Deliver Outsourced CFO Services to Your Accounting Clients

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If you’re looking to offer the best CFO Services for your clients, CFO On Call can help.

Accounting firms call us in to help clients with:

 

  • Systems – Helping business owners get their accounting and operations systems right with focus on efficiency.  We make suggestions on systems that can help them and assist in implementation if required.
  • Cash flow and Profit – Helping business owners with strategic business growth planning and goal setting.  Break-even analysis, budget and cash flow planning and overhead improvements are just some of the projects we undertake.
  • Business Growth – Helping business owners plan a better future financial position.  Helping them understand what their business is currently capable of and what is required to grow the business in the future.
  • Business Exit Planning– focus is on maximising future value and return.  Helping the business owner systemise business and improve processes.

We work well with clients who need help in systems, analysing, reporting and planning.  We provide the management and cost accounting skill base and focus on current and future financial position.

If you have clients with this type of need, we would be happy to discuss how we can work with you to assist them.  Once you’re comfortable with us…

If you have clients that you feel have unfulfilled potential, we would be happy to meet with you and them for an initial complimentary consultation.  Once we have a good understanding of the client needs, we provide a Fixed Fee Proposal for our services e.g. virtual CFO services (even part time).  We don’t lock clients into contracts and always maintain an open line of communication with the client and their accountant.

A couple of great assignments we’ve been part of recently:

Electrical Contractor

The accountant contacted us to see their client, as they had concerns that their job management system wasn’t aligned to the accounting system.  They were not happy with the output from the system and needed help calculating their overhead recovery rate and also not happy with the output of the finance team.  It was a business that was a mum and dad operation, that grew to 30 contractors in the field.  Their systems and processes had not grown or improved with the business.  Their finance team was inexperienced and a structure review was completed.  When we completed the assignment  the job management system and accounting system issues were corrected and a new internal Accountant was employed, due to the complexity and number of transactions in the business.  For this type of assignment we calculate a Fixed Fee.

Landscape Developer

A new business, this client had previously used a part time CFO for their original business (which they still have).  They made contact with us, as they were seeking assistance with their new venture.  They wanted assistance understanding their project profitability and guidance in setting up the most efficient process/system to document the project operational costs.  We also have worked through their break-even points, breakeven hourly rate per billable staff and machinery and overhead recovery rates.  This is a new client and we are starting to implement systems to assist with monitoring project profitability.  This client is on a monthly retainer.

If this sounds like some of your clients we would be very happy to help you with resources to service them.

Please feel free to call us on 1300 362 436 to arrange a time to discuss your needs.

Planing For Business Exit

- Business Exit Planning

Growth and exit might seem like unlikely bedfellows, but if you want to get maximum value for your business you need to start planning well in advance.

A recent survey of family businesses, which would be similar in most established western markets, revealed that the number of owners aged between 60-69 has increased from 21% to 37% in the past 3 years.

Of the total family business owners, 64% would seriously consider selling the business if approached and 20% would sell the business because they wish to retire. These numbers are significant, but only 34% of owners have an adequately funded retirement program.

The survey results indicate that the value of a business is critical to a number of business owners who would like to use the sales proceeds to fund their retirement.

However the number of owners who believe that their businesses are ‘sale-ready’ has fallen from 56% to 44%.

There are a number of steps we would recommend a business owner can take to significantly improve the value of a business. These steps apply whether the owner plans to sell within a few years or carry on for many years.

Prepare a business plan for the next 3 years  

Which documents the key aspects of your business and acts as a reference tool for you to develop and maintain the business

The plan should include:

    • The specific markets, products and services that you are targeting – what are the technical, environmental and industrial requirements?
    • If the existing markets have diminished, e.g. cheaper imports from overseas, what new market opportunities are there? Is there new technology which you can service or utilise? With the accumulated experience and expertise of you and your staff, can you come up with innovative ideas which may be commercially viable?
    • Research on your market opportunities (e.g. how valuable are they?) and how your competitors perform in those markets.
    • Your plans to market your business.
    • Resources required by the business, such as premises, equipment, materials and staffing (including levels of expertise).
    • A finance plan to realistically cover anticipated sales, costs, cash flow and loan requirements – a lender is unlikely to fund you without seeing a business plan.

A business has limited value to a buyer, if the person who sells it, will walk out of the door with all the knowledge in his or her head.

 

A new owner will pay more if the business has good operating systems which apply, with or without the owner being there.  This is called systemisation of the business and ways in which this can be achieved are:

    • Document the key workflows in the business and who is responsible for the critical actions.
    • Train the staff to accept accountability for these roles (and document in their position descriptions).
    • In this process, ensure that best work practices are carried out consistently.
    • Empower key staff to make “business as usual” decisions without referral to the owner.
    • Employ management system software which integrate activities from customer lead generation, to sales quotes, to sales order, to work scheduling and materials ordering, to material receipts and production/service staff time recording, to sales invoicing and accounting.
    • A system which provides this (e.g. an enterprise resource planning system or a job management system) will reduce duplication of work (e.g. re-entering details about the customer and their order in different systems) and will enable all staff to have access to information, whatever stage the job has reached.

Advantages of a good management system are

    • Work planning is more orderly, which increases customer satisfaction and improves the likelihood of work being completed on time.
    • Significantly reduces the amount of crisis management required.
    • The clarity of job roles and responsibilities increases job satisfaction for staff and is likely to have them more committed to contributing to the improvement of the business with new ideas.
    • Frees up the owner’s time to work on strategies for business improvement rather than the day-to-day issues.

A prospective buyer of a business will look at the certainty of current revenue and profits being maintained.

