Businesses who mainly sell to to other businesses (B2B) often experience a lull at Christmas, as many of their customers close over holidays and things slow down. If not planned for, this period can cause a bit of a knock to both profit and cash flow.
With many years of experience helping our clients handle the ‘holiday lull’, we thought we would share our six tips to help you through this time of year (or any other time of year where there’s a ‘trough’ in your profit and cash flow.)
1. Business Model
Your ‘business model’ is how your business is structured. Your goal with a business model is to ensure it is sustainable and profitable. Focus on:
Your ‘Key Drivers’ – Are they realistic and achievable? A ‘Key Driver’ for a service based business is staff utilisation (the percentage of labour time you are able to sell compared to the hours you pay staff.)
Setting a utilisation rate of 100% isn’t realistic, as it’s highly likely staff have things to do that aren’t always chargeable. You need to calculate what is realistic and achievable and factor this into your forecasts.
Overheads – How can they be reduced? Overheads are a big factor in business profit. You can be making good sales, but the money is ‘flying out the window’ in costs and overheads. If you want to achieve good profit and cash flow, you need to get control of your overheads. A great tool to achieve this is a ‘Budget’.
Once you’ve set your budget, you can enter it into your accounting system and report each month on what actually happened, compared to what you budgeted for. This is a great way to catch things quickly before they become a big unnecessary expense, that eats away your profit.
Review and Update on an Ongoing Basis – Once you’ve set a plan and budget, don’t just put it in the drawer and forget about it. It needs to serve as a guide to ensure you arrive at the goal you’ve set for profit and good cash flow. Putting aside some quiet time to carefully look through each line of your ‘Profit and Loss Report with Comparison to Budget’ is a well worthwhile exercise. It enables you to see if things are on track and if not to ask ‘Why?’
Your Pipeline is your future sales in the making and your Forecast is the target you want to achieve. Key Drivers to achieve your target include:
Quotes issued/won – How many quotes are you doing and how many are you winning? Many businesses spend a lot of time on quotes, so it’s vital to maximise your win rate, so you are using your resources efficiently and creating as many opportunities for income earning as possible.
Utilisation %: Chargeable/Invoiced Hours – How many hours are you selling compared to those you pay chargeable staff for? When you work out what your labour resource is costing you, it becomes clear that you need to cover the cost, as well as making a profit. A great way to target and improve profit in a service business is to apply the 3x model.
Put simply the 3x model is sales from charging staff time should be equal or greater than 3 times salaries paid. For example if you pay salaries to staff of $450,000, sales for services provided by staff should be at least $1.35m (which is $450,000 x 3). This could be considered as the sales ‘target’ or budget for the business.
Amounts Invoiced – Regularly monitor invoicing to ensure you are in line with your weekly, monthly, quarterly target. This can also be compared against your Profit and Loss Budget each month. The aim is to invoice as quickly as possible, to ensure good cash flow and that funds will be available to pay suppliers and overheads such as wages, rent etc.
Targets – A great way to achieve targets is to break them down to manageable chunks, such as weekly or monthly. By doing this you are more likely to end up with your desired result at year end. Set operational targets for:
- Quotes issued/won – let’s say you’re achieving a 50% conversion rate. If you could increase that to a 75% conversion rate, it would increase your sales by 50% without any extra marketing! It’s worth analysing quotes you won and what went right, compared to those lost.
- Utilisation %/Chargeable /Invoiced Hours – what is a reasonable target for Utilisation? You need to look at work practises and what people are spending their time on to see what is realistic. Are there ways you can eliminate non chargeable time such as admin? Are there hours worked on jobs that can’t be charged and why? Find out what went wrong and how you can eliminate the problem for the future. The result of all this is the hours you invoiced – you want to maximise it to achieve the best sales possible to cover your costs and overheads.
Weekly Forecasts – A yearly forecast is one thing, but how do you get to the end of the year with the result you had in mind? The best way is to break it down into manageable chunks. Your forecast needs to be reviewed weekly/monthly to ensure you are on track and that it’s achievable. Working on unachievable forecasts can be demotivating for a team if they never achieve them. If you conclude they aren’t achievable, you can fix it and improve motivation and results.
On a weekly basis, review whether results are on track to achieve budget. If not, what actions are required to address the situation?
- Can you ramp up marketing efforts?
- Can you do something to motivate sales staff?
- Can you offer an incentive – such as a staff celebration for achieving targets?
- Can you identify time wasting activities that enable more time to be spent on chargeable work and hence invoicing.
3. Marketing and Sales
Marketing/Sales Plan – What is it?
- Who is your target market?
- What benefit does your product/service provide and/or what problem does it solve?
- Where do your customers ‘hang out’ and how can you best engage with them? People over 70 may not be on social media, so instead of spending money on FaceBook advertising, spend it on physical magazine ads or relationship building with influencers in the market e.g. retirement resorts/nursing homes.
