Making More Money: Simple Strategies for Improving Cash Flow and Profitability
Improving cashflow and profitability
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Transcript of Improving cashflow and profitability
Welcome
Introduction to Seminar
What do you hope to learn in the next two hours:
Burning issues?
Topics of interest?
Opportunity to network
Have fun!
Section References
Maintaining Profitability – Section Six
Improving Cash Flow – Section Seven
Improving Profitability
Profitability Measures Hint
Using the profitability measures provided will ensure that you are aware of any reduction in profit as it occurs and understand what level of sales is needed to ensure that the business will turn a profit
Profitability Measures
MarginThat your profits are not being eroded by increasing prices in stock or expenses
Mark upHow to set new selling prices when stock costs increase
Break even analysisHow much you need to sell before the business is making a profit
Page 23
Profitability Measures
Gross Profit MarginMeasures the percentage of sales dollars available to pay the expenses of your business
Gross Profit Ratio = Gross ProfitTotal Revenue
Net Profit Margin Measures the percentage of net profit to the sales dollars
Net Profit Ratio =Net ProfitTotal Revenue
Page 24
Profitability Measures
Mark UpIs the amount you sell your goods above what it cost to purchase or manufacture those goods.
Percentage Value=
Sales Less Cost of Goods Sold
Cost of Goods Sold X 100
Page 25
Profitability Measures
Break Even
The break even calculation shows how many sales have to be made, in either dollars or units, before all the expenses are covered and actual profit begins.
Percentage Value=
Expenses /1 Less (Cost of Goods Sold %)
Net Sales
Number of Units =
Unit selling price less Unit cost to producePage 25
Case Study
Joe’s Motorbike Tyres
Let’s look at Joe’s profitability measures
Page 26 of Workbook
Improving Profitability Tip
Compare your profitability measures to businesses within the same industry to ensure that you are being competitive and achieving maximum profit potential
Discounting Sales
Discounting goods or services to entice customers to purchase will erode your profits
Where discounts are offered you will need to sell more goods in order to achieve your gross margin
Should consider other alternatives to entice sales (e.g. supplementary services or products)
Page 27 of Workbook
Discounting Sales Hint
You may like to consider offering your customers “add on” services as an alternative to offering discounts
Discounting Sales Tip
Always calculate the impact on profitability before offering discounts
Expense Management
Good management of general business expenses will contribute to increasing profits
Identify where costs are increasing and take action to maintain your net profit margin
Continually monitor all expenses
What are some of the actions you can take to reduce expenses?
Page 28
Expense Management Tip
Look for opportunities to join with other businesses for “group” buying that can provide discounts on your expenses
Improving Cashflow
Working Capital:
Adequate cashflow to meet short term obligations
Setting strategies to ensure cash crisis is avoided
Utilising 'internal' cash to fund operations
Working Capital Cycle
Product/Manufacturer Provider Service Provider
Page 29
Stock Management
Optimum level to ensure that customers needs are met
Minimum level of excess/aged stock
Holding cost of stock
Strong controls to avoid theft
Page 30
Stock Management Hint
Setting up good stock control procedures will ensure that cash is not tied up in holding stock unnecessarily
Stock Management
Efficient stock control requires a three step process:
Stock review
Buying policy
Operationalissues
Stock Review
Current level and value
Which are the good sellers?
Which provide the highest margin?
List slow moving, excess and aged stock
Update stock records
Make an action plan
Page 29
Buying Policy
Identify 'core' stock
Know what levels to order
Negotiate with suppliers
Beware of discount offered
Page 30
What Impacts Stock Management?
Supplier service
Advertising and promotion
Sales policy
Delivery
Any others?
Stock Days
Day’s Inventory
Shows how quickly stock is replaced
The less number of days, the quicker profits areearned
=stock on hand x 365
cost of good sold
Page 33
Stock Management Tips
'Just in time' delivery
Move excess or aged stock quickly
Keep accurate records
Regular stock count
Understand your stock
Use financial system to track stock
Page 32
Supplier Management
Often on start up, cash payment
Once up and running, negotiate improved terms
Make full use of terms
Supplier Management Hint
Setting up good management procedures will ensure that you get the most out of your suppliers
Supplier Management
Supplier selection
Payment terms
Managing relationships
Page 34
Supplier Selection
What is your priority from supplier?
