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Tag: profit

7 Ways To Increase Profit And Business Value

by lauramills
7 Ways To Increase Profit And Business Value

Have you ever wondered how your business is valued in the eyes of an external party? Then you need to know the seven (7) levers in your business.

With just a little additional focus on one or more of these 7 levers, you can directly improve the cash-flow, profitability and/or value of your business. There’s no smoke and mirrors, nor anything particularly difficult to undertake. However, many business owners do not take the time to appreciate how the financial performance of their business really works.  So, let’s break it down.

Often business owners will primarily focus on sales volume, in other words trying to sell more. However, whilst sales volume is important, it’s only one of the 7 levers available to you.

What are the 7 levers in a business that control your cash, profit and business valuation?

The first four levers are focused on your Profit and Loss and therefore directly impact the profitability (and cash-flow) of your business. As most, businesses are valued at a multiple of cash earnings. These levers also have a huge impact on the value of your business (along with other aspects such as Brand, customer base / income streams, and internal expertise / “keyman” dependence).

  1. Volume

Selling more – although increasing sales can grow your business, don’t forget to focus on the other levers below! How much of every extra $1 in revenue turns into profit and into cash in your bank account, and when?

Tip – formulate a sales & marketing plan, with a budget, which is aligned back to your  overall Strategy. Review and tweak the plan regularly.  This will help keep you focused on the right way to grow your top line.  Any growth needs to be sustainable!

  1. Pricing

can you increase your prices? Even a 1% increase can have a big impact. There can be a fear of losing customers by putting up your prices, which can often be unfounded.

Tip – review your margins by product / service stream / customer to ascertain which sales are making you money and which are not.  You need to know your break-even points!  Your part- time CFO can help – they love this stuff!

Tip – the results of your pricing analysis need to dovetail into the sales & marketing plan. It’s possible to make more profit from less turn-over!

  1. Cost of Goods Sold – reduction in % terms

This lever is most relevant to those businesses with direct costs such as manufacturers, construction, etc and places the focus on your gross margin.

Tip – revisit your direct purchasing arrangements and negotiate better terms and pricing. For example, bulk purchase discounts, early payment discounts, reduced freight.  Maintaining strong supply chain relationships is important but that doesn’t mean you can’t ask the question (or find potential alternatives).

Tip – review your direct labour-force using metrics such as labour utilisation, overtime levels, re-work, customer complaints, and down-time.  You may be able to re-deploy staff or reduce casual labour / overtime once you have this data.  Again, your part-time CFO can make this happen for you.

  1. Reducing Overheads

This may sound like an obvious one, but we always find at least some unnecessary “fat” in our client’s overhead expenditure.

Tip – someone needs to review the overheads line by line. Indirect / office wages, communications, insurance, utilities, freight, and advertising are the common ones where savings can be achieved. Even small reductions in certain areas can all add up over time!

These last three levers are focused on your Balance Sheet and are collectively called Working Capital. They have a significant impact on your cash-flow and therefore also on your funding requirements. Many businesses can avoid additional debt borrowings, or pay their existing debt faster by shortening their cash-conversion cycle.

  1. Reducing debtor days

This means improving the ageing profile of your Accounts Receivable function (i.e. getting your customers to pay you faster).

Tip – review your credit control policy and your payment terms as customers with poor payment histories should be carefully managed.  Review your collections process in terms of who chases the debt and when.  The introduction of direct debit may be an excellent solution for some businesses.

  1. Reducing stock days

This means a faster conversion of your inventory (if you carry it) into sold product, thereby reducing the amount of stock you hold.

Tip – introduce a stock-take process if you don’t have one. This can ensure that your financial records mirror what you actually have on the shop-floor. Then review the results of the stock-take for slow-moving or obsolete stock items – these may need to be discounted in order to convert them into cash.  Your purchasing policies may also need review if you are over-stocked with certain inventory lines.

  1. Increasing creditor days

This means taking longer to pay suppliers (without hurting the relationship or cutting off supply).

