April, 2015

Improve Profit in Perth

Improve profit in Perth – behave like a sniffer dog and look within your business

Most business owners experience cash flow problems from time to time and find themselves urgently needing working capital.  Read the following tips on how you can improve profit in Perth from within your business.  Many business owners immediately think of bank loans when they’re short of money, but there are other resources that can be tapped into before going to the bank.  The money you need might already be there, locked up in your inventory, assets or debtors.

You can free up funds from within your business by re-examining your systems to locate hidden funds that will be sufficient for your immediate needs and improve profit in Perth.

How to improve profit in Perth with good management

Even if the funds you free up from within your business are not sufficient, there is another payoff:  the effort you make in searching for them helps to ensure that you are running your business in an efficient manner.

To free up funds from within your business and improve profit in Perth, look closely at:

  • assets
  • customers
  • suppliers

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 that can improve profit in Perth.

Debtors

Are you letting some customers have a free run for months?  This is a common occurrence in businesses where the owners are so busy getting products out the door or providing services, that they don’t pay enough attention to basic business procedures such as chasing up debtors. Many customers will take advantage of this – don’t let it happen.

Here’s how you fix the problem:

  • Get invoices out promptly.  Whatever else you do, become efficient at getting invoices out promptly.  This is your future cash flow — the lifeblood of your business!  You want to receive payment as soon as possible, so start this new system NOW.  Depending on your business, you can often cut out statements simply by printing at the bottom of the invoice:  ‘Please pay on this invoice as no statement will be sent.’
  • Send the invoice with the goods or immediately the service is completed.  Date the invoice from no later than the day it is sent rather than following the standard ‘last day of the month’.  The earlier the invoice date, the better your chances of getting paid earlier.
  • Change the terms for some of your customers, or for new customers.  For example, set reduced payment terms such as  7 days or 14 days from thee date of invoice.
  • Follow up promptly when invoices aren’t paid by the due date.  This is critical.  Be polite but firm.  If you haven’t the time to do this yourself, then appoint someone to do it for you.

Monitor your debtor collection days and set an improvement target each quarter.  For example, if the average in your industry is 30 days, but you are taking an average of 45 days to collect outstanding debts, then there’s clearly room for improvement.  If your customers have been taking advantage of you because of your previous lax invoicing, then you may need to re-educate them.  Do this politely so you don’t offend them.

Consider factoring.  This simply means selling your outstanding invoices to a finance company.  So, instead of having to wait 30 days or more until an invoice is paid, you receive most of your money upfront from the finance company which, in turn, collects the money from your customer.  The finance company will of course charge you a commission for this service.  Be aware, though, that there are pros and cons to factoring.  For example, check that the finance company will not antagonise your customers with a heavy-handed approach.  Talk to them first about their collection methods.

Consider offering a discount for prompt payment.  If you are considering factoring, why not try offering a discount to your customers instead?  Discounts are not a good option for low-margin businesses, but can be an option for high-margin businesses.  You have to work out whether the use of money gained earlier is worth the discount you’re offering.  NEVER give the discount if the person has missed the due date for the discount offer.  This will not improve your profit.

Inventory

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.

A quick sale

Regularly review your stock levels, your turnover rates and your purchasing policies.  Can you free up money by reducing stock?  What about having a sale of slow-moving items - it might pay you to reduce these quite heavily to raise some quick cash.

Can you approach suppliers to take back any excessive stock you have?  They might help you 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 that you’re replacing slow-moving stock with the faster selling items.

Pre-paid expenses

This is another area you could look at as it often relates to services.  For example, you might pay your insurance bill for the year all in one hit, but you could arrange to pay small monthly amounts instead.  There might be an additional cost for doing this, but you must weigh the extra cost against the advantages of 12 small payments which your cash flow can comfortably handle versus one large annual payment.  Try a similar approach with your other bills.

Assets

Assets can drain significant amounts of cash out of a business.  Do you really put all your assets to full use?  You might be able to:

  • Sell off rarely used assets and hire suitable replacements when you require them.
  • Lease or rent assets and equipment that depreciate rapidly such as computers and/or vehicles.

Customers

Don’t forget your customers can be a source of business funds.  Apart from debt collection improvements already mentioned, try these tactics:

Ask some of your customers (start with the ones you know best) if they would be willing to use their credit cards for purchases instead of using the ‘pay on account’ arrangement they have with you.  For example, if they purchase say $2,500 worth of goods or services from you, they would pay for this by means of a business credit card.  They still get 30 to 55 days credit before having to pay the credit card company, but you’re paid straight away.

