businessnumbersmadeeasy.com
This eBook is not about dreams or rags to riches. What we would like to
share with you is a heartfelt, very firmly held view that business success is
not just about making MORE sales or increasing margins.
It?s about getting the fundamentals right.
This eBook is about explaining the fundamentals that make a business last
forever if you have the will. If you take to heart and enact what we propose
in this book, your business will be bulletproof - seriously and absolutely
impervious to peril and continually profitable, every day of its existence.
We believe passionately that being bulletproof is about getting the
financial structure right. For without that, you might have just as well
played your working capital through the pokies. You will last a year, two,
even ten, but in the end any sustainable bulletproof business must have its
existence.
We built a business that for 15 of its 26 years had the wrong business
model and it survived, but it was seldom profitable. Then we at last had the
courage to change the business model, using many of the techniques we?ll
discuss in this book, and for the next 5 years, it proved a different story! For
those 15 years, for every year we made a profit, the very next we had to
borrow and kick in more funds to prop it up and that was very
uncomfortable.
Now after all this time in business, having helped over 20,000 other small
to medium businesses with their accounting systems, setting up their
management accounts, fine-tuning their financial control and acting as
their part time CFO, we can genuinely say we have at last a really ingrained
understanding of what it takes to make a business bulletproof.
We sincerely hope you get huge value out of this eBook. It?s not very long
but if it helps you improve just one small aspect of your financial
management and gets you just $100 in extra profit, it would have been
worth our while. It has the potential though to make you more like
hundreds of thousands in extra profit. Thank you for reading this.
Warmest regards and best wishes for your financial future,
Sue Hirst & Stuart Frost
Co-founders CFO On-Call
1
1
businessnumbersmadeeasy.com
Contents
Chapter 1 ............................................................................................. Page 3
Why Business People Don?t Get Tax Accountants
Chapter 2 ............................................................................................. Page 6
A $100,000 Reason to Read This Book!
Chapter 3 ............................................................................................. Page 10
The 7 Key Numbers and How They Work
Chapter 4 ............................................................................................. Page 12
Driver 1: Revenue Growth %
Chapter 5 ............................................................................................. Page 16
Driver 2: Price Change %
Chapter 6 ............................................................................................. Page 19
Driver 3: Cost of Goods Sold %
Chapter 7 ............................................................................................. Page 25
Driver 4: Overheads %
Chapter 8 ............................................................................................. Page 28
Driver 5: Days Receivable
Chapter 9 ............................................................................................. Page 31
Driver 6: Days Payable
Chapter 10 .......................................................................................... Page 33
Driver 7: Inventory or Work in Progress
Chapter 11 .......................................................................................... Page 37
Key Numbers Quick Summary
Chapter 12 .......................................................................................... Page 40
About the Authors & CFO On-Call
businessnumbersmadeeasy.com
Chapter 1
Why business people don't get Tax Accountants!
Someone once said to us, "You know business accounting's simple...
just make sure your net income exceeds your gross habits!"
And in a way he was right. It can be simple if you know what to look
for. How many business people do you think, like reading, or readily
understand the typical financial reports they get from their tax
accountant once a quarter (if they're lucky), or more likely once a year?
An educated guess? 10%, 15% ? Probably no more. Most business
owners in our experience manage by "gut-feel". Often it's good
"gut-feel" and they manage and adjust their business settings or
business model, because they're passionate about their business and
are constantly looking for ways to improve.
Think about this ... a typical set of business financial accounts provided
by a tax accountant ... is prepared for tax purposes ... rather than to
really help you with ?managing the business?.
How cock-eyed is that?
What's worse, some tax accountants may only get the last set of
accounts to you ... what ... a year, eighteen months AFTER the end of
the financial year ... and what good is that to you then?
The issue is, that modern business moves quickly, we're accustomed to
information that's instant. You want to know what your business
situation is today and what you can do about it now, not sort through a
jumble of numbers from last year.
1
3
businessnumbersmadeeasy.com
Typical tax accountants deal with history. What has happened, not what
is likely to happen. And because they're so busy complying with all the
requirements of the tax authority, most just don't have time, (and
despite broad-brush claims about being all round ?business advisors?),
many don't have ?hands-on? business training to do more than the
regulatory body requires. That is, their task ends up being ... to
complete the accounts from the info you've provided ... and fill in the
forms for tax and compliance purposes.