The value of the business will be enhanced by:

    • A good spread of revenue across a number of customers. If 70% of revenue comes from 2 customers, built on a good relationship with the owner over many years, a buyer may significantly discount its value.
    • A spread of revenue across a number of market sectors, so that a downturn in one sector can be offset by a gain in another sector.
    • A good reputation in its industry.
    • The staff culture within the business. If there is a good mix of experience and expertise, coupled with a desire to move and innovate with changes in technology and markets, this will give confidence about the longevity and success of the business.

The suggestions made above are not a quick fix and can take years to implement. However they are a very sound investment – they can be valuable in ongoing profitability and when the time comes to sell the business; they also make work life more enjoyable and fulfilling, both for the owner and for staff.

If you would like to learn more about this subject, plus other useful business financial management tips, check out ‘Business Financial Toolkit’

BUSINESS FINANCIAL TOOLKIT

In Business It’s Not About The Turnover… It’s About The Leftover!

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Have you ever wondered why your business isn’t as profitable as you would like and keeps running out of cash?

Despite your great efforts at making plenty of sales… it just doesn’t seem to end up on the bottom line!

The problem is the big gap between sales and profit.  The gap is filled with costs and overheads.

Costs are the ‘direct costs’ of producing your product or service e.g. purchase of stock, packaging, freight etc.  If you’re in a service or jobs business, it’s the labour and materials to produce the job.  

Overheads are the general day to day things like rent, wages, stationery etc.

The place to begin ensuring a profit, is with Costs. Until you know exactly what it costs to produce an item or a job, it’s very difficult to work out what you should charge to cover them.  It’s tempting to just follow competitors and charge the same, the problem with that is how do you know they are making a profit?  They may get the business for a while, but will they still be in business next month or next year?

If you really can’t avoid competing on price, one option to be competitive might be to produce the item/service at the best possible cost.  Look long and hard for ways to produce in the most efficient and cost effective way.  How can you minimise cost without compromising customer experience too much?

Another option is to let customers know why your product/service is better than competitors and therefore why they should be happy to pay a commensurate price for the quality.  Make the invisible, visible… If there’s something you do that ensures a better quality item/job let customers know about it!

Once you’re confident you’ve got control and a fair amount of certainty about costs you’re in a great position to work out what margin you want to achieve and set your price to achieve that.

Once you’ve set your price it doesn’t end there!  You need to constantly review information about gross profit to keep your price at the right level to achieve the right level of profit.  Constant monitoring of costs is necessary to ensure you maintain the margin you need to ensure a profit.

If you’re delivering a service or job it’s desirable to have a budget or quote of what you think the job entails before you start (this is usually driven by customers, and should be undertaken for the benefit of the business too).  Once you’ve done one you also need to enter the actual transactions against the budget/quote (preferably in a simple system providing a budget versus actual report), so that you can see where things went right/wrong and learn for the future how to improve profit.

The next step in the gap is Overheads.  Some businesses end up with so many overheads, it can be a real headache to keep track of them all.  A great place to start managing them is with a Budget.  It really pays dividends to spend some time thinking about what overheads you need to incur to run your business, rather than just spending money willy nilly without any plan.  

Once you’ve put together a budget you can enter it into your accounting system and run a report every month to compare actuals against the budget, to see where things are on/off track and fix it quickly to avoid further losses.

Another great tool to help you manage overheads is ‘Purchase Orders’.  This is a simple form that everyone has to complete before they spend any of the business’s money.  You can set a limit of say everything over $100 requires a Purchase Order, signed by the business owner prior to ordering/spending.  It may seem time consuming, but if it saves you thousands of dollars it’s a well worthwhile exercise.

The above are fairly simple concepts and some tools to help you with them are:

  1. A monthly budget entered into your accounting system
  2. Pricing and costing analysis
  3. Reporting on actual versus budget each month
  4. Purchase Orders
  5. Quotes on jobs
  6. Report on job quote versus actual

For more information on ways to reduce overheads download our FREE eBook ‘14 Ways to Cut Fat Not Muscle From Your Business’

Business Made Easy

- Business Growth

Running a business can be a process of juggling and keeping all the balls in the air at the same time.  For small business owners this can be an exhausting and frustrating exercise, leaving little time for strategic thinking.  To make business development easier, focus on the five key areas applicable to pretty much any business:

  1. Your product or service
  2. How you market and sell your product or service
  3. How you deliver and finance your business
  4. How you handle Human Resources
  5. How you handle Customer Service

If you proactively manage and report on all these areas, you will find life less stressful.  There will be less crisis management i.e. dealing with things before they become a problem rather than after.

Being great at sales won’t help you if you take your eye off the ball with delivery and finance.  Your business could struggle with unhappy customers who won’t pay.  

Being the best inventor of products or services won’t help, if you don’t focus on marketing and selling.  Your fantastic product will sit on the shelf collecting dust.

To stay sane in business, you need to get systems in place to proactively manage these key areas.  You probably can’t handle all of them yourself, so you need to employ people or outsource.  

Product and service development.

The area that we find most business owners have difficulty to delegate or outsource is product and service development. But you can train others to take over in time.  It’s easier to achieve if this area is well documented and systemised.

Marketing and sales.

This is generally pretty easy to delegate or outsource.  Marketing is experiencing a massive shift at the moment with digital marketing and social media, and getting in expert help to decide on your method, message and delivery is vital to staying competitive.  

Having a well-tested and documented sales process is vital, ensuring you achieve a good conversion rate and make the most of your marketing spend.

Operations.

Good systems for handling operations and ensuring productivity will go a long way to improving profits and reducing rework and returns.  Understanding the ‘key success factors’ in your business, helps you to focus on what’s going to give you the ‘biggest bang for your buck’.  

If you sell products, a system for handling stock is vital to ensuring you have the right amount of stock at the right time.  If you sell services, a system for managing staff time and materials is vital to productivity and profit.