- Does your marketing need some tweaking and updating? Are you paying for advertising that isn’t delivering results? Investigate modern marketing methods like Ad words, social media, website updating, Search Engine Optimisation, email marketing etc.
Tracking of marketing results:
- Find out how people found out about you and keep a record for future analysis.
- Use a CRM (Customer Relationship Management) tool to keep vital intelligence about your customers and prospects and make it easy to communicate with them.
- Isolate marketing costs by type, so you can calculate cost per lead to see what’s delivering the best ROI (Return on Investment).
- Keep track of sales conversion rate by marketing method to see which ones deliver the best conversion rate.
- Document your sales process if you have one. You may have a ‘hot shot’ salesperson who has the best conversion rate – learn how they do it and try to replicate their methods with others.
Do you need to get some help in marketing and sales? Modern marketing is changing at breakneck speed nowadays and you can quickly get left behind your competition if you aren’t up to date with current trends. For example how good is your website? How easily can people find you online above your competitors? Is your website optimised for mobile devices? The majority of searching is done via a handheld devices today so your site needs to be easily viewed on one.
There is plenty of help available via FREE information online and good marketing consultants who can provide outsourced or occasional help to get you up to date. It might also be worth sending staff/business owner to sales training to improve methods.
4. Weekly Cash Flow Forecast
4 to 10 weeks out might be appropriate if cash is very tight. Sometimes even a daily forecast is needed to get over a rough patch. Plotting it out in black and white helps you to see your exact future position and enables you to plan actions to deal with it.
You need a plan in black and white to help you navigate the short term situation to ensure you make it through to the other side i.e. better cash flow position. Trying to handle it all in your head is very stressful and takes up valuable emotional energy that could be better spent elsewhere e.g. developing new clients, staff, resources etc.
A plan might involve ramping up debt collection, seeking longer terms from some suppliers, ceasing some overheads temporarily until things get back on track e.g. subscriptions. Good debt collection is absolutely vital at any time, however when times are tight it takes on even more importance. Be methodical about it:
- Invoice ASAP to speed up getting funds into your bank account.
- Send statements regularly via email
- Make follow up phone calls to large debtors and keep good records of conversations/promises.
- Keep following up until you get paid.
- Make payment arrangements with those who can’t pay up immediately – better to get something rather than nothing. The sooner you start an arrangement, the sooner you get paid off.
- Use a debt collector if a customer flatly refuses to pay and you don’t want to deal with them anymore. Some debt collectors will only charge if they collect on your behalf.
Factor into your cash flow forecast all commitments, such as wages, direct debits etc. Plot in when you can pay critical suppliers/subcontractors – if they don’t get paid they may stop supply – very harmful to business continuity.
Set payment plans with your suppliers and agencies such as Tax Office. Just like you, they are often prepared to make an arrangement to get debts paid off. By making an arrangement you smooth out the amounts paid, rather than lashing out big chunks of cash then not having enough to pay others.
Simply push payments out – one of the most injurious practices to cash flow is paying everyone immediately. We hear it so often “But I don’t like owing anything to anyone”. If this is your attitude, you may need to rethink it. Being in business is a ‘money go round’ – everybody owes someone something at some time. You must get over this attitude if you are going to manage your cash flow or you will be paying suppliers before you get paid by customers and you will feel the squeeze.
5. Monthly Management Reports
If you’ve entered your budget into your accounting system you will be able to print out a Profit and Loss Report with an Actual versus Budget Comparison.
Review this and then ask, are things on track?
If yes – great! Check this goes for all areas/divisions/branches/products/jobs etc. It might be that some are profitable and others are dragging things down. Dig a little deeper and don’t put all income into one line in your accounting system. Identify those not performing – find out why – address the issues.
If no – why not? Is your budget still realistic and achievable? Are there factors you can’t control and you need to revisit the budget?
If your budget is realistic, review your pipeline/forecasts for the next four weeks and plan actions required to achieve your target.
6. Working Capital
You need to understand the financial position the business is in. How much working capital do you need to run your business?
You need working capital:
- To pay suppliers before you get paid by customers.
- To keep stock ready for customers to buy
- For jobs in progress (not invoiced yet) that you have spent on labour and materials
- To pay taxes and superannuation when they fall due
If the dollars don’t all line up to give you a positive bank balance or stay within your overdraft limit you need to consider where the money is going to come from to cover it. It could come from:
- Your own money lent to the business
- Invoice finance
- Increased overdraft
- Better managing the factors affecting cash flow e.g. speed up customer collections, slow down supplier payments, costs and overheads reduction, minimisation of stockholding and jobs in progress etc
- Re-leasing equipment to free up funds
At CFO On Call we’ve guided many businesses through rough patches. If you think you can’t afford us – think again! The money to pay us is in the ‘New Money’ we help to create for your business, through better financial management.