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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The concept is great, I’d highly recommend it, we’re getting terrific information on our numbers and I don’t have the other costs associated with employing someone. Even though he is part time, there was rarely a time that you would call Michael and he wouldn’t pick up – and even when he didn’t, you’d hear back from him inside half an hour.

Adam Norich, Managing Director

UGT International, Homewares importer

Cash Flow Stress Busters for Business

- Cash Flow Management and Forecasting

A ‘shot in the arm’ about how small changes can impact your business results greatly.

Sue Hirst of CFO On-Call gives an explanation in ‘plain english’ about financial strategy for businesses.

Including discussion on:

  • How to avoid financial shocks
  • How selling more sometimes causes more cash flow problems
  • How to get more of your sales dollars onto the bottom line
  • How to work out your breakeven sales amount and set profitable sales targets
  • Pricing to ensure profit
  • Your Business Financial Roadmap
  • Tools to help profitability and good cash flow
  • How to improve your chance of getting growth funds
  • Understanding how your Balance Sheet impacts cash flow
  • A high level summary of the keys numbers to set you on the path to profitability

 

This 30 minute podcast could save you months of studying and headaches trying to understand accounting jargon!

One Simple Calculation… Could Make a Massive Difference to Your Bottom Line!

- Cash Flow Management and Forecasting

Recently a new client that we met with, complained he was struggling to be profitable.  We asked him if he knew what his ‘breakeven’ sales point was.  With a furrowed brow… the answer of the business owner was no.
He said he kind of set sales targets, but wasn’t exactly sure if those sales would be profitable or not.

We had a chat about why ‘breakeven’ sales point is vital to ensuring profitability in business.  Whilst we understand the objective in business isn’t to ‘breakeven’, it’s a good start to avoiding losses and helps you to work out what targets you need to set to achieve desired profitability.

Effectively you work out what is the gross margin that you make on your sales.  For example if your product or service costs $600 to produce and your sale price is $1,000, your gross margin is 40%.

Then you work out your regular monthly overheads or ‘fixed costs’ i.e. those that you pay every month, whether you make sales or not.  This includes things like rent on premises, admin wages, insurances etc.

To work out your breakeven sales point you divide your monthly overheads by the gross margin e.g.

  • Monthly Overheads = $  40,000
  • Divided by Gross margin =     40%
  • Breakeven sales point = $100,000

You can see here that you need to sell $100,000 to cover costs of $60,000 and overheads of $40,000.

We’ve set up a nice little calculator to help you work this out, as well as how many sales you need to make to meet ‘breakeven’.  It also calculates how much more you need to sell to achieve your desired profitability.

Contact us to get your FREE calculator or if you’d prefer a ‘no obligation’ chat with someone to discuss your profit and cash flow issues please click here.

Velocity Electrical Michael Brewitt, Director

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I can’t speak highly enough of John and CFO On-Call. I would recommend them to any business owner because we don’t know about this stuff. We don’t have the time to do an accounting degree, but we need someone to guide us. I’m now living the dream – running the business remotely! The internet has freed me up to work remotely. Everything is in the cloud now and CFO On-Call plays a big part as my Virtual CFO!

Michael Brewitt, Director

Velocity Electrical, Construction

How Can a ‘Virtual CFO’ Help You Grow Your Business?

- Business Growth

A Virtual CFO service is now available to smaller businesses and it doesn’t come with the high wage cost of employing a full time CFO.  Bigger businesses have had the benefit of a financial and ‘logical’ thinker in their businesses to guide them to better profit, cash flow and business value.

Most business owners didn’t go into business to become an accountant.  However, they need a good understanding of how the numbers work and how to drive better business performance.  They need a ‘financial co-pilot’ to work alongside them closely to guide the business in the right direction.  A ‘Virtual CFO’ fills the gap between an external tax accountant and a bookkeeper.

Here are some ways a ‘Virtual CFO’ can pay for themselves… way beyond their cost and help you grow your business.