Finance

This is the lifeblood of any business – profit and cash are the key elements.  Cash comes from profit and profit comes from proactive management of revenue and costs.  Timely and accurate reporting on both profit and cash flow, helps you to plan and take advantage of opportunities.  

Running out of cash is a key reason for business failure, yet few owners manage it proactively.  There’s plenty of help available and the cost pales into insignificance when compared to the outcome.

Human Resource

HR management is a stumbling block for business big and small.  Very few handle it well and proactively.  Industrial Relations laws may have scared some business owners into ‘risk management’ in this area.  

It’s really about developing people and helping them to be satisfied at work.  Satisfied and happy staff can make a business ‘fly’.  Getting things done is so much easier when people are engaged with the overall objective.  

HR is probably the most vital area of business, as it impacts every other area so closely.  Happy staff create great products and services for happy customers who are happy to pay.  

Google “human resource management system software” and there are lots of systems and guidance on how to provide proactive HR management.

Customer Service

Satisfaction here is a result of how well you manage all of the above.  If cash is the lifeblood of a business and happy customers pay, then Customer Service is vital to business survival and success.  

The very best way to gauge customer satisfaction is simply to ask them.  Whether its wait staff at a restaurant who ask how the meal was or an account manager who calls a client to ask how things are going, it’s vital that someone does it.  If you do it well, clients keep coming back and sales will grow.  

It’s much better to get proactive feedback on how you can improve constantly, or to wonder why sales are falling when it’s too late.

If you can put in place strategy and find people and resources to help, it can make being in business very much easier and less stressful for all concerned.  Importantly it puts your business in a position to grow and be less reliant on the business owner.

For more information on business growth contact us

Transport/Freight Business is Tough with Tight Margins…

- Business Growth

There’s considerable pressure on transport businesses to manage finances carefully to ensure you end up with a profit.

At CFO On Call we understand the issues affecting your ‘bottom line’.  

Here’s some ‘Key Drivers of Success’ in the Transport/Freighting Business:

  1. Laser focus on Cash-flow and Risk: Need to ensure businesses have the most effective and affordable financing terms and products. Many transport/freight businesses are using Cash Factoring products (where a % of the invoice is paid upfront) but these can be very expensive.
  • Are your business financing terms optimised? Do you have the right business insurances in place to mitigate risks?
  1. Good Systems: Integrated IT systems/solutions that allow individual job management, route management, invoicing, tracking of financials at a job/route level, labour cost management etc.
  • Does your business have the right system in place to help you run your business?
  1. Laser focus on Efficiency/Optimisation: Freight/transport industry is extremely competitive with a high level of fixed costs. In order to complete and optimise profits, businesses need to understand what their key metrics are and measure themselves against these metrics on a regular basis  (things like, labour expenses to turnover, truck expenses to turnover, gross margin by job, gross margin by route, fixed costs to turnover, labour utilisation, truck utilisation for each direction, % fill by route or job etc).
    • Does your business have regular Dashboard/KPI reporting?
    • Do you understand how your business’ KPIs compare against benchmarks?
    • Do you understand what the true profitability of each route is (including fixed costs etc)?
    • Does your business have the right mix between use of own and contracted trucks to ensure maximum utilisation, especially during peak periods?
  2. Growth: Does your business have sufficient cash flow to facilitate your growth ambitions?

HOW CAN CFO ON-CALL HELP?:

A chance to see how you can grow  and improve your business with confidence.  A Complimentary 20 minute ‘Sounding Board’ session with a commercially experienced person, to bounce your ideas off and ask as many questions as you like.

Quick Guide to ‘Work In Progress’ and its Impact on Cash Flow

- Cash Flow Management and Forecasting

When you’re in a service business Work In Progress Days (WIP Days) is a vital number to be in control of.  WIP Days is the number of days, on average, that jobs are in progress prior to invoicing.

One way of calculating this measurement is as follows:

Days WIP = Total Current WIP/Direct Costs x Time Period

e.g. If you have Current WIP of $1,000,000 and Direct Costs for the year to date of $2,500,000 then the formula would be as follows:

$1,000,000/$2,500,000 x 365 = 146

This means that in this example, the average WIP Days equals 146.  That is 146 days, on average, that jobs are in progress prior to invoicing or cash in-flow.  In other words, your business needs to cover the cash-flow requirements for a 146-day period.

This is a very sensitive ‘Driver’ in relation to cash-flow in a business.  Any movement upwards in this ‘Driver’ can have severe impact on cash-flow.  Any improvements in the number of WIP days will reduce your cash-flow requirements.

A large part of working capital in a service business is made up of labour or wages, contractors, materials, services and equipment used on jobs, as well as any other costs incurred.

WIP and Growth – I have seen many businesses struggle to manage growth in a service-based business due to lack of understanding of WIP Days and its impact on working capital.  I recently spoke to one business owner who had massive growth in his business.  He couldn’t understand why he was having severe cash-flow problems!

It turned out that he hadn’t allowed at all for the extra costs incurred in taking on more jobs.  More jobs means more labour to service the jobs, it means more materials and other costs to get the jobs done.  If you haven’t allowed for these extra costs or extra funding to cover them until payment is received, then cash-flow issues will be the result.

The other problem with taking on more jobs is that resources get stretched.  Not just service delivery resources but also administration resources.  When the number of jobs gets bigger it’s absolutely vital to be on top of the administration.  There can be all kinds of reasons why WIP Days can blow out.  There are often material delivery delays, misunderstandings about service visits and lost records.

The smart way to manage WIP Days is by using a Job Management system.

It doesn’t matter what system you use, but if your business is growing it’s vital to have a system.  A good system provides control for management.  If you are trying to manage jobs in your head, then business growth is going to provide massive headaches.

