What You Missed at ‘The Top Driver For Profit… It’s not the one you think!’ Webinar

- Business Growth

One of our fabulous CFOs – Andrew Free – recently shared some very useful information about pricing at a webinar.

Here’s what was covered:

  • Pricing to make a reasonable profit
  • Understanding your cost base and the different types of costs
  • The elements of a basic pricing model
  • ‘What If Scenarios’ in pricing
  • The difference between pricing products and services
  • The elements in pricing for services
  • Cost associated with delivering a service
  • Availability of employees to deliver a service
  • Utilisation rate of employees delivering services
  • Implementing an accurate pricing model
  • Feedback loop to maintain accurate and profitable pricing
  • Working through a services pricing model
  • ‘Price’ the ‘Big Lever’

If you’d like to learn more about pricing to be more profitable in your business check out the webinar recording here.

Overcoming the ‘How can I afford this?’ roadblock to getting good financial advice…

- Business Growth

 

It seems to be a perennial issue for business owners that they know they need help … but struggle with the concept of paying fees to get it… when they’re already struggling with profit and cash flow.

How can they overcome this roadblock and feel safe to pay for help and realise the improved profit and cash flow that comes from good advice and help?

A term we feel explains how to overcome this is ‘Pay for itself’ service.

How does it work?

We find that often the money in business is just in the wrong place … i.e. it’s in:

  • Lost sales, due to incorrect pricing
  • Lost sales due to low labour utilisation
  • Lost sales, due to lack of non-financial KPIs
  • Excessive costs and overheads, due to lack of analysis and budgeting
  • Excessive stock, due to lack of planning
  • Jobs not being invoiced quickly enough and run efficiently
  • Customers taking too long to pay
  • Suppliers demanding payment too soon
  • Lack of growth funding, due to inability to ‘tell the story’ well enough to lenders/investors
  • Excessive finance costs, due to lack of negotiation and poor understanding of contracts
  • Excessive taxes, due to lack of planning

The issue re the above is that the money needs to spend more time in the bank account and less time in these places.

It’s all about wastage, isn’t it?  Wasted opportunities due to lack of understanding and hesitancy to pay someone to fix it and head off these cashflow and profit gobblers.

If you’d like to know more about ‘Pay for itself’ help to avoid missing out on fantastic opportunities in your business click here to speak with a CFO.

 

Boosting Cashflow Employers

- Cash Flow Management and Forecasting

For those employing people, cash flow can be a constant headache… but it doesn’t have to be this way.

The best way to handle cash flow is to be proactive and manage it, rather than being knocked around by it.

It begins with understanding what cash flow is, what impacts cash flow and how can you make cash flow better.

 

What is cash flow?

Cash flow is the movement of cash in and out of a business.  It’s quite different from profit measuring, which measures when sales are made (not necessarily paid for) and when costs are incurred (not necessarily paid for).

It’s important to understand the difference between profit and cash flow, because it may be that a business is profitable, but can easily have cash flow issues if customers aren’t paying quickly enough and suppliers are demanding to be paid.

 

What impacts cash flow?

Cash flow is impacted by:

  • How much you sell and how quickly customers pay you for it.
  • How much you buy and how quickly you have to pay for it.g. what terms you get from suppliers, how often you pay wages and how often you pay taxes etc.
  • How much stock you hold and how long you’ve held it for (think of stock as dollars piled up on the stock room floor!)
  • How many jobs/projects you’ve got on the go where you’ve had to pay for labour and materials but haven’t been paid by customers yet.(think of jobs/projects as dollars piled up on the workroom floor!)
  • How much money you the business owner has injected from your own pocket.
  • How much money you’ve borrowed.
  • How much you spend on equipment, vehicles etc.

 

What can you change to make your cash flow better?

  • Get your customers to pay as quickly as possible… preferably up front or deposit and progress payments.
  • Negotiate the longest possible terms with suppliers and tax agencies.
  • Minimise stock holdings – have a really good understanding of your stock movements and requirements to ensure it sits on the shelf as little time as possible.
  • Speed up finishing jobs, so you can invoice them and get deposits and progress payments if possible.
  • Inject your own money into the business if you have it (particularly in these low interest times).It could be the best ROI available to you.
  • Borrow on the best possible terms and present the best proposition to lenders, to ensure you get the funds you need… and don’t be bullied into poor rates and terms.If you’ve got a good proposition you can shop around.
  • Caution when buying equipment.It may seem like a good idea to pay cash for it today… but in six months time when you’re overloaded with expenses and tax bills, you might regret it.  Better to spread the outlay over a longer period and smooth out cash flow.

 

What is a 3 Way Forecast and how can it help your business?

- Business Growth

Many businesses have been heavily impacted by the coronavirus pandemic and have survived through the receipt of various government subsidies. These subsidies have been a welcome lifeline, but what happens to your cash flow now they’ve ended?

Banks are being supported and encouraged to lend by the government, but it doesn’t mean that they will relax their lending criteria. We all know that they like ‘bricks and mortar’ security. Many small businesses cannot offer ‘bricks and mortar’, so what can they do to gain the funding support that they need?

The next biggest factor in getting a loan is the bank having confidence in you, the business owner, as someone who really knows what’s going on in their business and importantly, knows what’s going on with the finances and cash flows of the business.