Business Management

  1.     Discuss and decide your ‘big picture’ goals… what you want to achieve in your business in terms of business growth, improved profit, cash flow, business value, efficiency and lifestyle.
  2.     Discuss and set targets for specific parts of the business i.e. KPIs (Key Performance Indicators).
  3.     Review and reorganise management structure and team to align with business goals and targets.
  4.     Discuss profit improvement opportunities including outsourcing any ‘non-core’ activities.
  5. Help you to manage Cash Flow to avoid running out of cash and enabling you to achieve sustainable business growth.
  6.     Implement ‘best practice’ financial management processes and systems to ensure accurate, timely information you and lenders/investors can rely on.
  7.     Plan and implement business transformation projects with your team.
  8.     Review ‘Risk Management’ and “Governance’ i.e. how the business is set up and fulfils its legal obligations to all stakeholders to avoid disasters and costly mistakes.
  9.     Help with managing relationships with bankers, accountants, legal advisors, insurance providers etc.
  10.     Review your business finance to ensure you’ve got the best and most cost-effective funding in place.  They will help you with finance applications and preparing ‘business cases’ to secure funding.  This is one of the most valuable areas of help an outsourced CFO can provide, to ensure you get the growth funding required at the right price.
  11. Attend regular meetings to review reports and discuss performance, targets and further improvement actions and opportunities.  Being a ‘sounding board’ for your ideas and aspirations.

Planning

  1. Review your strategic direction to ensure it’s in line with your objectives and review options.
  2. Assist you to prepare a short and long term Business Plan, Budget and Cash Flow Projection.
  3.   Assist you to plan for your exit planning and succession and build business value to ensure an acceptable sale price.

 

Growth & Development

  1.     Discuss your ideas for new products/services and markets.
  2.     Assist you to work out the cost of and help you to implement business expansion plans.
  3.     If you plan to merge your business or acquire another business,  performing ‘Due Diligence’ to ensure it’s a profit and value building option.
  4.     Train, coach, mentor and develop your finance team, to ensure things are done right and you can rely on the information provided.

 

Cost of your VCFO

Agree a ‘value-based’ fee with your VCFO ensuring it is far outweighed by the value they deliver to your profit, cash flow, business value and lifestyle.

 

For more on working with a Virtual CFO download the eBook:

How to hire a top-level VIRTUAL CFO at ‘zero-cost’! 

What is a CFO?

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A chief financial officer (CFO) is an executive officer responsible for creating and implementing financial strategies that manage the past, present, and future financial situations and actions of an organisation. The CFO monitors financial statements, manages liquidity, analyses financial reports, and forecasts future cash flows within the organisation.

 

Cash-Flow-StressAs a business owner, staying on top of your finances can seem like a never ending process. 

Your sales are strong, your customers and staff are happy and your business is clearly growing but there never seems to be enough money in the bank to do everything you want.

Inevitably, that leads to doubts as to whether you’re even making money in business. The truth is, if you can’t diligently monitor your financial situation, it’s near impossible to know if you’re actually making or losing money.

So to help monitor finances, many business owners rely on external accountants to manage tax and compliance and bookkeepers to record and keep financial transactions.

While accounting firms and bookkeepers are very beneficial in keeping financial records more accurate and organised, there still remains a gap between these two, and that is financial strategy.

Financial strategies tackle more than just historical data – they identify ways to improve your financial situation, therefore positively impacting your business’ profitability.

So, if you want to make sure you’re paying yourself what you deserve and that your cash flow paints an accurate picture of your finances, you need to consider implementing an effective financial strategy.

That means hiring a CFO.

 

What does a CFO do?

A CFO, short for Chief Financial Officer, is responsible for managing the past, present, and future financial situations and actions of an organisation.

They do this by focusing on creating financial strategies that help drive a business to succeed.

A CFO’s goal is to unlock more opportunities while taking into account current financial constraints and finding ways to overcome them as the business grows.

 

More specifically, the CFO leads the business in these areas:

Controllership (The Past)

Controllership duties focus mostly on the “past” aspect of a CFO’s responsibilities. CFOs do a lot of reporting, ensuring that they present accurate and timely historical data relating to the organisation’s finances.

The CFO is in charge of monitoring the accuracy of financial statements required for all shareholders, employees, creditors, analysts, and regulatory bodies, since many decisions are based on all of this information.

Treasury (The Present)

The CFO is also responsible for the organisation’s current financial situation.

They manage cash flow and decide how to invest money based on historical financial information and by assessing potential risk. This is one of the most important responsibilities of a CFO.

The CFO also oversees the organisation’s cash balance and working capital, determines how to balance debt, equity, and internal financing, and makes decisions on issues relating to liquidity.

Economic strategy and forecasting (Your Future)

Businesses also heavily rely on the CFO for their financial future business cash flow forecasting.

