  There’s another benefit here too.  If the customer turns out to be a dodgy payer, you’ll discover this early on instead of at the end and you can cut your losses before they mount up and perhaps drag your business down. This tactic is suitable for tradespeople subcontracting to a developer.

Next steps

  • Identify exactly how much additional cash you’ll need – this is especially important if you decide you need additional finance from a lender.
  • Seek professional help from an accountant, business mentor or your bank manager.
  • Reduce your expenses and tighten your credit policies based on the steps above.
  • Research additional options for increasing your cash position, from low interest bank loans and overdraft facilities, to equity dependent assistance.

If you need help with your business or are experiencing cash flow problems in Perth, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which our clients find very valuable in tackling cash flow problems.

Download our free guide: Calculating Your Break Even Point.  Enter your details below and we will email the guide to you.

Captcha
captcha