Customers very quickly get annoyed when jobs aren’t completed properly, and this has an impact, not only on WIP Days, but on payment collection days, which further adds to cash-flow issues.

A good job management system should include:

  •   Quotes
  •   Parts and Labour tracking on jobs
  •   Job Cards
  •   Orders
  •   Delivery dockets
  •   Invoicing
  •   Scheduling
  •   WIP reporting.

It should also include the ability to compare Quotes versus Actual results on jobs and profitability on each job and type of job.  It may seem like a pain to install such a system, but once entrenched into your business the benefits far outweigh the cost.

Imagine being in a position where you have all previous job and quote information at your fingertips instead of rifling through paper all the time!

A job management system also allows you to analyse the productivity of labour by reporting on labour sold compared to labour paid for.

This can be a real eye opener once you start to track and report on it.  Many systems also allow you to calculate selling prices of materials based upon the cost price rather than being fixed, and you having to recalculate them all the time.

This can make a massive difference to your profit at the end of jobs and remove a lot of hassle, constantly having to keep an eye on cost prices.

How To ‘Tune Up’ Your Profit and Cash Flow

- Cash Flow Management and Forecasting

Sales, profit and cash are the key issues to focus on in business financial management.  If you can get these three working right,  you’re well on your way to building a sustainable business with capacity to grow.

Most people focus on sales to begin.  I’d like to start with profit!  The reason to start with profit is, if you’re making sales without profit you will go out of business.

Break-Even First. The best place to start making enough profit is to avoid losses.  Understanding break-even sales is a great starting point.  

Break-even sales, is the amount of sales you need to make to avoid a loss i.e. to achieve a $0 profit or loss result.

This is impacted by fixed and variable costs.  Fixed costs are those that you incur all the time, e.g. rent, admin wages, telephone etc.  Variable costs are those incurred in making a sale, e.g. a product and associated costs like freight inwards, packaging etc.  If you’re selling a service it’s labour and materials on the job.

When you’ve calculated variable costs per product or job you then calculate gross margin.  For example if a product costs $40 (including all costs associated with getting the product ready for sale) and you’re selling it for $100, gross margin is 60%.

Now you need to know fixed costs. Let’s say they are $30,000 per month. To work out break-even sales – take fixed costs of $30,000 divided by gross margin of 60%, which gives a figure of $50,000.  This is your monthly break-even total sales.  If your average product sale is $100, divide the total sales break-even figure of $50,000 by your average sale of $100 to come up with a figure of 500 units to breakeven.  In simple language this means you have to sell 500 units per month at $100 to break-even.

Now you know your break-even, use this as a basis for setting targets to achieve your desired profit. For example: with every additional unit you sell above the break even volume of 500 units, you will make $60 profit, which is the gross margin per unit of sale. Therefore if you target to make $6000 profit you will need to sell an additional 100 units.

Gross margin is one of the most impactful results in business. If you can’t make a decent gross margin, it’s going to be very difficult to make a net profit.  One of the biggest issues we find in financial management is the lack of understanding of a product or service ‘true cost’.  It’s often thought of as just the raw cost of the product or service.  Items such as freight inwards, currency exchange, packaging etc. are wrongly omitted when calculating cost.  This is dangerous, because it means when pricing a product and calculating a margin, the true cost isn’t being accounted for.  In this case the gross margin suffers and this reduces what’s available to cover fixed costs.  The result is losses and constant need to focus on more volume of sales to meet cash flow needs.

This leads us nicely onto cash flow.  So far we’ve considered profit… and ‘good cash flow’ comes from ‘good profit’.  Surprisingly though bad cash flow can also come from good profit.  This arises due to the impact of factors other than those profit related i.e. sales less fixed and variable costs.  You can be making money in the ‘Profit and Loss Statement’ and losing your battle in terms of your ability to pay your expenses when they fall due (Cash Flow Issue), and much of the key drivers for your cash flow are in the ‘Balance Sheet’.

What’s in the Balance Sheet probably has more impact on cash flow than anything else.  I’m mainly referring to Accounts Receivable, Accounts Payable, Inventory and Work in Progress.  When you make a sale it’s a long way for those funds to get into your bank account if they are invoiced to customers who may take 120 days to pay (if ever!)  

Funds are paid to suppliers, who may or may not offer good terms.  They sit on your stock room floor in the form of products waiting to be sold. They sit in Work in Progress in the form of labour and materials paid for before the job gets finished and invoiced to customers.  

And that’s on top of paying your regular fixed costs.  Your challenge to keep cash flow healthy is to:

  • Minimise the number of days customers take to pay
  • Maximise the number of days taken to pay suppliers
  • Minimise the number of days goods sit in stock waiting to be sold
  • Minimise the number of days jobs are in progress before being invoiced

In summary:

  • Sell the right products/services at the right price.
  • Understand your true cost to get the price right and achieve a desired gross margin.
  • Know your ‘break-even’ sales as a basis to calculating a target for desired profit.
  • Constantly monitor variable costs to maintain your desired margin
  • Constantly manage fixed costs to avoid wastage
  • Constantly manage Accounts Receivables, Accounts Payables, Inventory and Work in Progress levels.

Tools you can use to help:

  • Inventory management system
  • Job management system
  • Accounts Receivable management system
  • Accounts Payable management system
  • Budget
  • Cash Flow Forecast
  • Accounts/bookkeeping system

All these systems need to be properly set up by someone who understands the overall picture i.e. you need to understand what you want to get out of them, so they are set up with that aim in mind. Otherwise you just end up with a load of useless data and more costs.

Price right? Profit Right?