This means that a CFO is tasked with pinpointing areas of finance that are most efficient. They will then use this information to generate new objectives to improve the organisation and maximise its return on investment.

This aspect includes financial planning and analysis, where the CFO forecasts the business’ future cash flow and predicts the best ways to ensure the business’ financial profit in both the short and long term.

Because of this, the CFO plays a critical role in the organisation’s decision-making processes.

 

Other duties of the CFO

While controllership, treasury, and economic strategy and forecasting are the most important roles of a CFO, their duties aren’t limited to these three main aspects.

CFOs also help in the following areas:

  • Compliance – Many CFOs manage compliance with federal, state, and local laws to ensure that the business meets all financial standards. This avoids any penalties and lawsuits.
  • Policy development – In line with creating effective financial strategies, CFOs can also develop policies that shape and align with their strategies.

 

What are the qualifications of a CFO?

Given that CFOs have large responsibilities that are crucial to the financial success of a business, you can’t hire just anyone for the job. 

Finances are the most sensitive facet of a business, that’s why you want a CFO who is competent, trustworthy, intelligent, and dependable.

You also want a CFO who has experience in managerial or executive positions, since this is a leadership role.

 

 

 

Here are the skills that a good CFO will possess:

Leadership skills

A good CFO knows how to lead their controllership, treasury, and financial planning teams to provide accurate data and make the right decisions for the business’ future.

This means that a CFO should know how to properly manage time, delegate tasks, communicate with their team, carry themselves with confidence and positivity, value accountability, and inspire others to do and be better.

And of course, one can’t be a good leader without demonstrating integrity and honesty in all their responsibilities.

 

Analytical skills

The duties of a CFO require a lot of analysis of complex reports and data to inform short-term and long-term financial decisions. 

If you’re not a natural numbers person, a CFO can analyse your situation on your behalf and explain the actual ‘story’ financial reports are telling you about your business. Utilising this expertise is crucial in developing strategies to overcome the financial issues you face and help you sustainably grow. 

Going further, a CFO will identify and analyse trends (i.e. which product or service margins are slipping) and put you in a position to respond to or capitalise on them. 

With a large percentage of their job revolving around reporting and analysis, a CFO has excellent problem-solving and critical thinking skills that will enable you to future-proof your business. 

 

Interpersonal skills

Apart from being a leader to their finance team, a CFO needs to build wider internal relationships (e.g. other managers and executives, board members, etc.) and external relationships (e.g. creditors, investors, etc.), so a CFO must be proficient in communication.

A CFO will set up your finance functions including your accounting system, accounts staff, reporting and will liaison with your accounting firm. That means, you no longer have to manage every relationship personally and be a conduit to finding answers from different parties to appease questions from accountants and lenders (and everyone in between). 

Field knowledge

With the complexity of a CFO’s duties, they must have a wealth of knowledge in finance to perform their responsibilities competently. It’s also advisable to employ a CFO with corporate experience.

 

Other skills

The work of a CFO can be very technical, so a CFO should also be proficient in:

  • Strategic planning.
  • Financial modelling.
  • Risk management.
  • Financial compliance management.

 

Education

Apart from work experience, an ideal CFO needs to have the appropriate level of education. 

The minimum requirement is a bachelor’s degree in accounting, business administration, or finance, but it’s highly preferred for the CFO to have a master’s degree in these fields.

A CPA (certified public accountant), CFA (chartered financial analyst), MBA (Master of business administration), and CMA (certified management accountant) are not required, but are definitely a bonus.

 

How is a CFO different from a CEO?

In its most basic sense, here’s the difference:

  • The chief executive officer (CEO) is the highest-ranking overall position.
  • The CFO is the highest-ranking finance position, and they report to the CEO.

 

To be more specific, here are some of the main differences between the two roles, according to the Corporate Finance Institute:

 

  • Key responsibilities

The CEO keeps an eye on the big picture. This means that they oversee all departments and ensure that the organisation’s goals, relating to all areas of its operations, are achieved. 

The CFO on the other hand, has more specific tasks (budgeting, accounting, compliance, and auditing) and only handles finance-related departments. 

  • Strategy

The CEO is responsible for the general strategy of the organisation, whereas the CFO is responsible for the financial strategies to support the business’ general strategy.