Has your accountant ever sat you down and said, "Right, I'll show you
the key numbers in your business that we can fine-tune, to give you an
extra $200,000 in cash flow. Would you be interested in that?"
You'd climb right over the desk,
grab him or her by the scruff of
the neck and scream, "Would I
what!"
So, where do you find the info
that will help you direct your
business to better cash flow
and profitability?
Is the answer to get more or better reports from your accounting
system? Well, that may help you see what's happened recently, but it
may not help you change or adjust what will happen in future months!
What is most important is to understand what numbers really ?drive?
the results. If you can fully appreciate what numbers ?drive? the results,
you can adjust the ?numbers? to achieve a desired, much better
outcome, before, not after you've had a less than satisfactory result.
1
4
businessnumbersmadeeasy.com
This eBook is a version of our printed book about those ?Key
Financial Numbers?. What they are (and they're pretty much the
same for most businesses), how they work and how a small timely
adjustment, to just one, two or three of the "drivers?, can mean
thousands of extra dollars flowing back to the bottom line and into
the bank.
The best way to explain it is by way of example. The business we?ll
discuss in the next section has a turnover of $1Million and stock
level of $80,000 and put $20,557 back into the bank ... just by
reducing the Inventory days by 10, from 42 to 32. (42 being the
average number of days the stock was held before the change was
made).
This is just one of the seven numbers!
This is fact! It's not wishful
thinking! We can tell you many
case histories where business
owners, who after making just a
seemingly small tweak to some
of their Key Financial Numbers,
doubled a profit result, or got rid
of an expensive loan or bank
overdraft. In the pages that
follow, we hope you can see a
great opportunity to understand
what they are and then do
something about it!
1
5
businessnumbersmadeeasy.com
Chapter 2
100,000 reasons to read this book!
Are you interested to see how a business, let?s call it QuickCall
Supplies, turning over $1 Million dollars in total revenue ... can add
over $100,000 to its cash flow and improve its profit by $60,000 ...
without selling one extra thing and still paying its suppliers on time?
What you?re about to read is genuinely possible and improvements,
some similar, some smaller and some better could be made to ALMOST
EVERY business in the country!
The secret to good financial control is knowing what to control and by
how much. In the chapters that follow you?ll read about the ?Seven Key
Numbers? and see how each number works in more detail.
In this section, we want to give you an early example and explain how
the ?Seven Key Numbers? might work in this example business
QuickCall Supplies - with a turnover of $1 Million dollars.
The ?Seven Key Numbers? is not a new concept. They have been
around since Adam was a boy. It?s just that they have never been
presented and explained in the way we do in this book. They apply to
all businesses and work to a greater or lesser extent, depending on the
business type. In these pages we?re not going to try to explain how
they impact on all types of business. It?s just sufficient to know, that
they are almost ALL you need to know to be a good manager and
controller of your own 'financials'.
With QuickCall Supplies we will make small achievable adjustments,
over the course of twelve months, to just five of the seven numbers
and calculate what a difference each makes individually and then to
the bottom line in total.
1
6
businessnumbersmadeeasy.com
Our ?map? of the Seven Key Numbers, as applied to this business, comes
next and that?s followed by a short explanation of each number. You will
see the change planned to the Number in the box on the left and the
savings created by that change in the box on the right.
KEY NUMBER 1 is REVENUE GROWTH % or more sales. In this example
that is not going to change, to demonstrate that making more sales is
not always the answer to better cash flow and profitability.
KEY NUMBER 2 is COST OF GOODS SOLD %. We?ve agreed that we can
decrease this by just $1 in every $100 (1%) negotiating with suppliers
on some items. Note: That?s just 1% - improve this by 2% - to double
this number!
KEY NUMBER 3 We?ve also agreed that we can reduce the OVERHEADS
% by considering each line item on our Profit & Loss Statement and will
find at least 6% savings. This saving goes straight to the bottom line.
Note: For every 1% improvement add an extra $3214 to profit!