- Latest News

How do businesses determine their Price to customers?   Some typical methods:

  • Charge a bit less than or the same as competitors
  • Charge a bit more than the product or service costs
  • Charge as much as you need to earn to cover your costs i.e. Break-even
  • Charge what you can get away with
  • Charge what you think it’s worth   
  • ‘Cost’ the product or service and calculate a markup to provide an acceptable profit

Let’s discuss the merits and pitfalls of some of the above methods.

Follow Competitors or the Market

The problem with following competitors is that you don’t always know how they calculated their price.   It may be unsustainable in terms of the costs to deliver the product or service. You may win sales from them in the short term, but unless you develop a better way of pricing you are likely to go out of business eventually, if the price doesn’t cover costs.   

They may have cash reserves to cover the shortfall between Costs and Price for a while and you may not.   They can ‘sit it out’ until you go out of business trying to compete and collect all your customers later.

This may sound a bit extreme, but we see it all the time in business… look at the airline industry, this is a classic strategy they have employed in the past.  

Charge a bit more than the product or service costs

The $64,000 question here is ‘How much does the product or service cost?’.   If you have looked closely at Financial Reports you will have seen the term ‘COGS’ which means ‘Cost of Goods Sold’.   

This is purely the cost of getting the product or service out of the door or ready for sale.  COGS does not include overheads, such as administrative staff, advertising, office rent, stationery etc.   

You can see the danger then of charging a bit more than the product or service costs. You still have to cover the cost of Overheads and these need to be factored into the Price. The danger is that if you don’t work out your ‘Breakeven’ sales figure you may be making a Gross Profit, but after paying Overheads you are making a loss.

Break-even analysis is the practice of calculating how much Sales you need to cover COGS and Overheads.   It is an absolute ‘must’ in business to know your ‘Break-even situation’.

Charge as much as you can get away with

This is a great strategy… so long as it covers your COGS and Overheads.   It may work at first, but if you don’t keep a close eye on COGS and Overheads and they ‘creep up’, it may turn out to be unprofitable in the end.

Charge what you think it’s worth

Worth is an interesting concept isn’t it?   It can mean different things to different people.   What the customer thinks it’s worth may be quite different to your perception.  Again, if this figure at least covers the COGS and overheads, that’s OK but most of us are in business to make a profit.   

You still need to keep a close eye on costs to ensure your margin is not being eroded by increased costs.   

The issues relating to Price are as follows:

  • Get the price right
  • Know thy Costs
  • Keep the price right

In order to get the price right you need to:

  • Determine the cost of delivery of the product or service to customers excluding overheads.
  • Know your Overheads, so that you can work out your ‘Breakeven’ sales and how much you need to sell to cover it.
  • Decide how much profit you want and calculate this into the Price.
  • Know your Margin and report on it regularly to ensure it is not being eroded by increased costs.
  • Know your customer satisfaction levels.   Dissatisfied customers won’t pay any price.
  • Regularly review pricing and do small increases to cover increased costs.   It is much easier to do small regular price increases than irregular large ones. Factor this into your contracts with customers and use increased costs as a reason for price increases.

Keep the Price Right

Price increase can be a very controversial subject.   Many business owners fear increasing prices, because they think customers will go elsewhere.   Where else would they go?

A price increase, combined with a small decrease in revenue may not be such a bad thing.   This scenario can have a positive impact on both profit and cash-flow.   

It is often more difficult to increase Revenue than to increase Prices.   Many customers don’t even notice a small increase and fully accept one to cover CPI rises.  For many businesses failure to incorporate this into their price means they are absorbing increased costs and eroding margins.

Your net income should exceed your gross habits!

- Latest News

… or Why separate your cash-flow from the Business

When asked the key to financial happiness one business owner said –  ‘Your net income should exceed your gross habits!’

Jokes aside, I urge business owners to keep their own finances separate from those of the business, in order to manage both sustainably and for the survival of the business.

Separating your personal finances from those of the business can have a very positive impact on the cash position of both parties.

Some SME/SMB owners run their business bank account as if it was an ‘open tin’ for themselves and their families.  If carefully managed and monitored this may not be a problem.  

The problem is, we have rarely seen a situation where it is monitored at all, and therefore is mostly a problem!

If the situation isn’t managed well, it’s difficult to know how much of the funds are available and required by the business as well as the business owner.  If the business bank balance suddenly goes up it can be very tempting to pay yourself a bonus because you think you deserve it.  

The real question is – can the business afford it?  Some will get carried away the minute a big sale is made and use the income to fund personal luxuries.  Later they regret spending the business’ working capital when finances get tight.

This is usually the point at which they need to head to the bank for an overdraft and find they have to encumber the family home to secure funding.  In effect the overdraft is required to support their personal spending habits.

Drawings accounts are often used as a way for business owners to funnel personal spending through the business, then tally it up at the end of an accounting period and pay the relevant tax.  

Again this is fine if you have some kind of control on the situation.  A problem occurs when there is no limit on spending or income drops.  This situation is often made worse when family members have credit cards on the business account.  

I have personally seen some horrendous credit card bills from family of business owners, that the business just cannot sustain.  Would a business owner allow their employees to take a wage/salary that reflected their spending ability rather than their earning capacity – I think not.  Taking a wage/salary rather than drawings, means personal spending must be disciplined.  Employees have to do it, so why not business owners?

Another drawback with running Drawings accounts is that you effectively have to enter every item of personal spending in your accounting system, which can be quite time consuming and not very beneficial to the business.

The best way to manage a business is to treat it as a separate entity from yourself as the business owner.  The business must be able to survive on it’s own merits.  If a business owner is constantly dipping into the business’ funds uncontrollably, it doesn’t stand a chance of surviving.

The finances of each entity need to be managed separately.  This begins in both circumstances with a budget.  The business needs a budget, so that you know if it will make a profit and be able to meet cash obligations.  The business owner needs a budget, so that they know if they can meet their own living costs and obligations.