Even better, encourage your customers to pay directly into your bank account.

Ask for progress payments

If you supply goods or services over a period of time, ask your customers if you can invoice for progress payments.  This is quite a common method of ensuring you get some regular cash flow instead of waiting until the end of a job, then waiting at least another 30 days for payment.

There’s another benefit here too.  If the customer turns out to be dodgy, you’ll discover this quite early on and you can cut your losses before they mount up and drag your business down.  This tactic is therefore very suitable for tradespeople subcontracting to a developer.

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 they won’t budge, try this tactic:  split the order in two and offer to pay normal credit terms (30 days) on the 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.  After all, they have a vested interest in helping you succeed.

  • Discounts – give customers an incentive to order more items through discounts for large quantities.
  • Re-order levels – set up minimum stock levels to avoid shortfalls on important lines.
  • Default reordering – set up re-ordering quantities so the most economical quantity is ordered.
  • Stock – try to take delivery of stock so you can sell it before paying the final bill.

Take advantage of discounts

Pay accounts on time if discounts are offered for early payment (and there is no harm in asking for a discount).

These are just suggestions and may not be suitable for your business.  Feel free to contact us about ways to find money in your business.

If you need help on how to improve profit in Perth and how to find money within your business, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which can assist.

Achieve Business Success and Improve Profit

Eight tips that could help achieve business success and improve profit

To maximise your business success and improve profit, there are eight key tips that should be adopted.  International researchers who have studied many small businesses have found that these tips consistently play a part in business success.  They are:

  • Owners leading by example
  • Having a simple business structure
  • Information sharing among employees
  • Staff are carefully chosen
  • Staff commitment and loyalty
  • A unique product or service
  • A specific customer focus
  • Prompt follow up

1.  Owners lead by example to achieve business success and improve profit

The owner leads by example.  He or she is usually the first to arrive and the last to leave.  They know everyone by name and their presence is obvious.  They show a strong commitment, setting high standards all round.  This commitment should be easy to understand; after all, if they don’t work hard in their own company, how can they expect any one else to take their business seriously to achieve success and improve profit?

2.  Simple business structure

They operate a simple and open business structure that includes an open door policy for every employee.  They value the contribution of their employees, many of whom are given the opportunity to influence aspects of the business that would ordinarily be denied them in a large hierarchical company.  This type of approach ultimately will encourage business success and improve profit.

3.  Information sharing among employees

Goals, problems and concerns are discussed openly.  Feedback is encouraged and staff are asked to contribute their own ideas for making improvements and overcoming difficulties that ultimately will achieve business success and improve profit.  It is often this aspect of open communication that staff appreciate the most; after all, it is fairly unique to small businesses.

4.  Staff are carefully chosen

Staff are recruited very carefully because the owner recognises they are vital to their business.  Staff are hired on the basis of their knowledge and skills which will be beneficial to the business, not because of friendships or family links with the owner.

5.  Staff commitment and loyalty - how this can affect business success and improve profit

When staff are very committed and loyal, good performance is rewarded with praise, extra responsibility and money.  Poor performance is not.  Consistently poor workers are removed as they upset the balance of the team.  Companies whose staff show optimum commitment and loyalty have a source of competitive advantage that is hard to copy or beat.  Successful staff breed business success and improve profit.

6.  A unique product or service

Most successful businesses have unique products or services such as their own designs, products, systems or some other aspect which sets them apart from their competitors.  They work hard to sustain this advantage by being innovative and constantly adapting to market changes.

7.  A specific customer focus

Successful small businesses always focus on their customers’ needs and endeavour to supply them with what they want.  This focus means adopting a market-led approach and always looking for ways to improve products and/or services.

8.  Prompt follow up

On occasions when an enquiry or complaint is received, successful small businesses deal with them as quickly as possible.  The results are promptly reported back to the customer and, in the case of complaints, measures put in place to reduce the likelihood of similar issues reoccurring.  Successful small businesses view complaints and problems as opportunities for growth and improvement.

One person whose publications make an interesting read is Richard Branson - here is a guy that truly has got the right mix bang on!  Genius?  Maybe!  You be the judge.

If you need help on how to achieve business success and improve profit, call us today on 9204 3733 or  Contact Us – we will be happy to help.  We can offer our Management Consulting service which can assist.