KEY NUMBER 4 Next we?ll look at improving our ACCOUNTS
RECEIVABLE or Debtor Days, as it?s also known. Many small businesses
are hurting, because their cash is being used by their customers, rather
than it being in their own bank account. A reduction of just 11 days
brings in an extra $32,275! Note: That is $2934 for every one day
improvement here!
KEY NUMBER 5 What about QuickCall Supplies? stock level? DAYS
INVENTORY that?s called. Can they bring that down just 10 days? If they
were a service or jobs based business the equivalent to this would be
Work in Progress. That makes a positive difference of another $20,557!
Note: That?s $2055 for every one day improvement!
1
7
businessnumbersmadeeasy.com
KEY NUMBER 6 The next driver is PRICE CHANGE! Let?s say we can put
up prices (on average) by 2% . Not much. Costs have risen for us; fuel is
more expensive etc, so we agree 2%. See the improved cash flow.
Note: Even 1% would be good!
KEY NUMBER 7 The last Key Number is ACCOUNTS PAYABLE DAYS and in
this case there is no change.
That?s it. In this case we have shown, a BIG improvement in cash flow and
profit, by adjusting just FIVE of the Seven Key Numbers ... without the
business selling one extra dollar of goods ... and still paying its suppliers
on time.
The value now created for this business is that it improves cash-flow by
$100,311 and creates additional profit of $60,383.
This is valuable cash that the business can use to reward its shareholders
and/or for working capital!
In your business it may well be that you can?t improve, increase or
decrease the same numbers as did QuickCall Supplies*, but it may be that
you can improve or adjust other drivers. You will need financial control
expertise to help. The chances are the cost of engaging such a person
would be just a fraction of what he or she could save you.
*QuickCall Supplies is a purely imaginary business the financial history of
which is to illustrate the value of the Key Financial Numbers. It is not
related to any client or business known to the authors.
By making small but
sustainable changes to
these numbers ... as part
of a plan ... the results
can be amazing!
1
8
businessnumbersmadeeasy.com
1
9
businessnumbersmadeeasy.com
Chapter 3
The Seven Key Numbers - How they work!
What are they and why do they matter? Let?s bring a little more clarity
to the subject.
In a typical set of financial reports i.e. Profit and Loss Statement and
Balance Sheet, there are a lot of numbers. It can be a daunting task for
business owners to make sense of it all. Then to know which numbers
are the important ones. Of course some would argue they are all
important, but that?s only true if you understand what you?re looking
at and can control them.
Of the seven numbers, four are calculated from the Profit and Loss
Statement and three from the Balance Sheet. How many business
owners look closely at the Balance Sheet? It might be time, if the
balance sheet doesn?t always make sense to you, to seek advice from
a good financial controller or CFO. Someone who looks at business
issues from a management perspective, rather than just a tax
perspective!
Key Financial Numbers in business are what ?drive? the results. Those
shown here can have a huge impact on profit and cash flow. A small
change in any one, or a combination, of these can have surprising
results as we have seen.
The ?Seven Key Numbers? we will discuss in this book are the most
critical to the financial success of just about every business. But
there?s a BUT. Most are not contained in a typical set of financials,
which is a frightening thought, considering how important they are
and how they literally control your profit and cash flow!
But and vitally important, these are numbers you can do something
about. They are within your power to control and manage ? and you
don't have to wait for your tax accountant to prepare your end-of-year
financials.
1
10
businessnumbersmadeeasy.com
The numbers we?re about to discuss are ?Financial Drivers? rather
than ?Results?.
The Seven Key Numbers that Drive Profit & Cash flow are:
1. Revenue Growth (Shown as a Percentage %)
2. Price Change (Shown as a Percentage % )
3. COGS (Cost of Goods Sold) %
4. Operating Expenses/Overheads (As a Percentage % )
5. Days Receivable (Average Days it takes to collect)
6. Days Payable (Average Days to pay all suppliers)
7. Days Inventory (The number of days that stock sits on shelves
- or Work in Progress which is the equivalent in a service
business)
Let?s explain these driver by driver to see why they're important.
1
11
businessnumbersmadeeasy.com
Chapter 4
Key Number 1: Revenue Growth Percentage %
See how to calculate this number in Chapter 11.