Tip – contact your suppliers to re-negotiate your settlement terms. It’s just a matter of asking the question – they may say “no” but then again, they may really value your business.

Now you know the what the 7 levers are, it’s time to do something tangible with them in order to make a real impact on your business. If you don’t have the internal expertise or time to make it happen, we would be happy to talk to you about how a part-time CFO can bring this to life. After all, as CFOs it’s what we do!

 

Photo by Monstera

Profit Improvement through Expenses and Supply Chain Management

by lauramills
Profit Improvement through Expenses and Supply Chain Management

There are two types of expenses, fixed and variable. Careful and regular monitoring should be in place for all businesses.

Fixed Expenses

Fixed expenses remain relatively constant regardless of the volume of sales. These are usually salaries, insurance and rent.

If your organisation has a significant decrease in sales, profit is impacted as fixed costs remain constant. Additionally, although termed “fixed”, those costs can increase alongside changing economic and other trading conditions.

The following tips can help a business improve the management of fixed expenses.

  1. Regularly review all these costs and compare them against other suppliers’ pricing to ensure the business pays competitive rates.
  2. Salaries are classified as a fixed cost. You should review your staffing levels and make sure they align with your business activity
  3. Compare your expenses to the industry standard. This will also help you know if the costs you are incurring are in line.

Variable

On the other hand, variable costs are directly impacted by changes in the activity levels or the volume of products or services that your company produces.

It is crucial to differentiate variable costs from fixed costs as variable costs are critical when it comes to profitability. If your organisation is not performing as expected, sales can remain flat or are decreasing. It is essential to manage these costs in line with the sales to reduce the risk of profit erosion.

The following tips can help a business improve the management of variable costs.

  1. Analysing profit margins, not just on a company level but on all product lines. You may find that one product has a high margin and another a negative margin. This will not be evident unless you report on each product line.
  2. Make sure you are aware of which costs are attributed to sales. If you see that the profitability is reducing, you may need to reduce those not attributed to sales, for example marketing costs.
  3. Staffing can be a high cost for any organisation. Consider hiring staff on a casual or part-time basis so that you can scale your staffing levels up and down based on sales demand. There are also recruitment agencies that will handle this aspect for you.

Supplier / Supply Chain

When thinking of supply chain, you usually think about the delivery of goods, are they on time or are they correct, and when will you pay for them. If you think about your supply chain as another way to maximise your profitability, you will be on the right track.

The following tips can help a business improve the use of its supply chain:

  1. Implementing the proper inventory method, finding the balance between too much and insufficient material.
  2. Technology that suggests minimum material quantities, and when more stock needs to be ordered.  As a result, this can reduce reliance on human interaction and ensure the stock is on hand when required.
  3. Review your supply chain arrangements regularly, look to see if you can get a better price or negotiate the current arrangement. Having your suppliers hold the stock could reduce your cost of storage.
  4. Always have two suppliers. If something were to happen to one supplier, this would not impact your organisation as much if you only had one supplier.

Each business has its own challenges when it comes to profitability. This blog only touches the surface around what can be achieved.  The CFO Centre has been assisting SME’s for 20 years, offering highly experienced Chief Financial Officers on a flexible, part-time basis. As CFOs, we are qualified CPAs or CAs with extensive commercial experience across multiple sectors, so we know what to look for and how to respond.

Written by Elechia Jones, Regional Director, The CFO Centre

Photo by Adeolu Eletu on Unsplash

What The Rolling Stones Can Teach You About Making Profit

by lauramills
What The Rolling Stones Can Teach You About Making Profit

At an age when they should (or we just wish they would) hang up their leather trousers and retire, more and more ancient rockers are embarking on yet another tour with The Rolling Stones top of the list. 

Prior to Covid, The Rolling Stones (of course!), Madonna, The Who, Neil Young, Rod Stewart, Pearl Jam, Queen, and even Ringo Starr were all performing on stages around the globe. Given that many of them are nearing or way past grandparent-age, you might wonder why they’re still bothering so many years after their first taste of fame. 