A properly prepared funding submission will go a long way to creating confidence. So, what should this funding submission contain? These are the key elements of a 3 Way Forecast:

  • A detailed forecast of future revenues and expenses.
  • A detailed forecast of future cash flows, operating, investing, and financing. This demonstrates to the bank your capacity to service and repay debt.
  • A projected balance sheet.
  • These three elements of the forecast are, in bank language, a three-way forecast. Properly prepared, this document makes it much easier for the banks to consider and meet your funding request.
  • All the above forecast numbers need to commence with current financial data that shows exactly where the business stands at the commencement of the forecast period. (statutory accounts from two years ago won’t cut it).
  • And there needs to be a detailed written commentary that discusses your business plan and sets out the basis for the various assumptions that underlie the forecast numbers.

Put yourself in the best position to get the funding you need by being able to submit a professionally prepared funding application. These documents will not only tell you and your banker exactly what your funding needs will be but, as a bonus, will also point to ways that you can improve business outcomes.

Click here to discuss how we can help you to get this information together for your loan application.

Financial Roadmap… What You Missed at the Webinar

- Cash Flow Management and Forecasting

To kick off the New Financial Year we shared a ‘Financial Roadmap’.

A ‘Financial Roadmap’ is like a GPS guide, to help anyone in business to set a path to desired profit and cash flow management.

There are some simple tools and methodologies to produce a ‘Financial Roadmap’ including:

  1. Profit & Loss Budget
    a. A Profit & Loss Budget is a documented plan of future sales, costs, overheads and finance costs, setting out in black and white what you expect them to be.
    b. It helps to set a Budget because it gives you targets to aim for, helps to control spending and improves profitability.
    c. Budgeting Tips
    i. Set realistic targets – include extra costs and overheads required to deliver sales targets.
    ii. Support targets with other plans such as marketing, sales and staff/resources. What are you going to do to achieve the sales targets?
    iii. Separate fixed expenses from variable costs i.e. standard monthly overheads, such as rent, wages etc. from direct cost of items you sell or labour and material on jobs.
    iv. Allow for contingencies – not everything goes exactly as planned!
    d. Example of a typical Profit & Loss Budget – we gave a tour of a very simple and typical Profit & Loss Budget (spreadsheet based, not subscription software)
  2. Break-even – knowing your ‘break-even’ sales point is a great way to avoid losses and is the basis for targeting sales and profit and understanding your costs and overheads.
  3. Cash Flow Forecast
    a. It helps to prepare a Cash Flow Forecast because it’s difficult to predict your cash position in your head! Simply plotting it out in black and white, provides a clear picture of what will be the ‘peaks and troughs’ in your cash position, enabling you to be proactive before it becomes an issue.
    b. The Cash Flow Forecast differs from the Profit & Loss Budget because it’s based on timing of cash in and out, whereas the budget accounts for sales and costs in the same month, even though they may not actually be paid in that month. This helps you to get a clear picture of both cash flow and profitability.
    c. Cash Flow Forecasting tips
    i. Compare actual against forecast weekly or monthly depending on the situation, so you can gauge how accurate your forecasts are.
    ii. Investigate significant negative variations and take corrective action.
    iii. Update your forward forecast to stay in control of cash flow.
    d. Example of a typical Cash Flow Forecast – we gave a tour of a very simple and typical Cash Flow Forecast (spreadsheet based, not subscription software).
  4. KPIs
    a. Non-financial KPIs are the most useful to set targets that will impact sales.
    b. We shared some examples of typical ‘non-financial’ KPI reports in graphical format, so that a business owner can quickly see where things are on/off track. Examples were:
    i. Marketing scorecard
    ii. Quote scorecard
    iii. Labour productivity scorecard
    iv. Staff & Material Costs % of Sales scorecard
  5. Reporting
    a. Minimum standard reports
    i. Profit & Loss Statement
    ii. Balance Sheet
    iii. Cash Flow Forecast
    iv. Accounts Receivable Analysis
    v. Accounts Payable Analysis
    b. Additional Useful Reports
    i. Profit & Loss by division, category, customer, salesperson etc.
    ii. Detailed Job Profit & Loss Report
    iii. Detailed Stock Profit & Loss Report
  6. Systems
    a. Have you got the right systems in place?
    b. Are they set up right?
    c. Do they provide information for good decision making?
    d. Do they save time/money?
  7. Business Grants
    a. Examples of some available
    b. Eligibility
    c. How to get them

All of the above is typical of what we work through with our business clients, to help them achieve their desired profitability for the year and avoid cash flow problems.
If you’d like to chat with one of our friendly CFOs and see a demonstration of the Financial Roadmap, they are happy to spend a complimentary hour ‘one-on-one’ to discuss your plans and goals for this financial year and how you can turn them into reality.

Click here to set a time that works for you.

Happy New Financial Year! Watch the webinar here

Virtual CFOs: A Rising Trend

- Complimentary E-Books

A cheat-sheet written for street-smart business owners… who are ready to grow!

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5 Tips to Manage Your High Growth Business

- Business Growth

Growing a business is a very normal aspiration but how do you manage that growth so that the growing pains don’t put so much pressure on the operations that it all comes undone.

  1. Plan

As the old saying goes “If you fail to plan, then you plan to fail”.

Make a specific growth target rather than just a vague notion of growth.