  • Relationships and reporting (internal and external)

Internally, the CEO reports to the board of directors, while as mentioned, the CFO reports to the CEO (but may also attend Board meetings). All department executives report to the CEO, but only finance executives and managers report to the CFO.

Externally, the CEO is the public face of the business, meeting with community leaders and the media (if need be), while the CFO builds relationships with lenders, banks, investors, regulators, and other financial institutions.

 

What is a Virtual CFO?

CFOs are important in all businesses. But because of their value in growing an organisation, corporate CFOs can be very expensive. For this reason, some businesses decide not to hire a CFO at all. However, there’s a good alternative to a corporate CFO that saves you a lot of money: a virtual one.

Apart from working remotely, virtual CFOs deliver their services on a contractual, flexible schedule. What this means is that their services are customised based on your needs – they don’t need to report in person or work full-time.

Since you only pay for their services and time rendered, they become a much cheaper option when compared to a full-time corporate CFO.

There are many reasons a virtual CFO is the perfect fit for a business in growth stage or even an established business looking to utilise the experience and skills of a CFO but aren’t necessarily looking to employ one full time. 

A virtual CFO is an investment into the future success of your small business. You can use the services of a skilled CFO as needed, without the significant cost.

Hiring a CFO – whether corporate or virtual – is like having a ‘financial co-pilot’ to guide you through turbulent times and help you avoid making incorrect financial decisions that could cost you later. 

 

Looking to work with a CFO to ensure your business remains financially viable? Please reach out to us for a no obligation one-on-one business review.

 

 

 

Top 5 Covid 19 Survival Tactics For Business Owners

- Complimentary E-Books

You need a ‘clear headed’ plan to cope with this
situation and come out the other side intact.
Obviously there will be many businesses that
won’t make it, however many will come through
this, if they employ a sensible survival strategy
and maintain a high level of determination.

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Your Step by Step Guide to Avoiding Cash Flow Crunch

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The only certainty that’s emerging throughout this crisis, is that we all need to learn to live with uncertainty!

Uncertainty doesn’t have to mean being unprepared. It means we need to consider several potential scenarios and be prepared to cope, as well as possible, with each.

Perhaps the best place to start is with the ‘worst case scenario’, so that you can build from there to cope with the worst, best and most likely scenarios.

 

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Improving cash flow in business

- Business Growth

Cash flow is, without a doubt, the most critical issue in successfully managing a business. More businesses fail due to lack of cash than any other issue (even very profitable ones!!)

We’ve compiled a simple and high level explanation of cash flow, what impacts it and the best way to manage it to help you sleep better at night.

What is Cash Flow and how is it different from Profit?

What is Profit?

Profit is the difference between what you sell and what it costs to deliver your product or service to customers. You also deduct general overheads from sales to arrive at a net profit figure. These factors are recorded in the same period, so that you can see if the business was profitable or not. I.e. If you work on projects, you measure the total value of the project against the costs relating to the project. This is where it gets tricky… if a project is in progress over more than one accounting period. You need to manage it in a job management system and make certain accounting entries into the general accounting system to report the true profitability of the project.

What is Cash Flow?

Cash flow differs from profit, because cash flows in and out of the business at a different rate to invoicing customers and paying suppliers and overheads. Whilst you may invoice a customer as soon as a product or job is delivered, a slow payer may not pay for 60 days! You may have had to pay for materials and labour on that job way before you even invoiced the job, let alone received payment from your customer.

This is the answer to the question people often ask “How come I’ve sold plenty, but I don’t have enough cash?”

What are the factors affecting cash flow and how can you influence them?

  • Sales growth percentage

This is the percentage by which sales go up or down from one period to another. Everything you can do to improve marketing and selling your product/service has a positive impact on this figure. Sometimes an increase in sales can cause cash flow issues, because you need more cash to fund the time it takes between paying suppliers and getting paid by customers.

  • Cost of goods/services sold percentage

This is the cost of goods/services compared to sales by percentage. It’s important to measure this by percentage, so that you can see how they are comparing as sales change. If you don’t measure them by percentage, it’s often the case that costs grow and eat up the extra sales and profit! Focus on reducing this percentage. Actions such as negotiating with suppliers for better pricing and payment terms and finding efficiencies in supply, will have a big impact on not only profitability, but also on cash flow.

  • Price change percentage – up/down

This is the percentage by which you increase or decrease the price of your goods and services. Many businesses fail to do small regular price increases and this leads to margin squeeze i.e. falling profitability over a period of time. It then becomes difficult to achieve a big increase and customers may defect to a competitor. Small regular increases are the way to go. Every dollar of price increase ends up straight on the bottom line!