The performers will say it’s because they love it and that they ‘don’t want to let the fans down.’ But there’s another hard-nosed reason to get their weary old bones back on the tour bus. And it’s this: touring boosts their profits in a way that digital music sales and royalties can no longer do. 

“With digital music so freely and widely available, hardly anyone makes money off sales or royalties these days,” reported Mike Rowell in an article for Forbes. 

Top performers can take home 35% of the night’s gate sales and up to 50% of the money made from merchandise sales, according to Forbes’ journalist, Peter Kafka. Their record labels are likely to receive none of that, which means the stars are likely to receive a whopping payout for their performances.  

Singing aside, what can you learn from the likes of Mick Jagger when it comes to your business? 

To focus on the part of your business that brings the most profits. The Rolling Stones could have retired decades ago and waited for the income from album sales and royalties to trickle in. Instead, they made the decision to continue to tour and have generated many millions as a result. In just under three years, for example, the band’s overall concert grosses topped $401 million, according to Billboard. 

The following story also illustrates why it makes sense to focus on the most profitable part of your business.  

A major US direct marketing company with over $1 billion in annual sales recently reviewed its database to determine where its profits were coming from, B2B or B2C. At that time, 50% of its sales were to consumers and 50% to businesses. I was shocked to discover that the profits on the business sales were 500% better than those to consumers. Most consumer sales weren’t even profitable even though they represented the majority of customers, transactions, and expenses. 

The decision was made to focus on B2B sales. It required a significant turnaround in the business: at that time, the company employed 500 people taking inbound calls from customers and only 100 people making outbound calls to businesses. 

The change took two years. By the end of that period, 95% of its sales were to businesses and only 5% to consumers. Sales flourished. They had been growing at 21% before the turnaround but by the end of the two years averaged 50%. Profit growth was equally dramatic. 

So, what can you do to boost your profits besides cutting costs? For a start, identify your most profitable customers and then do everything possible to increase sales to that segment of your business. Focus on attracting more customers like them.   

Want further reading on profit? We outline 3 of the 4 factors for increasing profit in our blog Critical Factors For Improving Profit 

Fortunately, it’s not something you have to do alone. A part-time CFO (Chief Financial Officer) will help you to accomplish a more profitable company with less stress and hassle than if you were to try to do it on your own. Watch our 3-minute video on How it Works,  which explains the part-time CFO model from the CFO Centre. 

 

Photo by Clem Onojeghuo from Pexels

Need Help with Your Cash Flow?

by charlottenoble
Need Help with Your Cash Flow?

Cash flow problems put your company at risk.

Unless your company manages cash flow effectively and uses regular cash flow forecasts, your company is in jeopardy. Cash flow shortfalls mean:

  • You can’t pay suppliers on time
  • You can’t make debt repayments on time or at all
  • You can’t buy new inventory to meet customer demand
  • You can’t pay staff wages
  • You can’t compete for new contracts
  • You can’t advertise to attract new clients
  • You can’t hire new staff.

This will have a knock-on effect on your company’s profits, market share, and brand reputation. It could even result in your company going into liquidation.

One US bank study found that 82% of business failures are due to poor cash management.

How to Fix Your Cash Flow Shortfalls

Fortunately, most cash flow problems can be resolved with help from the right people. They will help you to identify the causes of cash flow problems in your business and advise the best way to fix them.

To find out how to fix your cash flow problems and prevent them from recurring, grab your free copy of the “Cash Flow” report NOW!

Causes of Cash Flow Problems

Conditions that can impact your cash flow include:

  • A fall in sales or a decline in gross profit margins. This could be a result of changing economic conditions (such as the most recent global financial crisis), increased competition, or a drop in demand for your product or service.
  • An unprofitable business model
  • Using a negative cash flow business model. You offer customers or clients credit terms of anywhere from 30 days to 90 days (or longer).
  • Having excessive debt
  • Having inadequate stock or credit and debtor management.