Create an Operational Plan to achieve that growth target that covers:

  1. Marketing – determine how many leads you will need or how many tenders you will need to submit etc, to support your growth target.
  2. Sales – determine how many leads will convert into sales or how many tenders you will win.
  3. Purchasing and Supply – calculate what production you will need to satisfy the sales plan or what products you will need to buy or what staff you will need to provide the services. Document where you will acquire the raw materials, products or staff.
  4. Logistics – figure out whether you will need to add vehicles to your fleet or find additional outsourced transport and how much warehousing you may need for additional stock levels.
  5. Staffing – work out what staffing will be needed in all areas to support the additional volumes of sales, products, services and paperwork.  
  6. Premises – assess whether the current premises are big enough to support the increased requirements for manufacturing, warehousing and offices.

You may do it in a different order e.g., you determine the revenue growth you desire which then drives the marketing numbers needed to achieve the higher sales.

Translate that Operational into a Financial Plan:

  1. Full Profit & Loss – all elements of the Operational Plan will have revenue or costs associated with them e.g., normal staff costs plus the cost of any additional staff and the cost of recruiting them.
  2. Balance Sheet – all the movements in the P&L will be reflected in the Balance Sheet and this needs to be planned to ensure there are no unintended consequences like breaching any requirements your shareholders, investors or lending institutions might have about the balance between different elements in your assets and liabilities, otherwise known as ratios.
  3. Cashflow – ultimately all the activity in the Operational Plan and Financial Plan ends up being reflected in cash flow and there must be a plan to manage that cash flow. It is the one thing that often trips up growth plans. Everything is tracking according to the plans but there is a mismatch between the expenditure needed to grow sales and manage the increased activity and the cash coming in. A proper cash flow plan will reveal whether additional funding is needed in the short, medium or long term to enable the target to be reached.

 

  1. Measure and Adjust

 Once the plan is agreed and implemented then the actual activity must be measured against that plan on at least a monthly basis to see how it is tracking and determine if corrective action is needed. If the variance to plan is significant then the plan may need to be adjusted.  If there is a significant shortfall and it looks like the plan is working, but more slowly than expected, then adjusting the plan may mean deferring additional expenditure until it is required.

If the growth is much faster than expected, then the plan will need to be adjusted to ensure additional expenditure is made earlier and potentially show that additional funding will be required sooner. By having a plan, measuring actual results and adjusting the plan you stay in control of the growth trajectory.

It would be extremely unusual for the actual operations to be perfectly in line with the plan.  

 

  1. Communicate

Make sure the relevant elements of the plan are communicated to the internal and external stakeholders.

All employees should be aware of what will be expected from them, whether it is additional lead generation, more sales, more widgets to be manufactured, new suppliers to be found, more employees to pay, more invoices to issue, more cash to collect, more invoices to pay or new funding to be obtained.

Suppliers need to be forewarned if greater volumes need to be supplied or they may not be able to satisfy the increased requirements. There should be discussions with third party logistics providers or suppliers of certain overhead items if there may be constraints. Financial institutions, particularly lenders, need to be kept informed to ensure there are no issues with current facilities and to ensure they are aware that additional funding may be required.

 

  1. Keep things up to date

One of the great temptations when growing a business is to prioritise the activities that promote growth and defer some of the less exciting aspects of running a business. Paperwork processing slows down, collecting debts gets neglected, suppliers don’t get paid on time, PAYG and super payments are forgotten, the accounts aren’t kept up to date etc. Maintaining the discipline of keeping these normal activities up to date is essential to ensure that the overall health of the business is strong, and the business doesn’t get into serious issues with cashflow or compliance with statutory requirements. It also means that any additional funding requirements can be pursued with the best possible chance of success when you have well maintained and up to date financial records and reports.   

 

  1. Be Flexible

Having a plan is important, measuring and adjusting is necessary, communication is crucial and keeping up to date is valuable, but the need for flexibility is key. Build flexibility into the plan and keep that mindset as it is implemented and active.

For example:

  1. Don’t commit to a long-term lease on new premises until the growth is baked in and maintained. Look at a short-term lease somewhere close to current premises. Cultivate a strong relationship with your landlord or real estate broker.
  2. Don’t recruit additional permanent staff until the resource requirement is certain, employ staff as casuals or on short term contracts.
  3. Be prepared to look at alternative sources of funding. Maintaining a solid relationship with your lender is important, but don’t forget to do a regular comparison to see if there may be a much better facility available.

Most importantly, be flexible with the plan, it will almost always need adjusting, sometimes because the assumptions are too optimistic and is not realistically achievable, sometimes because it was too conservative and succeeded beyond all expectations.  Sometimes external circumstances like Covid-19 can cause the need for a massive readjustment. Not hitting the exact target is not an issue, but not being flexible enough to adjust can cause a good plan to end in failure.

Growth in and of itself is no guarantee of success, but if you manage growth correctly then you enhance your chances of success immeasurably. 

 

‘To learn more on this subject watch a recording of our webinar – click here

 

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

 

5 Tips to Avoid Your ‘Blue Sky’ Budget Bringing You Undone

- Business Growth

A ‘Blue Sky’ budget is one that includes a factor for growth.  This is a great idea… however where it often falls down, is in calculating everything else that enables the business’ ability to create and handle the growth.