Discounting on the other hand is a tool often used when times are tough or stock needs to be shifted quickly. The issue with discounting is that you need to sell a lot more volume to avoid making losses due to discounting. The discount comes straight off the bottom line!

  • Overheads percentage

This is the amount of overheads compared to the sales you’re making. It’s important to measure this by percentage, so that you can see how they are comparing as sales change. If you don’t measure them by percentage, it’s often the case that overheads grow and eat up the extra sales and profit! A budget is a great way to keep control of overheads. Once you’ve worked it out (usually in a spreadsheet) you can enter it into your accounting system and compare the actuals against the budget every month, to check things are on track. If they get off track you can fix it quickly and avoid further losses.

  • Customer Payment Days

This is the number of days, on average, that all your customers are taking to pay you. Not to be confused with the terms you offer to customers e.g. 14 days. Often if poor collection processes are in place, this number can blow out to 60, 90 or 120 days! This is a cash flow killer. Effectively your customers are using you as a bank. You must put processes in place to speed up payment. Actions like clear credit terms, quick invoicing, regular statements and follow ups, easy ways to pay etc. will speed up customer payments.

  • Supplier Payment Days

This is the number of days, on average, that you are taking to pay all your suppliers. Not to be confused with the terms they offer you e.g. 30 days. Often suppliers will try and get you to pay before the agreed terms and this is another cash flow killer. Effectively they are using you as a bank. Don’t pay early unless you’re offered incentives such as a discount.

  • Inventory/Work in Progress Days (WIP Days)

This is the number of days, on average, that all your stock is on the shelf waiting to be sold or your jobs are in progress before invoicing your customer. If you’ve got too much of either of these, they are sucking up precious cash flow. Think of stock as dollars piled up on the stock room floor and jobs are dollars piled up on the workroom floor. Informed stock buying is the way to reduce inventory days. Systems that help you to analyse stock usage will guide you to optimise purchasing to avoid over/under stock. The same goes for WIP days – a job management system will help you to see where jobs can be invoiced quicker or better still deposits, pre payment or progress payments achieved to alleviate cash shortages.

  • Interest, Tax and Loans

Interest on loans is an obvious one. The better you can manage the factors above and reduce reliance on loans the less you will pay. Taxes unfortunately can’t be avoided, so need to be allowed for, to ensure the cash is available when the bill needs to be paid. Loans have to be repaid eventually and repayments factored into the cash flow.

What is the best way to manage business cash flow?

This is a simple tool that plots out in black and white when you expect cash to come into the bank account and when it goes out.

You start with the opening balance and depending on the health of your cash situation, you may want to view the forecast on a monthly, weekly or daily basis. You add in the funds coming in and going out for each period and calculate what will be the bank balance at the end of each period. That way you can see beforehand where issues are likely to occur and fix them.

You can speed up payment from customers, slow down payment to suppliers, reduce spending, increase lending or put some business owner funds in for a while to cover shortfalls. You can do the forecast on a spreadsheet or a dedicated app. Either way you will sleep better at night if you know what the situation will be with plenty of time to manage it.

For more detailed information on how to manage the factors affecting cash flow, download our eBook ‘The Top 7 Levers to Maximise Sales, Profit and Cash Flow in Your Business’

The top 7 ‘levers’ to maximise sales, profit & cash flow in your business

- Complimentary E-Books

Most business owners spend time looking at the results of their efforts in the Profit & Loss Report and occasionally the Balance Sheet.

 

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UGT International laud “great financial advice and strategy” from Remote CFO On-Call partner

- Latest News

When you’ve grown accustomed to a certain way of approaching things, the words ‘different’ and ‘change’ can be daunting to say the least.

Adam Norich can attest to this. As Managing Director of UGT International, a homewares importer based half an hour outside of the Melbourne CBD, his job is to evolve with the times and keep across trends in the market.

But when it comes to crunching numbers, he admits he’s always been a little “old fashioned”.

“I’m not big on titles,” Adam said.

“We’re a business that has grown steadily for many years and we’ve always had an external accountant and an internal bookkeeper.

“Unfortunately our bookkeeper came to retirement and as a 32-year-old family business we wanted to replace them with an all-rounder, but the trouble we found was that often people were either too senior and didn’t want to do the bookwork or too junior and wouldn’t have been able to provide sound financial advice.”