How to avoid three common mistakes and improve profit in your business

Profit Improvement

What exactly is profit in a business?  This blog shows you how to avoid three common mistakes that can seriously affect the success of your business.

1. Sales are NOT profit

The biggest mistake a newcomer can make is to assume 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 are in a happy mood because you have all that profit coming in… except that 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 tender 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 costs of raw materials or stock, and the direct labour costs of producing the goods or supplying a service.

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

When you start a business, it’s important to get your pricing and job costing checked by an experienced accountant or financial adviser, because they may well identify costs that you have overlooked.  We can help with this - contact us and we will walk you through the process to help you improve profit.

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

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 mistake when trying to improve profit.

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 16.6%.

You can use this formula to work out profit margin:

Price – Cost
Price x 100

In this example, $120 – $100 = $20, divided by $120 and multiplied by 100 (for a percentage) = an actual profit margin of 16.6%.

So while the owner assumes the business is making 20% on all sales, the selling price is actually giving away 3.4% of the expected profit.  Although this does improve profit, it is not as much as the owner expects.

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

If you had 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 when trying to improve profit.

The point is to check your profit margin is really what you want it to be.  Decide what minimum acceptable profit margin you need to sustain your business and improve profit, 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

Many new business owners assume any surplus profit is what they should take out of the business as their salary.  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 improve 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 necessity for start-up owners in order for the business to become viable and to improve profit.

But in the medium to long term, you need to aim for a salary that is at least in line with, or preferably better than, what you could earn elsewhere as an employee.  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.

We can help you work out a sustainable profit level for your business, and this should be reflected in your pricing.

If you need help to improve profit in your business, 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 profit in their business.

How to calculate your Break Even Point.

Profit Improvement

If you don’t calculate your break even point you can’t make informed business decisions on pricing your product or services to ensure you are generating a good level of profit.

To cover the costs of your business you need to sell enough goods or services to reach your break even point.  Knowing where that point is, and how long it will take you to reach it, can be fundamental to your success.  This is especially true if you’re thinking about starting or buying a business.

Calculate fixed and variable costs

The first step is to establish your fixed and variable costs from which you can calculate your break even point.

Fixed costs – how they affect your break even point

Fixed costs are bills your business always has to pay, regardless of its level of sales.  Also known as overheads, they could include:

  • Salaries for permanent staff
  • Rent on your premises
  • Insurance
  • Interest on debt

Variable costs – how they affect your break even point

These increase with your level of sales – for example, the cost of materials and production.  Others include sales bonuses, part-time wages and freight.

Now work out:

  • Total fixed costs for the year
  • An average overall variable cost for each product or service sold (the variable cost per unit)

Some costs might be a combination of fixed and variable such as a phone bill split between a line cost and call charges.  Separate these bills into fixed and variable parts for greater accuracy - this will help you in calculating your break even point.

If separating them is too time consuming, choose which element is greater and classify it accordingly.  For example, if you don’t make many calls to mobile phones or outside your local area, you’d classify the phone bill as being a fixed cost.

How to determine your break even point

Let’s assume you manufacture shoes with the following details:

  • Budgeted fixed costs of $60,000
  • Average cost to make a pair of shoes is $110
  • Average sale price per pair of shoes is $250

Calculating your break even point requires the use of a few formulas:

  1. Sales price per unit ($250) minus variable costs per unit ($110) = contribution margin per unit ($140)
  2. Contribution margin per unit ($140) divided by sales price per unit ($250) = contribution margin ratio (0.56)
  3. Fixed costs ($60,000) divided by contribution margin ratio (0.56) = break even sales volume ($107,142)

Based on these calculations, if you sell more than $107,142 worth of shoes you’ll make a profit.  That equates to 429 pairs.

Using your break even point

Once you have worked out your break even point, the next step is to work out whether the sales volume you will need to break even is realistic and achievable.

You can also use your break even point calculation to see the effect changes in costs has on your business.  If you were able to source cheaper materials and reduce the variable cost per pair of shoes, you’d need to sell fewer pairs to achieve your break even point.  If your sales remained the same, you’d make more profit.

To be of real value to you, your fixed and variable costs calculations need to be accurate, so it’s worth investing time to work out your figures accurately.

For an in depth explanation on break even point, check out what Wikipedia says!  If you find this confusing, we can help.

If you need help to gain profit improvement and calculate your break even point, 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 achieve profit improvement and calculate their break even point.