 

For example if you’re going to grow sales by say 20%, how much more marketing do you need to do?  How much more sales capability do you need to deal with the extra leads from the marketing?  How much more overheads will you need to deliver the extra sales?

 

What we often see is extra overheads factored into a budget, allowing for the extra sales.  The big danger with this is, what happens if the sales don’t materialise?  We see the overheads spent, without the extra sales… causing losses.

 

So what can you do to make sure your ‘Blue Sky’ Budget stacks up and you don’t end up with losses?

 

  1. Factor in extra leads and sales conversions to a ‘Marketing & Sales Plan’ to create the extra sales.
      1. Extra sales don’t just happen by ‘magic’.  They come from marketing and sales efforts.  If you want to increase sales by 20%, that probably means you need to target an extra 40% in leads coming into your business.  Why double the extra sales?  It would be quite unusual for a business to convert 100% of leads coming in.  Let’s say you have a sales conversion rate of 50%, this means if you want to create an extra 20% in sales you need to create an extra 40% in leads coming in.
      2. If you know which marketing efforts create the best quality and quantity of leads, you need to factor in a plan to achieve those leads.  Once the plan is set you need KPIs (Key Performance Indicators) to ensure it’s on track.  You need to target a certain number of leads each day, week or month, to ensure there will be enough sales opportunities to achieve your desired sales figures.
      3. What’s your current sales process?  Are there ways you can improve this to increase the sales conversion rate?  If you can achieve an improvement here, it could save you extra marketing spend in order to achieve the extra sales.  It may be that you need to invest some funds in setting up the improved sales process initially, but it will pay big dividends down the track.
      4. Factor in extra marketing and sales costs to create the extra sales.  If you need to create extra leads to increase sales, you need to know what the leads cost you to get.  If you don’t keep a good record of where your leads are coming from, now is a good time to start.  The aim is to get maximum leads for minimum cost.  You need to know how much each lead cost you to get from various sources and what were the sales conversion from each i.e. quality of leads.  When you know this, you can factor in the cost of acquiring the extra leads to achieve your targeted sales figure.
  2. Monitor the extra Sales achieved and Gross Margin carefully
      1. Be disciplined with pricing. One of the great temptations when targeting extra sales is to start reducing prices when the budgeted sales don’t happen. This is not necessarily a bad thing but any margin erosion through reduced prices either needs to be offset by a reduction in the cost of the sales or a reduction in the associated overheads. Otherwise you risk ending up “buying” revenue with no increase in profits. 
      2. Don’t be afraid to modify your plans if you either undershoot or overshoot your sales budgets substantially. There is no shame in attempting to increase sales and not succeeding, as long as the right corrective action around costs follows. Conversely, if the sales increase is much greater than budgeted be prepared to spend the additional overheads required to support that growth or the team may buckle under the additional pressure of managing without the correct resources. Right sizing the support structure to the actual level of sales is crucial.
  3. Make overheads variable as much as possible
      1. Overheads are often ‘bumped up’ in line with extra sales targets. A problem arises when the sales don’t materialise to cover the extra overheads. If you can manage extra overheads to be as variable as possible this helps. For example, don’t lock yourself into extra premises or staff immediately… grow them gradually in line with sales growth.  Use ‘pop up’ premises on a short term basis if possible, take on casual or short term contract staff, to meet resource needs until you’re confident the extra sales are permanent.  
  4. Cash Flow Forecast to handle growth
      1. Many businesses fall into the trap of thinking extra sales will fix all issues.  We often get asked the question “How come my sales are up but cash is still tight?”  This is a typical scenario.  What happens when you make a sale is that you often have to buy stuff before you’ve sold it e.g. labour and materials.  It takes time for the sale to be finalised e.g. a project or stock that sits around in store for a while.  You’ve had to pay for the labour and materials, often before you’ve sold them.  Then, if you give payment terms to customers, you have to wait to be paid.  All of this creates cash flow squeeze, if you aren’t getting up front deposits or progress payments.  It follows then if you need cash to fund sales… the more sales you make, the more cash you need.  If this isn’t factored into growth plans, it can cause lots of headaches.  Doing a detailed Cash Flow Forecast will highlight how much extra cash you will need and you can deal with it upfront, rather than waiting until it’s a problem.
  5. Budget reviews to monitor progress closely
      1. Setting a budget is a great start to achieving extra sales and profit.  What we often see though is the budget gets set, it’s then shoved in the drawer or filed away and forgotten about.  A budget is like a ‘financial roadmap’ to your desired destination of profitability.  You need to regularly check it’s on track.  The best way to do this is to enter it into your accounting system, then report monthly on the budget versus actual progress.  If it’s on track… great!  If it’s off track you need to ask yourself why and do what needs to be done to get it back on track.  Doing it this way avoids a big surprise at the end of the next financial year, being losses you hadn’t anticipated.

 

Setting solid targets and systems for tracking them is the only way to achieve your desired outcome of better profitability.  There’s an old saying:

“If you aim at nothing you will meet the target with amazing accuracy!”

 

For more information to help with successful budgeting – download your complimentary ‘Top Budget Tip Sheet’

 

Managing Cash Flow In Construction

- Complimentary E-Books

Managing cash flow and cash flow forecasting are two of the most difficult things to keep under control and plan for in a construction company. On average, construction payment takes 83 days, and as cash trickles down from owners to subcontractors and suppliers, these payments can be further pushed out.