Your cash flow problems can be due to any of the following:

Late paying customers When a customer doesn’t pay on time, your business can experience cash shortfalls.

Poor debt collection processes Not issuing or chasing up invoices in a timely fashion can result in reduced cash flow.

Low prices If your prices are too low, but your expenses are rising, your company is almost certain to experience cash flow problems.

Low sales Too often business owners try to resolve poor sales by looking for new clients. But this incurs more costs in areas like advertising and marketing to attract those new clients.

Too generous payment terms Allowing customers to pay in arrears for goods or services received is a bit like giving those companies short-term, interest-free unsecured loans.

Overtrading Rapid growth means your company will have to invest in more stock, equipment, or hiring staff to meet demand. If you don’t have sufficient working capital, the company will experience cash flow problems.

Too much stock Every dollar or pound you have in inventory is a dollar or pound you don’t have in cash.

Too much debt If you’re overleveraged (when you’ve borrowed too much and can’t pay interest payments or principal repayments or meet operating expenses), you’re likely to experience cash flow problems.

Cash Management

Cash is vital to your business. Without it, your business won’t be able to pay suppliers and creditors and to meet its payroll obligations.

Finding and fixing the cause of your cash flow problems in your business and putting systems in place to manage cash effectively is vital for your company’s survival.

Under the Spotlight – The Operator

by lauramills
Under the Spotlight – The Operator

The CFO as an ‘Operator’

  • Ownership of Cash flow
  • Maximisation of Profits and Profitability
  • Reduce Costs
  • Increase Productivity & Efficiency

If cash used to be King, in today’s new landscape it’s now Emperor. The Operator frees up the Business Owner from having to worry about the day to day financial operations. Your CFO will ensure that your business is built on rock solid foundations and able to withstand unforeseen market conditions. Cash has always been critical to every business, however now more so than ever. Your CFO will help (re)structure your business to maximise your cash position. This involves balancing supply and demand while cutting back unnecessary costs and improving productivity, efficiencies and ultimately profit.

Being thought of as the Operator may not be the first role that a small business owner would think of for their CFO. In his recent blog, my colleague from The CFO Centre – Dr. Andre Van Zyl set out The Strategist role that a CFO often fills. While that role is critical for any organisation’s long-term existence, CFOs also have vast tactical experience in an Operator role. We are obviously not referring to operating a factory floor machine. We mean that the CFO has the ability and experience to oversee and operate a number of critical functions. A calm and reassuring Operator may be key to a company’s future.

Business frustrations

Time, or the lack of it, is so often cited by small business owners as one of their biggest frustrations. Our CFO Centre clients often comment that they are spending so much time working in-the-business that they can’t spend enough time on-the-business. A Part-time CFO who works closely with a small business owner can free up time for the owner by sharing the load. This ensures the owner is as fully focused on those very client or customer facing roles that were the initial catalyst for creating the business. This can be a significant ‘value add’ aspect of the Operator role of a CFO.

By the very nature of the CFO role, all our CFOs have either worked their way up through, or had executive responsibility for, the Finance functions in various organisations. They deeply understand the importance of running a tightly controlled organisation, with specific focus on cash flow management, profitability, and productivity. Andre wrote about developing three-way financial forecasting models which are critical for banks and financiers. It is just as important to deliver against those models.

The last two years have forced many businesses to consider whether current business models can survive, will survive, or even should survive. Critical decisions may need to be made on products or business lines to either scale-up, maintain status quo levels, scale-down or even shut-down completely. A part-time CFO can help small business owners as they work through that exercise.

A new or refined operating rhythm may therefore need to be designed, which may require minor tweaking or more major restructuring. Consideration of this may be critical for survival. The Operator who has extensive business experience will greatly assist with a rapid transition to a new business model. Central to this will be the robust and disciplined forecasting exercise – with potentially a myopic focus on Cash Flow management.

Part-time CFOs from The CFO Centre have the relevant experience required to assist business owners navigate through their growth journey.

 

Written by John Paterson, Principal (NSW) – The CFO Centre.