Because it is easy to monitor, many businesses focus on their sales figures or turnover. Certainly there is a tremendous buzz when a large order is won or a big cheque arrives. Rightly so! However, that is not the full story.
There are many examples of sales staff who give such large discounts to achieve their targets that the business they write isn’t profitable. Turnover is vanity.
Profit is more important. Whilst not as easy to monitor, it is essential to the future of the business. Not only discounts but overheads are pivotal; if overtime has to be paid to achieve a deadline, the price needs to reflect this. It would be better, in almost every case, not to write the business than to do so at a loss. One helpful way to look at this is to calculate the breakeven point for the business based on latest costs and to ensure each day week or month exceeds that figure. To have a future, a business needs to ensure it focuses on profit. Profit is sanity.
Even if a business is growing, the need to manage the money in the bank is paramount. Often, an increasing turnover puts pressure on a business which needs to buy in supplies and pay wages before being paid itself. More so in a recession! Managing the cash flow of a business may seem like a luxury when time is scarce but can be the key the most important factor in managing success.
Cash flow is always a key focus. If a business cannot pay, no matter how profitable, it will fail. Businesses need to look at:
• How much deposit they can charge before supply
• How they assess each customer to be sure they can pay the full amount due
• What price they charge and how it compares to competitors
• How they can reduce their costs of providing the product or service
• How they can reduce their overhead
• What system is in place to ensure money is received when due
• How they chase overdue funds
• When they put customers on “stop”
• How often they reconcile their bank statement (can be done daily online)
• How they plan ahead for larger bills such as VAT, rent and taxation
Not all of these will apply to any one business but all businesses need to review some of these. It is essential no items are returned unpaid by the bank as this will impact upon the company’s credibility and ability to borrow in the future. Also, the bank charges can be enormous. Hard though it may be to resist, it is better to delay issuing a cheque or making a payment rather than default.
Look at turnover, monitor profit but don’t forget that cash is key.
If your financial management and cash flow is fully under control and all systems are exemplary, focus elsewhere in your business to improve. If not, a little time and energy at this stage can mean the difference between failure and success.
Free advice is available from White Egret Limited. We are pleased to offer a free initial session to talk about the general issues facing the business and to see in what ways we can help and assist. There is no obligation on either side but we are always happy to chat; call or e-mail today.
Julie Leigh julie.leigh@whiteegret.co.uk 01202 768574 07940 983132