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Top 5 Things That The Owners of CFO On Call Have Done To Stay In Business For 30 Years!!

- Business Growth

Cash Flow Savvy

Cash flow is the lifeblood of any business and ours is no different.  Luckily being CFOs, we’ve understood this from day one.  We could perhaps be accused of not being bold enough in our growth trajectory… However slow and careful with cash has seen us ride out some of the last 3 decades of booms and busts.  When times have been good we haven’t loaded ourselves up with ‘over the top’ expenses.  When times haven’t been so good, we’ve been able to manage with ‘slim income’ coming in.  Obviously this has meant management had to forego payment at times, as well as having to inject our own funds.  A little worrying at times, but if you believe in what you’re doing it pays dividends to ‘put your money where your mouth is’.

 

‘Sticktoitiveness’

It’s been the best and worst of times in our 3 decade long journey.  We’ve ridden the rollercoaster of ‘the good, the bad and the ugly’ of staff, partners, business landscape, suppliers, customers etc.  Through it all we never lost sight of the ‘end game’ which, put simply, is to connect business owners with savvy Virtual CFOs to help them manage their financial challenges and be able to grow their business sustainably.  We never tire of seeing business owners freed from financial burden and being able to confidently grow their business to its full potential.

 

Embraced technology and systems

I remember way back in the 90s when computerised systems really began to take off.  We installed a CRM system that came on a ‘floppy disk’.  It cost us about $50!  This was probably one of the best things we ever did in business.  The amount of time this small piece of software saved us and how it enabled us to build a database, that is now around 13,000 contacts, is phenomenal.  Obviously we now pay a monthly fee for our CRM system that far exceeds $50, but that database is now a fabulous asset to the business and regularly delivers new leads and clients.  

We’ve operated as a ‘work from home’ business for the past 6 years, so when Covid hit, it was ‘business as usual’ for us.  We’re used to collaborating via Zoom, cloud based project management, accounts etc.

Recruited ‘only the best’ team

We took on our first employee about a year after start-up and this was a massive decision and commitment.  Suddenly we were responsible for the pay and well being of another human being.  It was quite scary at the time, however absolutely necessary if we were to grow the business.  I can’t tell you we were the best employers at that time… but we sure learnt a lot about how to work with staff.  They aren’t just there to make your life easier!  They come with their own motivations, beliefs and experience.  If you appreciate this and work together to arrive at solutions, it works great.  If you think you know best and don’t listen to your team you’re ‘cruising for a bruising’.  If you recruit ‘only the best’ and work together, your business will run smoothly and you will have a happy and productive team.  You will also spend a lot less time putting out fires.

 

Learned to say ‘No thanks’

It sometimes seems like everyone sees us as an easy route to clients.  We are constantly being approached by those with the latest software, gizmo or something that’s going to make our clients’ lives easier and us rich in the process!  Like every novice in business we had our heads turned by some of these types and wasted too much time in the process.  When we analysed the ROI of some of these relationships, we realised they just weren’t worth it.  Some relationships have worked out great for us, but we’re very careful now about what we get involved with and quickly figure out what to say ‘No thanks’.  Sometimes the best word is a polite ‘No’.  It really pays to think objectively about what you’re getting involved with and do a dispassionate ‘Pros and Cons’ assessment.

Being in business has been one of the most frustrating and rewarding experiences.

Would we do it again?

Absolutely!!!

 

What Happens When The Music Stops?

- Covid 19

HOW WILL YOUR FUNDING NEEDS BE MET NOW THE SUBSIDIES  HAVE ENDED?

Many businesses have been heavily impacted by the coronavirus pandemic and have been surviving through the receipt of various government subsidies. These subsidies have been a welcome lifeline, but they have now ended. It’s the time to start asking yourself: What happens to your cash flow now?

Banks are being supported and encouraged to lend by the government, but it doesn’t mean that they will relax their lending criteria. We all know that they like ‘bricks and mortar’ security. Many small businesses cannot offer ‘bricks and mortar’, so what can they do to gain the funding support that they need?
The next biggest factor in getting a loan is the bank having confidence in you, the business owner, as someone who really knows what’s going on in their business and, importantly knows what’s going on with the finances and cash flows of the business. A properly prepared funding submission will go a long way to creating confidence.

The Ingredients of a Successful Funding Submission

So, what should this funding submission contain?

These are the key elements:
● A detailed forecast of future revenues and expenses
● A detailed forecast of future cash flows, operating, investing, and financing. This demonstrates to the bank your capacity to service and repay debt
● A projected balance sheet

These three elements of the forecast are, in bank language, a three-way forecast. Properly prepared, this document makes it much easier for the banks to consider and meet your funding request.

All the above forecast numbers need to commence with current financial data that shows exactly where the business stands at the commencement of the forecast period – statutory accounts from two years ago won’t cut it.

And there needs to be a detailed written commentary that discusses your business plan and sets out the basis for the various assumptions that underlie the forecast numbers.

Put yourself in the best position to get the funding you need by being able to submit a professionally prepared funding application. These documents will not only tell you and your banker exactly what your funding needs will be but, as a bonus, will also point to ways that you can improve business outcomes.

Contact CFO On-Call to arrange a free chat about how we can help you to get this information together for your loan application.