I have been in business for twenty plus years and from the very start I paid myself a wage and never pay personal expenses from the business.  I am happy I took this decision, as it has made things so simple.  I never have to worry about a big tax bill at the end of the year, because it’s been paid throughout the year.  

I never have to wonder how much of the money in the business bank account belongs to the business and how much belongs to me.  

Another benefit of paying yourself a salary has been that you will become disciplined to pay pension contributions in just the same way that I pay them for staff – on a regular basis.  

Some straight talk about making extra profit!

- Latest News

Sales, profit and cash are the key issues to focus on in business financial management.  If you can get these three working right,  you’re well on your way to building a sustainable business with capacity to grow.

 

Most people focus on sales to begin.  I’d like to start with profit!  The reason to start with profit is, if you’re making sales without profit you will go out of business.

 

Break-Even First. The best place to start making enough profit is to avoid losses.  Understanding break-even sales is a great starting point.  

Break-even sales, is the amount of sales you need to make to avoid a loss i.e. to achieve a $0 profit or loss result.

 

This is impacted by fixed and variable costs.  Fixed costs are those that you incur all the time, e.g. rent, admin wages, telephone etc.  Variable costs are those incurred in making a sale, e.g. a product and associated costs like freight inwards, packaging etc.  If you’re selling a service it’s labour and materials on the job.

When you’ve calculated variable costs per product or job you then calculate gross margin.  For example if a product costs $40 (including all costs associated with getting the product ready for sale) and you’re selling it for $100, the gross margin is 60%.

 

Now you need to know fixed costs. Let’s say they are $30,000 per month. To work out break-even sales – take fixed costs of $30,000 divided by gross margin of 60%, which gives a figure of $50,000.  This is your monthly break-even total sales.  If your average product sale is $100, divide the total sales break-even figure of $50,000 by your average sale of $100 to come up with a figure of 500 units to breakeven.  In simple language this means you have to sell 500 units per month at $100 to break-even.

Now you know your break-even, use this as a basis for setting targets to achieve your desired profit. For example: with every additional unit you sell above the break even volume of 500 units, you will make $60 profit, which is the gross margin per unit of sale. Therefore if you target to make $6000 profit you will need to sell an additional 100 units.

 

Gross margin is one of the most impactful results in business. If you can’t make a decent gross margin, it’s going to be very difficult to make a net profit.  One of the biggest issues we find in financial management is the lack of understanding of a product or service ‘true cost’.  It’s often thought of as just the raw cost of the product or service.  Items such as freight inwards, currency exchange, packaging etc. are wrongly omitted when calculating cost.  This is dangerous, because it means when pricing a product and calculating a margin, the true cost isn’t being accounted for.  In this case the gross margin suffers and this reduces what’s available to cover fixed costs.  The result is losses and constant need to focus on more volume of sales to meet cash flow needs.

 

This leads us nicely onto cash flow.  So far we’ve considered profit… and ‘good cash flow’ comes from ‘good profit’.  Surprisingly though bad cash flow can also come from good profit.  This arises due to the impact of factors other than those profit related i.e. sales less fixed and variable costs.  You can be making money in the ‘Profit and Loss Statement’ and losing your battle in terms of your ability to pay your expenses when they fall due (Cash Flow Issue), and much of the key drivers for your cash flow are in the ‘Balance Sheet’.

 

What’s in the Balance Sheet probably has more impact on cash flow than anything else.  I’m mainly referring to Accounts Receivable, Accounts Payable, Inventory and Work in Progress.  When you make a sale it’s a long way for those funds to get into your bank account if they are invoiced to customers who may take 120 days to pay (if ever!)  

Funds are paid to suppliers, who may or may not offer good terms.  They sit on your stock room floor in the form of products waiting to be sold. They sit in Work in Progress in the form of labour and materials paid for before the job gets finished and invoiced to customers.  

And that’s on top of paying your regular fixed costs.  Your challenge to keep cash flow healthy is to:

  • Minimise the number of days customers take to pay
  • Maximise the number of days taken to pay suppliers
  • Minimise the number of days goods sit in stock waiting to be sold
  • Minimise the number of days jobs are in progress before being invoiced

 

In summary:

  • Sell the right products/services at the right price.
  • Understand your true cost to get the price right and achieve a desired gross margin.
  • Know your ‘break-even’ sales as a basis to calculating a target for desired profit.
  • Constantly monitor variable costs to maintain your desired margin
  • Constantly manage fixed costs to avoid wastage
  • Constantly manage Accounts Receivables, Accounts Payables, Inventory and Work in Progress levels.

 

Tools you can use to help:

  • Inventory management system
  • Job management system
  • Accounts Receivable management system
  • Accounts Payable management system
  • Budget
  • Cash Flow Forecast
  • Accounts/bookkeeping system

 

All these systems need to be properly set up by someone who understands the overall picture i.e. you need to understand what you want to get out of them, so they are set up with that aim in mind. Otherwise you just end up with a load of useless data and more costs.

 

For a FREE copy of our E Book ‘The Seven Key Numbers that drive Profit and Cash Flow’ visit https://cfooncall.com.au/downloads/improve-profit-and-cashflow/

8 ways to make ‘Innovation’ a daily part of your business!

- Business Growth

What do you think of when you hear the word ‘Innovation’?  I recently asked one business owner who came up with the following words

  • Change
  • Improvement
  • Growth
  • New
  • Ideas
  • Next step

Plato (Greek Philosopher Born in 427 BC) coined the phrase ‘Necessity… the mother of invention’.  You could easily substitute the word ‘innovation’ for ‘invention’ and see that actually, innovation isn’t new at all – it’s been happening forever!  It’s in our DNA to constantly seeking out new and better ways to do things.  Just like fashion trends – ideas get recycled and put forward as something new.

