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A SIMPLE WAY TO ENSURE
AND HEALTHY CASH FLOW
IS TO FOCUS ON WHAT
One of the biggest missed
opportunities we see in business
reports is lumping all revenue into
one account and not breaking it
down into categories. Breaking
down, not only the revenue but
the costs associated with each
revenue source, enables you to
see clearly where you're making
and losing money.
• What drives revenue needs to be
• How saleable is the product or
service and what's the market?
• What marketing is working and
how much is it costing to acquire
• Is it profitable revenue?
• How does the true cost of
delivering the product or service
compare with the price?
• Are customers returning and if
not why not?
Pricing of products and services is
vital to profit. To ensure profit it's vital
to know the true cost of the product
or service and keep an eye on it, to
avoid 'margin squeeze' i.e. allowing
costs to rise without increasing prices
and absorbing extra cost. Market
forces have an impact on pricing
but it's not viable to continually
absorb cost increases without price
increases. It's not always necessary to
One client recently told us they
hadn't increased prices for years. We
did some analysis to find out what
were their best-selling products. On
each of these we agreed to a small
increase with no resistance from
customers. A small regular price
increase is much easier to achieve
than irregular big ones. Most
customers expect a CPI increase and
if it's written into contracts, it's much
easier to achieve.
Costing of products and services
is vital knowledge to work out
gross profit, which is an important
benchmark. Cost of products may
include the product, importing,
freight, packaging, labour, warehouse,
raw materials, etc. Cost of jobs may
include labour, materials, out of
pocket expenses, etc. If gross profit
is below expectations it may be
necessary to assess how products
and services are costed and acquired.
We had one client in a wholesale
business whose packaging was a
large portion of costs. They said
they couldn't negotiate a better
price with the supplier. We did
some shopping around and found a
supplier who offered a 10 per cent
reduction. The regular supplier soon
agreed to a similar reduction.
Labour is another example of
cost management on jobs. It's often
the case where chargeable labour
spends time doing non-chargeable
work such as admin. If you take the
number of people, and calculate
the total hours spent on admin
multiplied by their hourly charge out
rate, it's often the case that the cost
of employing someone else to do it,
is less than the missed income.
Overheads can get out of hand
where there is no budgetary control.
A budget can be a saver as well
as keeping your banker happy.
Also, giving someone the task of
shopping around for better deals on
supplies can be a saver.
One overhead that can get out of
hand is wages. Often in a growing
business, staff are employed to
meet demand, without proper job
descriptions. An organisational
chart can be useful for a growing
business. Begin by listing all tasks in
the business, then list who currently
does them. Any overlaps and gaps
should become obvious and job
descriptions can be realigned to suit.
Debt collection is an area that
has blown out in the last few
years. Dunn & Bradstreet recently
reported that average collection
days were 55.6 days. Compare
this to your seven day terms to
see what impact this is having on
cash flow. Start with terms of trade
so your customers understand the
expectation. Invoice as soon as
the product or service has been
delivered or get a deposit or
progress payments. Then follow
up smartly. Email follow-ups for
small amounts and phone calls
for large amounts. Keep good
records of reasons and excuses
for late payment and agree to
outstanding amounts being paid off
in instalments over a period.
Stock and jobs can be a huge drain
on cash flow. Think of stock as dollars
piled up on the stock room floor
and jobs in progress as dollars on
the work room floor. It really pays to
reduce the time stock sits in store and
jobs wait to be finished and invoiced.
Good records and planning are vital
to management of both. There are
some cost effective online systems
available that can save thousands of
dollars in working capital requirement
to fund stock and jobs.
Slowing down payment to
suppliers is often the last resort
where there are cash flow problems.
Often we see suppliers being
paid too quickly or worse being
overpaid. A close eye on this area
can provide much needed cash. ◗
BREAKING DOWN BARRIERS
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