Small Business Cash Flow Management

- Cash Flow Management and Forecasting

 7 steps to implementing a proven small business cash flow strategy

Regardless of the size or age of your SMB, understanding cash flow management strategies for small business is critical to your overall success.

Said simply, small business cash flow management is the process of monitoring, tweaking, and optimising the payments and income of your business.

Despite its simple explanation, small business cash flow management is much easier said than done. It may take years of work for an inexperienced person to accomplish cash flow forecasting correctly, or just a few weeks with the help of professional CFOs.

Today’s most successful SMBs follow seven cash flow management strategies for small business:

  1. Getting customers to pay invoices (and on time)
  2. Adopting subscription sales
  3. Seeking better payment terms from suppliers and banks
  4. Documenting all business income and expenses
  5. Reducing expenses
  6. Paying vendors and bills at the right time
  7. Increasing prices

When managing a small business there’s generally five key areas to focus on. But as your small business grows, it can become increasingly more difficult to stay on top of your finances. Often, it’s not until later that you realise your business is actually spending more than it’s making.

This scenario is a nightmare for every small business owner. Cash flow is the lifeblood of every business, so spending more than you make can have a tremendous impact on operations and finances, especially for small businesses.

That’s why small business cash flow management is crucial to your business’ success.

But how can you make sure that there’s always more cash coming in, when you know that there are expenses necessary to keep your business going?

The solution? Accelerate the flow of incoming money, and delay the flow of outgoing cash.

Having a chief financial officer (CFO) or a virtual CFO will definitely help you achieve this, but it’s also a great idea to have a better understanding on how to solve small business cash flow problems on your own.

We’ll guide you on what you can do to improve your cash flow, but first, it’s important to know what cash flow actually is and why its importance to your business.

What is small business cash flow?

Cash flow is the amount of money flowing into and going out of a small business’s accounts.

As mentioned earlier, cash flow is your small business’ lifeblood. So if your cash flow is poor (i.e. your expenses exceed your income), that means that your small business is “sick”.

That said, having positive cash flow doesn’t necessarily mean that your business is profitable. However, it does indicate your business’ liquidity.

The more liquid your business is, the more financially capable it is to apply for a loan, pay off short term liabilities, debts, and unexpected expenses (e.g. due to unplanned events, economic downturns, etc). It also means you can more easily reinvest in your business and return money to its shareholders.

How does cash flow affect small businesses?

If a small business is operating with positive cash flow it opens them up to emerging opportunities that may otherwise be missed with negative cash flow, or keeps cash free for unexpected events and situations.

As an example, if you’re a small business utilising heavy-machinery on a factory floor, positive cash flow means machines can be fixed efficiently, without a great loss to productivity if they break. But if cash flow is negative, there may be no reserve funds to cover the expenses of broken equipment.

Any breakdown in operating processes – no matter the small business – will result in delays to delivering your products or services to your customers. To make up the shortfall, you might have to pay overhead and suppliers from your own back pocket.

How can cash flow help a business grow?

Positive cash flow isn’t just to safeguard your small business, it can actually be used to help it grow.

Whether you want to tap into a new market, hire more staff, open an office in another location or boost your marketing initiatives, cash flow solutions for small business can be used to take your small business to the next level.

With positive cash flow the options are endless.

HOW TO MANAGE cash flow in small business?

Cash flow is important to any business, but having negative cash flow often hits small businesses more than bigger, more established companies.

When starting a business, you have a lot of expenses and you’ll find that money is going out fast, while getting sales might initially be slower than anticipated.

Unfortunately, this is a common reason why many emerging businesses fail. That’s why the first six months of a business is a very crucial period, where you need to ensure that you’re managing your cash flow well.

If you’re cash-flow negative for too long, it will spell danger for the future of your small business.

Other dangers of mishandled cash flow in the early stages may include:

  • Profit bleed — Mishandled small business cash flow management prevents businesses from achieving their sales and profit targets.
  • Less liquidity — If a large amount of cash is tied up in less liquid materials, it may be harder to source financing or funding from third parties.
  • Business failure — Bad small business cash flow management equals bad business operations – and potential closure in the near future.

Thankfully, a poor cash flow process doesn’t necessarily doom a business to failure. With the right cash flow management strategies for small business, you and your business may be financially successful for years to come.

How much cash flow should a business have?

According to CB Insights, 30% of businesses fail because they run out of money and 60% of small business owners feel they don’t know enough about accounting or finance.

So given that cash flow is crucial for every business, it’s important to understand how to evaluate your small business cash flow.

A Cash Flow Forecast will tell you how much cash you should have.

When this process is completed by CFO services for professional industries, it may remove a large portion of the guesswork from cash flow management strategies for small business.

Cash flow strategies for small business

Keeping your small business cash flow positive is a challenge, hence it’s important to analyse and plan around your current cash flow and your cash flow goals.

But in order to have a solid strategy, you need to have a clear idea on what should be included in the plan. So, here are seven concrete ways to help you improve your small business cash flow:

1.   Get customers to pay invoices on time

Be assertive when reminding your customers of payment. It is their responsibility to pay on time, but if poor collection processes are in place payments can be delayed by up to 120 days – that’s a cash flow killer for your small business.

There’s nothing wrong with you sending an email or calling to gently remind them of the deadline. One way to encourage them to pay on time is to incentivise quick payment through discounts (you need to be careful this doesn’t erode too much profit). Another way is to penalise late payers with interest penalties.