In recent times innovation has arguably moved at a faster pace than any other time in history.  The younger generation and some very bright sparks are driving innovation in all aspects of life e.g. entertainment, product/service purchasing, health care, learning, business and the list is massive!

If you’re reading this message you’re most likely a business owner or involved with a business.  What we’re interested in is how you can include innovation into your business, so that it’s a constant occurrence.

Why is innovation important for business?

Innovation is a key enabler for:

  1. Achieving business growth and improving bottom line results.
  2. Making productivity and efficiency gains to improve profits.
  3. Competing successfully and responding quickly to changes in the external environment.
  4. Engaging and inspiring your employees and customers.

How you can make innovation part of your business’ DNA:

    1. Recognise that innovation is about ways to move your business to the next level.
    2. Reducing costs is a must – so that you can compete with your new ‘low cost’ competitors from around the world. You need to be the “Cost Leader” in your industry.
    3. Improve efficiency – how to do more with less is the catch-cry nowadays – as a western civilization with high labour costs, we must find ways to compete in the global marketplace, if we are to stay relevant.  One way to do that is by leveraging technology.

Have a culture of innovation in your business by

    1. Leading your team and sharing your own innovative attitude and ideas.
    2. Encourage innovative ideas from your team at regular discussions/meetings. Ask what they think.
    3. Incentivise your team to contribute new ideas.
    4. Prioritise actions/projects for maximum ‘Return on Investment’
    5. Communicating with your team that they all should be “Innovation Leaders” and that innovation should occur at all levels in the business, including the production floor. Innovation should be seen as being part of your employee’s day-to-day activities and not just the responsibility of management.

Ask your customers how you can improve their experience

  1. Via social media.
  2. Run a competition to incentivise them to contribute good ideas.
  3. Listen closely to complaints and compliments for ideas.
  4. Do surveys of customers (very easy nowadays online).
  5. Simply ask when speaking with them.
  6. Ask front-line team members for feedback.

Ask your team how you can make their lives easier and less repetitive

  1. If you can remove boring and repetitive tasks it provides a more conducive environment for innovation.
  2. Innovation doesn’t mean people losing their jobs because things get automated – it just means people can be used more effectively – no robot or computer system can replace the human brain (yet!).

Seek out ways to be innovative in your industry

    1. Attend industry events/shows to see what new products/services are available.
    2. Join your industry association.
    3. Read industry journals.
    4. Join industry related sites and social media online.
    5. Look closely at competitors to see what they’re doing.
    6. Research online – just Google it!
    7. Join networking groups to learn what others are doing.

Prioritise your innovative actions

    1. Decide which aspects of your business need the most innovation – if you’re falling behind competitors and your sales are declining, look at your product/service first and how you can modernize it.
    2. Work out your ‘Return on Investment’ in innovation.  i.e. if implementing a new mobile workforce management system will save your service staff several hours a week each, and it will just cost you a few thousand to implement, you will probably recoup your investment pretty quickly.
    3. As well as working on your product/service innovation work on
      1. Marketing – use new methods e.g. digital marketing, social media, blogging, automated.
      2. Sales – employ a cloud based CRM to track your pipeline of opportunities and report on results.
      3. Operations – utilise new methods to be more efficient at delivering your product/service e.g. online ordering, better delivery scheduling, outsource non-core activities, systems in the cloud for easier access and safety of data.
      4. Finance – get online!  Cloud accounting saves many hours or boring and repetitive data entry due to automatic bank feeds.  It also puts the business owner in much easier contact with daily accounting issues and can provide better and more detailed management reporting.
      5. Human Resources – cloud based systems make it much easier to be compliant and on the ball with HR management.
      6. Customer Service – technology and social media makes it much easier to get feedback from customers with online surveys/comments.

Seeking out government and outside assistance with your strategy and implementation of innovation.

    1. There are lots of government resources available nowadays to help business to be more innovative with.
    2. Access to Grants.
    3. Tax benefits.
    4. Changes to law relating to employee share schemes.
    5. Changes to law relating to crowdfunding.
    6. Insolvency law reforms.
    7. See www.innovation.gov.au

Sometimes it helps to bounce your ideas off an outside person, as well as your team.  Find good CFO Services who have lots of commercial experience and is connected to other businesses in the marketplace.  They tend to move in wider circles and have a good grasp of what is happening in the business environment.  They are in a good position to share this knowledge in a ‘two way’ conversation and act as a ‘sounding board’ for you.

A2 Milk shares soar on profit growth

- Business Growth

The company said revenue in the four months to October 31 was up nearly 69 per cent at $NZ262.2 million ($A236.7 million), reflecting strong growth in nutritional products in Australia, New Zealand and China, as well as positive momentum in the US and UK.

The dual-listed dairy firm’s net profit for the same period more than doubled to $NZ52.3 million ($A47.2 million).

The news drove A2’s ASX-listed shares up 39 cents, or 5.5 per cent, to $7.46.

A changing product mix and increases in raw material costs had put pressure on some product margins, but this had been more than offset by the weaker New Zealand dollar.

A2 Milk also said it has a strong platform from which to expand further into new markets and new nutritional categories.

“Based on this strong trajectory, the board continues to believe that there is significant potential for further growth in our priority markets in Australia, China, the United States and the United Kingdom,” chairman David Hearn told the company’s annual general meeting in Auckland.

The company said its A2 fresh milk brand and A2 Platinum infant formula brand are performing well in Australia and New Zealand, and A2 Platinum sales continues to grow in China.

The recent launch of Australian fresh milk into the Singapore market was also progressing well.

Mr Hearn said the A2 Milk board continues to monitor the appropriate use of available capital in the best long-term interests of all shareholders, and will update the market at the release of the company’s half-year results in February.