Prepare list of preferred suppliers
Credit check all suppliers
Regularly compare supplier pricing and service
One main supplier, ensure a back up available
Page 34
Supplier Payment
Negotiate payment terms before entering into the transaction
Document standard payment terms on each purchase order
Calculate benefit of taking discount for early payment
Regularly check that payment is not made early
Agreed process for damaged or return goods
Review the terms with each supplier regularly Page 35
Supplier Relationships
Meet regularly
Adhere to payment terms
Procedures for late payments
Communicate when delay in payment
Solid, reliable customer
Page 35
Creditors Days
Day’s Creditors
How well supplier payments are being managed
Payment before agreed term = decrease cashflow
Payment after agreed term = damage relationship
=accounts payable x 365
inventory
Page 37
Supplier Management Tips
Extend payment terms
Payment terms commence
after delivery of satisfactory goods receipt of credit note
Structured payment run
Tight controls over
early paymentover paymentduplicate payment
Continually review supplier contractsPage 36
Managing Work in Progress
Good record keeping system:
All detail recorded at order
Track and prioritise all outstanding orders
Send invoice with delivery
Record important dates:
orderestimated completion
deliveryinvoice
Page 37
Work in Progress Hint
The key to managing work in progress is to have a good record keeping system
Improving Work in Progress
Only order when needed
Identify 'bottle necks'
Review processes
Have adequate stock to complete order
Review progress cycle regularly
Request deposit for special orders
Page 38
Managing Debtors
Credit sales ties up cash
Wasted effort and time in chasing payment
Increased risk in bad debt
Page 39
Managing Debtors Hint
Ensure that you have good procedures in place to encourage prompt payment
Managing Debtors
Credit controls
Payment terms
Managing customer relationships
Page 39
Credit Controls
Credit check all customers before sale
Rank by credit risk
Set sales limits according to credit risk
Regular review of credit risk
Record outstanding paymentsexceed limits
Document proceduresPage 39
Customer Payment Terms
Document on each invoice
Ensure that they are adhered to by staff
Implement procedures to support terms
Policy and procedures for returned goods
Page 40
Customer Relationships
Meet regularly
Review actual payment with terms
Act quickly for disputed goods/services
If delay in delivery, notify immediately
Solid, reliable supplier
Page 40
Debtors Days
Day’s Debtors
The average number of days taken to collect fromdebtors
Payment received after agreed term = decreasecashflow
=accounts receivable x 365
sales revenue
Page 42
Managing Debtors Tips
Invoice early
Provide incentives to pay early
Make payment easy (payment options)
Pay commission on amounts collected
Review outstanding payments regularly
Page 41
Managing Debtors Tips
Identify slow paying customers and contact
Offer payment plan
Stop supply
Document all communication
Sack the customer!
Cash Conversion Cycle
Stock days + Debtors days – Creditor days
The total number of days in the working capital cycle:
Page 43
Working Capital Management
Working Capital Cycle
Stock management
Supplier management
Work in progress
Debtor management
Cash conversion cycle
Page 43
List 3 actions you will follow through with as a result of this
workshop
Then
List 3 things that you’ve learned in this seminar
List 3 actions you will follow through with as a result of this
seminar
List 3 things that you’ve learned in this seminar
Business mentors help you to identify a clear direction for you and your business.Business mentors can also advise you on how to:
conduct market researchwork out your break-even pointprice and/or cost your products or servicesdevelop an effective marketing strategyuse other business management tools
To arrange a session with a business mentor go to:
www.sbms.org.au/OurPrograms/SpecialistVouchers.aspx
and type in AFS as your code
Using your SBMS voucher
Questions?
Thank you for attending
Check outbusiness.vic.gov.au/workshops
for more workshop information