2.   Look into adopting subscription sales

If your product or service is being used and repurchased regularly by your customer, apply a subscription program so you’re sure that you get paid periodically (e.g monthly).

Aside from receiving upfront cash for future costs, subscription sales secure future sales, making it easier to accurately forecast your income and therefore your cash flow.

3.   Seek better payment terms from suppliers

Having better credit terms means that you don’t need to borrow as much money with interest. Also push for payment terms of 60-90 days rather than 30 days to slow down your cash outflow.

4.   Document all business income and expense streams

Make sure all your income sources and expenses are well-documented in an organised manner. You can’t accurately compute your cash flow if your data is lacking.

Having accurate data will also help you better analyse where your money is going, which in turn will help you predict or estimate future expenses more clearly.

5.   Reduce expenses

There are a lot of products and services that may hypothetically appear to be useful for your business. But, sometimes, that’s the urge to get something new and ‘flashy’ kicking in.

Before you make a purchase, think about whether your business really needs it. If it doesn’t, don’t buy it.

Also, if you need to purchase something, take the time to look for the best deals where you  get great quality and quantity for a low price.

Choosing used equipment (as long as it’s in good condition of course) over something brand new is also a good money saver.

6.   Pay vendors and bills at the right time

Often suppliers will try and get you to pay before the agreed terms, but this is not good for your cash flow. Don’t pay early unless you’re offered incentives to do so, such as a discount.

Paying right on time will ensure that you always have cash on hand, and it will help properly track the outflow of cash and maintain cash flow balance.

7.    Increase prices

If you’re really struggling to make your small business cash flow positive, it might be time to slightly increase your prices. Many businesses fail to do this and it leads to margin squeeze (i.e. falling profitability over a period of time).

But with some extra ‘knowhow’ big financial gains can be made by increasing prices. A manufacturing customer increased their bottom line by up to $200,000 simply by accurately accounting for the ‘scrap’ of raw materials and reflecting in their pricing.

So when increasing your prices, consider your competitors, the increasing prices of your equipment/inventory, the amount of manpower needed to produce your products/services, the amount of time needed to deliver these products/services, and whether your products come off as cheap or valuable.

How can a Virtual CFO help improve your cash flow?

Having a CFO as your go-to financial manager is important if you want to solve your small business cash flow problems.

However, given the qualifications of a CFO and how much they can do for a business, they aren’t an affordable hire.

That’s why hiring a virtual CFO is a better alternative for small businesses. You only pay for their services and time rendered, so they become a much cheaper option.

Virtual CFOs deliver their services remotely and on a flexible schedule, so you don’t need to worry about paying for an extra office space or hiring someone full-time.

Having a healthy cash flow is crucial in order for small business to survive in the present and succeed in the future.

That’s why you need the right person to help you manage your finances every step of the way.

 

Struggling to fully understand cash flow and business financial management? Book a free “hour of power” call with one of our Virtual CFOs to learn more about CFO Services for Small Business.

How to manage cash flow in construction

- Cash Flow Management and Forecasting

Managing cash flow and cash flow forecasting are two of the most difficult things to keep under control and plan for in a construction company. On average, construction payment takes 83 days, and with how cash trickles down from owners to subcontractors and suppliers, these payments can be further pushed out.

And, because of the industry’s nature, there are a plethora of factors to consider when monitoring, maintaining, and improving construction cash flow. All these factors make it hard to determine where exactly your money goes, let alone forecast your cash flow.

So issues like delays in payments and money owed to you, add significant strain to your operation, and if mismanaged, can stifle growth and potentially result in failure.

For this reason, it’s crucial to understand what cash flow is, why it’s important, and how to manage it to help ensure profit for your construction company.

What is cash flow?

Many people tend to confuse the difference between profit and cash flow. But, they actually have a stark difference. Profit is the difference between what you sell and what it costs to deliver your products or services. This means that profit is what’s left over after all of your business’ expenses.

Cash flow, on the other hand, is the net amount of cash and cash equivalents flowing in and out of the business at any given period of time. The company has a positive cash flow if there is more income than expenditure in that period.

So, a business’s ability to generate positive cash flow determines how much value it can create for its shareholders, hence the need to properly manage cash flow.

Why is it important to have positive cash flow?

Having negative cash flow means that you have more outgoing than incoming money. Having negative cash flow can mean one of two things:

  • Your business is losing money, or
  • Your business has poor timing of income and expenses.

That said, having negative cash flow doesn’t automatically mean that your business is failing. If your negative cash flow is caused by poor timing, then a positive net profit is still possible. However, this isn’t always guaranteed.

Negative cash flow also means that when unexpected expenses come up, your business won’t have any cash on hand to cover it (i.e. you might have to delay payment or make up the difference from your own pocket until you get your income).

Generating positive cash flow means that your liquid assets are increasing, which puts you in a better position to settle debts, reinvest in your business, return money to shareholders (if relevant), and have a buffer for unexpected financial challenges in the future.

What is construction cash flow

The construction industry is always hectic, with so much money flowing in and out among client, contractor, and supply chain.

With so many factors to consider, such as budgeting for retainage, paying bills on time, paying cash for assets, and needing to pay employees for labour-intensive work almost weekly, any slight miscalculations or problems can greatly impact the construction cash flow.