Shares in The A2 Milk Company have surged after the fresh milk and infant formula supplier said revenue and profit grew strongly in the first four months of the current financial year.

 

Right and wrong business methods and little pointers to increase your profits

- Latest News

Financial Statements can be a bit of a mystery to the uninitiated.  If you begin to glaze over

when it comes to looking through your Balance Sheet – you’re not alone.  We are often asked:

“What’s the Balance Sheet for and what does it really mean?”

It often comes as a shock that the health of the Balance Sheet can make or break a business.

The Profit and Loss Statement is probably easier to understand, in that it simply shows the Income at the top, Costs and Overheads below and the difference is your profit or loss.  

Profit and Loss is reported over a period – usually monthly and for the year to date.  The figures are usually based on invoices in and out i.e. not just cash transactions.  

This means when an invoice is raised it is accounted for in the Profit and Loss even though payment may not have been received.  This is referred to as ‘Accrual Accounting’.

The Balance Sheet lists the balance of what the business ‘owns’ and what it ‘owes’ at a given point in time – usually the end of the month.   

It’s a bit like a personal financial position e.g. you own your home, motor vehicle and furniture and you owe the mortgage, vehicle loan and credit cards.  

The difference between what you own and what you owe is your personal equity in your belongings.

Some examples of what a business owns:

  • Cash in the bank – positive bank balance or Cash Deposits
  • Amounts owed by customers (Debtors or Accounts Receivables)
  • Stock – finished goods and raw materials
  • Work in Progress or costs on jobs not yet invoiced
  • Assets such as vehicles, equipment, furniture & fittings
  • Deposits paid such as rental bonds

Some examples of what a business owes:

  • Bank Overdraft – negative bank balance
  • Amounts owed to suppliers (Creditors or Accounts Payables)
  • Outstanding Lease amounts
  • Taxes due
  • Staff Superannuation amounts due
  • Unused staff leave

The above lists are not exhaustive, but are an example of typical Assets (what you own) and Liabilities (what you owe).  As described in the personal financial situation, the difference between what the business owns and what it owes is referred to as equity.  

In the Equity section of the Balance Sheet is also shown the balance of previous and current year profits and losses carried forward.  Simply, it’s where the ‘wash up’ of the Profit and Loss Statement sits and how the two reports link together.

The important issue to understand is that if you only look at the Profit and Loss Statement, you are seeing less than half the picture about what is going on in the business.  

The following are key issues affecting business performance reflected in the Balance Sheet:

Amounts owed by customers (Debtors or Accounts Receivables)

If this area isn’t being constantly managed, it can cause cash flow to dry up.  An example is, one of our clients had a customer which was a very large organisation and he concluded they were always slow to pay.

But the truth was the purchase order and invoice didn’t match up, which caused difference between departments who didn’t pay and didn’t explain why.  These invoices totalled $160,000, which is a hefty portion of the client’s cash flow.

Amounts owed to suppliers (Creditors or Accounts Payables)

An over-efficient Accounts Payable person can be the worst enemy of cash flow in a business, and wasting available credit is ruinous to cash flow i.e. paying suppliers too quickly.

Stock

Excess stock very often becomes dead stock. Bulk purchase discounts can seem attractive, but if the goods are going to sit around and become obsolete, it’s a false economy.  You need enough to meet demand but not too much.

Work in Progress (Jobs not yet invoiced)

The longer jobs aren’t invoiced the longer the money isn’t in the bank.  The longer a job isn’t invoiced the greater the likelihood of a dispute, when an invoice is raised.  Regular invoicing not only helps cash flow, it also means that people remember what went on, when a contractor was working for example.

Bank Balance

Bank reconciliations are a vital way of checking everything is correct in the bank account.  Is everything coming out of the bank correctly? Are there any deposits that have gone astray?  Are there deductions made incorrectly, such as leases ended where amounts are still being withdrawn.  We recently saw an example of this, where one of the major banks deducted five extra months lease payments on a lease that had ended.

Unused staff leave

Letting staff hang onto leave can cost money and is often more expensive to pay out, than the rate at which it was accrued. i.e. when they accrued the leave they were on a lower rate of pay than when it gets paid out.

Taxes due

Withheld taxes can be a real slug, if you haven’t factored them into your cash flow.  The business may be profitable, but if it hasn’t collected payment from customers it might be paying GST on uncollected funds.

The danger of being under-capitalised and then trying to grow the business quickly, by big sales, is what brings many businesses undone.  

We saw a business go under recently – they took on a big project at the same time as spending working capital on websites, office fit-out, fancy workshop etc.  Unfortunately we didn’t get to them in time, before they had passed the point of no return.

The Acid Test – Your Quick Asset Ratio

The ‘Quick Asset Ratio’ is a measure of how well a business can meet its short-term obligations.  The ratio is calculated as follows:

(Cash + Accounts Receivables + Other Current Assets) / (Overdraft + Accounts Payables + Other Current Liabilities)

Example of Quick Asset Ratio calculation for a business has the following

  • Cash in the bank $60,000
  • Accounts Receivables $80,000
  • Other Current Assets $30,000
  • Accounts Payables $60,000
  • Other Current Liabilities $40,000
  • Calculation ($60,000 + $80,000 + 30,000) / ($60,000 + $40,000) = 1.7

The Quick Asset Ratio for this business is 1.7.  That means the business has $1.70 of short-term resources for every $1.00 of short-term debt.  

Banks look very closely at ratios to determine business health and lending risk.  Banks vary and change their view on desirable ratios, but a ‘Quick Asset Ratio’ of 1.7 would be generally considered acceptable.

A business may show a profit, but if the Balance Sheet doesn’t look healthy cash flow squeeze can be the result and make it very difficult to run and grow the business.

Maximisation of what the business owns and minimisation of what it owes is the key to business financial health.