Enter stage left, CFO On-Call, and more specifically, outsourced CFO partner Michael Granek.

As a people person, Adam wasn’t sold on the virtual aspect of the company, but Michael’s experience in the field was enough to earn him a chance – and he certainly hit the ground running.

“Coming into any family business isn’t easy, but as our bookkeeper retired rather abruptly Michael had to come in, roll his sleeves up and really work in the company rather than on it for the first few months,” Adam said.

“He wasn’t against that, but what struck me immediately was seeing how much he cared about the company and the people – that’s an important thing to me.

“Yes, he provided great financial advice and strategy – his influence has helped us to improve procedures and policies and set professional budgets for the first time, and he has been an asset on the tech side of the business which has taken the pressure off me.

“But for me, everything comes down to personal connection and showing ethics and that attitude of caring about what you do, and Michael embodies that.”

UGT International continues to go from strength to strength, with Michael’s passion, dedication and hard work a significant reason for this.

“The concept is great, I’d highly recommend it,” Adam said of CFO On-Call.

“Even though he was only part time, there was rarely a time that you would call Michael and he wouldn’t pick up – and even when he didn’t, you’d hear back from him inside half an hour.

“This has been a great experience for us.”

 

Want someone like Michael on your team? Request a free hour of power with our CFO’s today.

How to Save 44% on Your Finance Function Cost and Get Better Information into the Bargain

- Complimentary E-Books

Have you ever worked out what the finance function in your business really costs? When you analyse it and review the cost and effectiveness of each aspect, it can be quite an ‘eye opener’.

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Time To Plan Your 2020/2021 Financial Roadmap

- Covid 19

Whether we like it or not COVID-19 has had an impact for the better or worse on just about every business in the world!

The question is, how will businesses survive?

How will those negatively impacted cope until sales start to go back to pre-COVID-19 levels… if ever?

How will those positively impacted be able to take advantage of new opportunities that have arisen due to COVID-19?

How will those that have no option but to shut down, do it in an orderly fashion, without too much penalty for well-intentioned business owners who, through no fault of their own, have had their business wiped out?

If you’re one of the lucky ones who can survive and even see new opportunities, how are you going to take advantage of them?

If business growth is an option for you or if you just need to manage the current situation, to keep going until things improve, there are some key financial issues that need to be considered.

Here are some key financial issues to consider:

  • Sales fluctuations need to be factored into all business planning. Whether sales are going up or down, the impact needs to be considered. Your level of sales impacts other factors, such as costs, overheads, customer and supplier payments, stock requirements and job management.
  • In these uncertain times it’s vital to plan for the worst as well as hoping for the best. That means ‘What If Scenarios’. When budgeting and cash flow forecasting you need to consider several scenarios… best, worst and most likely. If you pre plan, you will be able to run the business to cope with most scenarios.

For example, if sales suddenly go up, how will you purchase extra goods and services required to deliver? Do you need to have funding in place to cover the cost until you get paid by customers? Lenders/equity investors have funds now, but you must present your proposition properly to give them confidence to approve. They generally require 3 Way Forecasts i.e. Profit & Loss Budget, Balance Sheet Forecast and Cash Flow Forecast.

If sales suddenly go down, how will you manage costs and overheads to suit? Creating as much flexibility as possible in outgoings is vital to cope with fluctuating sales. On the other hand, if you really can’t do that, another strategy is to work out your break-even sales point to cover your fixed overheads. Break-even means a $0 net profit result. In some cases, break-even may be a good result in uncertain times. Once you know what your break-even sales point is, you can use that as a basis for targeting sales to achieve or improve on that result.

  • If you have to withstand losses, how long can you do it for and how will you sustain that? Like the country’s economy, some business owners may decide to wear losses and debt to keep going, if the business has a viable future beyond COVID-19.
  • The key to getting this right is to employ logical thinking, which is not easy to do, if you feel stressed and emotional about what’s going on. CFO On-Call people have worked through financial crises, downturns, recessions, booms… you name it, and we are here to be your ‘Financial Co-Pilot’ through these turbulent times. Call us to arrange a brief chat about your circumstances and how you can make the best of them.

If you would like guidance on how to effectively manage your financial roadmap, take advantage of a FREE 30 minute Coaching Session with a CFO On-Call.