Imagine a scenario where you invoice your client as soon as a construction stage is finished. But after more than 60 days, your client hasn’t paid you yet. This poses a big problem as a construction company, because you may have needed your client’s payment to pay your subcontractors for their labour, and your suppliers for the materials and heavy equipment.

Late receipt of payment from your client can result in your construction company having to borrow money elsewhere in order to pay suppliers and workers.

That’s why it’s important for every construction company to analyse when a project will incur costs and how much they will amount to. This cash flow analysis will help the company make sure that they have proper funding for materials, equipment, and manpower, as well as suitable facilities for the project.

If you’re unsure how to plan and prepare for cash flow, a Virtual Chief Financial Officer can help set-up your construction company for success.

 

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Cash flow strategies for construction project management

Ensuring that you’re on top of your cash flow allows you to make better business decisions and understand where your money is going.

But managing cash flow means more than just securing new clients and getting paid for a job well done. For every project, there are a ton of costs associated, and your clients may take time to pay.

So to help you manage your construction cash flow, here are 10 important tips you need to be aware of:

1.      Know your client better

While most clients have the best of intentions, sometimes they get sidetracked or end up neglecting their obligations.

Business is a two-way street. As much as you need to be trustworthy and capable of doing honest business with your clients, they should also be the same.

So, before taking on a project, you need to make sure that your clients are financially capable of paying you the agreed rates on time.

To determine whether they’re capable, you need to thoroughly review their financial statements and check their creditworthiness. You should also cross-check references from contractors that have already engaged and worked with your potential client.

2.     Make sure that your estimate is profitable

It’s a myth that clients will always go for the lowest bid. While it’s true that the client wants to spend less if possible, they also understand being ‘cheap’ often sacrifices quality.

In the end, they probably want to work with a good company who can deliver what they want, at a reasonable price.

Given that, you don’t need to reduce your estimate to the limit just to increase the chances of it being chosen. Remember, the ultimate goal of your business isn’t just to get projects – it’s to generate profit.

So how do you know that your estimate is accurate and profitable? One important way is to calculate your mark-up the right way. You don’t want to end up having to cover some expenses because your estimate turned out to be too low.

Your mark up is the cost added to cover things like contingencies, costs, overheads, and buffers for increases in prices of equipment or labor and to ensure a profit.

3.     Spread out costs

Don’t use cash to buy your materials and equipment. Instead, finance your purchases through credit cards, lines of credit, and loans.

Sure, there will be interest charges, but what this means is that you will have more cash on hand for other (and unexpected) expenses to continue operating the business.

4.     Forecast your cash flow

Cash flow forecasting means estimating the cash incoming and outgoing across all areas of your business over a period of time.

This will help you estimate the future growth capacity of your company, so that you can plan and budget better for both the short and long term.

To ensure accuracy of the expected future income and expenses, it’s best to monitor your forecast on a monthly basis.

5.     Look for the best prices and control building costs

If you want to be financially efficient and savvy, so that you can save more and spend less, you need to be responsible with how much you spend for your materials and equipment.

Take the time to canvas and look for great bargains and discounts. You’d be surprised: you can get amazing quality for much lower prices.

Always make sure to compare quality versus price across different sellers of the materials or equipment you need. Also look for the best deals available, and learn how to negotiate prices and terms where possible.

6.     Plan payments around receipt of stage payments

Stage payments are often done every month when an agreed stage of a project has been completed.

It’s best to plan your payments around every stage, so that subcontractors and suppliers are paid in accordance with progress payments.

7.     Assert yourself when collecting payments

Delayed payments may lead to negative cash flow (i.e. you may be expecting to receive a payment that you will in turn use to pay bills).

So, have all the documentation ready when payment is due, and submit it to the right people to avoid any delays. Speak up when you know that the payment is due for completed and signed off work.

8.     Avoid accepting variations/change orders

Change orders or variations can mess up the careful planning put into maintaining a positive cash flow. If you can’t avoid them, make sure to stay on top of all the change orders and insist that clients contribute to the cost upfront.

Make the clients sign off on all variations and agree on a date where they can no longer make any changes.

9.     Create a system for quoting on your jobs.

Given that there’s a lot of monitoring to do to ensure a positive cash flow, you can’t keep track of all of the prices and data if you don’t have a proper system in place.

Have a system so that you know your materials, overheads and labour for each job. This will help you determine the profit you will make when doing the quote.

At a minimum, you need a cash flow spreadsheet, but if you want something more user-friendly and convenient, invest in cash flow software.

This will help you greatly with analysing your current cash flow accurately and with cash flow forecasting.

10.     Be time-efficient

You need to be organised so that all your work can flow without interruption. Plan each stage to avoid any delays in work completion, and have the materials ordered early, so that they will be delivered at the right time.

Doing this helps your cash flow, so that no equipment or materials take up space or tie up working capital that you can use more productively. It will also ensure that delivery of materials will not cause any delays in the construction process.

Managing cash flow in a construction company is crucial to ensuring its profitability and success. So in order to make sure that there’s more money flowing in than out, you need to plan ahead and find ways to ensure that you always have cash on hand for future costs and that you’re always paid on time.

 

To learn more about how to benefit from improved cash flow management in your construction company, book a call with us.

Adam Norich UGT International

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