Management Memos

Making Measurably More For You Since 1985

July 2018
 

July 2018 New Financial Year. New Budget. New Profits!

It's a new financial year, OK.This year you have a bright new budget, some new things you'll do to make the business better, and a really positive outlook.


Just how strong will your business really be by next June 30?

How Bright Is Your Future?
To achieve the kind of growth you expect, though, you will need more. Now is the perfect time to review business practices, and get off on the right foot this financial year.

The debt collection agency, Prushka, has just conducted its bi-annual survey, and found that over 50 per cent of SME's feel positive about the future of their business. All the same, underlying concerns remain about profitability, growing the customer base, and (for some) collecting unpaid debts.

These concerns are quite fundamental. Your budget plan to grow the sales in the new financial year has to be more than just a wish or pious hope - there has to be a plan. If growing the customer base is one of the worries, that puts the sales growth plan at risk. So what will you do?

Similarly, the concern about profitability seems to indicate that just going on the same old way won't cut it on the money front either. Do you have a plan to increase profitability?

One downside of restricted profitability is the cash shortage that follows. Many SME operators don't consider the cash impact of reduced profitability.  Here's a bit of arithmetic to show what this might mean in a typical SME

Some Arithmetic
We don't know your business - unless you're one of our clients - so let's imagine that you have annual sales of, say, $2.5M.

Stock HoldingLike a lot of typical SME's, you'll probably have a margin of about 50%, so your Cost of Goods Sold will be around $1.2M. For many of the small businesses we see, the stock turn is typically four times. That means you have $300,000 tied up in stock.

If you're a cash business, outstanding debtors won't be much a worry to you. But even in a cash business, you can find about a quarter of the trade is in account trading. So that amounts to $600,000 - and if the average debt age is 45 days, that means your debtors are tying up $75,000 of your cash. If you have even more account customers, the matter gets proportionately worse.

Adding your stock investment and debtor balance means that you have $375,000 cash tied up in working capital.

This year, when you increase sales by 10%, you'll add another $250,000 in sales. For many SME's. where stock and range control is not strong, it means another $30,000 going into stock and another $7,500 being tied up in debtors.

This increase in stock investment, and the extra cash tied up in debtors, is all money that has to be found, and usually it comes from profit. So you will need another $37,500 profit just to increase your working capital. You'll be making money, but never seeing any of it!

The Crunch Get Paid Early!
If you're running a Return on Sales of 5% as many SME's do, the extra sales of $250,000 will generate just $12,500 extra profit - while your business will eat $37,500. At that rate, you will feel the pinch!

Even if you're running a Return on Sales of 10%, often considered a pretty low, but still reasonable level, you would generate only an extra $25,000. That's less than the $37,500 you need. You'll still feel the pinch!

The Management
Now it's time to swing into 'management mode' - even if you don't feel like wrangling with numbers!

What if you really decided to get some efficiency into your stock? Suppose you managed differently, and got your stock turn up to eight times - instead of your current four times? That would bring down your stock investment from $300,000 to $150,000. Instead of needing an extra $30,000 cash to go into stock, your stock will release $150,000 - in cash!

That's amazing, when you think of it like that, but few people ever do - they think it can't be done. It can!

To make this work, you really do have to think hard about what is making you money, and where to put your effort. For instance, it is often thought that spare parts make good money, because there is little price competition and the margins can be good. When you look at how long that stock has been sitting there, waiting for someone to need it, you realise that it makes more sense to buy in (on expedited shipment perhaps) those spares when needed. Talk with someone you trust about this, or call My Red Zebra.

Now, turn to your account customers. There are several ways you can get debtors to pay early. If you get your debtors down to 30 days average, you have just released $25,000 in cash. Again, talk with someone you trust about this, or call My Red Zebra.

The Wash Up
Making these changes to your business will release $175,000 in cash - making it easier to manage and much more profitable - and it is all doable by you. You may need help, and it may take a year or two to get the balance right, but that's no reason not to try.

What this means in the long run, is that when you budget for an increase of 10% in sales, you will need an increase of $15,000 for stock and $5,000 for debtors, making $20,000 in all.

Since you are now well profitable and running at 10%, your extra sales will generate $25,000 - and yield you a new $5,000 to look at in the bank balance.

 

Increasing sales can increase your need for cash more than you generate in profit

Internal management steps you take can turn around your cash-strapped situation

Once you've addressed these 'management issues', your business is stronger, more profitable, and makes money you can see!

 

Now that's growing!

 

PS: Don't forget expense reduction - but that's a story for another day!


We can help you see your strategic strong points, protect your strategic weak points, and win on the digital sales front. And then you can just hang up. NSA!

Phone us (see the numbers below) or use the contact form here to get help. Absolutely obligation free.

 

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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.