Business owners focus a lot of attention on Revenue.
?Let?s make more sales and the profit will look after itself!?
Heard that before? Making sales is obviously important ? but what
is just as important ? is what those sales cost you to make and also ?
what they cost you to fund.
As soon as you sell something, and often well beforehand, there are
costs involved e.g. goods for sale, freight, labour, overheads etc. It?s
critical to know these costs, because if they exceed your price, then
obviously you are making a loss and heading for cash-flow
problems.
This driver is the most important of all the seven, because business
growth is often the killer of small businesses. What! Go back a
second! It?s because there are many other numbers as well as
1
12
Revenue that relate to profitability.
If the other numbers aren?t well managed, revenue growth will just
exacerbate cash-flow issues. If it?s not a good situation ? it won?t get
better with more sales ? but it can get much worse. Revenue Growth is a
cause for celebration, but it?s also cause for attention to other ?Key
Drivers? because more sales can cause cash-flow problems.
The age-old question accountants get asked by their business clients is:
?How come I?ve made more profit but I don?t have any more cash??
The answer to this lies in the ?Cash Flow Cycle? diagram following. The
?Cash Flow Cycle? is often not well understood by small business owners
? until the business starts to grow and they begin to experience a cash
flow squeeze. Let's explain how it works. In the image below you can
see a timeline of 365 days.
Before you can sell anything you have to buy something i.e. stock or it
could be labour. Depending on your sales cycle i.e. how long the stock
sits in store, you may hold onto stock for 60 days.
Depending on the terms you get from suppliers you may have to pay for
that stock after 30 days ? which means you have 30 days negative
cash-flow. That is you?ve had to pay for it 30 days before you sold it.
1
13
businessnumbersmadeeasy.com
Depending on your accounts receivable management you could wait
60 days to get paid ? which adds another 60 days negative cash-flow.
This adds up to 90 days negative cash-flow!
This is your money! You have paid for the stock on day 30. You have
sold the goods on day 60 ? and then given credit to your customer
who has taken 60 days to pay for it.
Effectively another party is using your money to fund their business.
What this illustration shows is that the money due to you, has been
somewhere other than your bank account for 90 days.
That is, it is in the bank account of your supplier and of your customer.
This can cause a BIG problem when growth occurs. You now have to
buy more stock and find more working capital ... and the issue just gets
bigger!
If a business isn?t working to minimise these things, that is the number
of days stock that is held ? and then the number of days a customer is
taking to pay ? then the problem just gets worse when sales grow.
Sometimes businesses get so focused on increasing sales that the
issues of stock movement and accounts receivable just get ignored, or
it?s viewed as not considered worth investing in.
This is the reason growth can often kill a profitable business!
A lot happens to cash on its journey from the sale to your bank
account. If you are planning to grow your business, obviously it helps
to understand this phenomenon and put in place measures to manage
it.
1
14
businessnumbersmadeeasy.com
Ways to manage revenue growth and see where the profit and losses
are:
1. More sales could mean more capital required. Understand the
impact of revenue on the other numbers. More sales may mean
more working capital is required.
2. Account for different product/services separately. Don?t lump all
revenue into one account in your accounting system. Split it up by
product/service groups, divisions, branches etc.
Also split the costs related to each so you can see which ones are
profitable and which aren?t.
3. Find what categories
make you money.
Once you know which
categories are
profitable and which
aren?t, you can work
on maximising the
profits and learning
from mistakes where
losses are occurring.
4. Measure profitability by jobs. Keep track of labour, materials etc.
on jobs so that you can compare to revenue and see which jobs
are profitable and which aren?t.
businessnumbersmadeeasy.com
1
15
Chapter 5
Key Number 2: Price Change Percentage %
This means the percentage increase or decrease of the price, at
which you sell your products or services.
In a highly competitive marketplace it?s tempting to sell for the
cheapest price possible. This is fine, but let?s state the obvious ? if
you?re not covering your real costs with the price you?re charging ?
then you?re not going to make a profit!
A common trap is that many businesses fail to increase prices
regularly by small amounts e.g. by the Consumer Price Index (CPI),
or where there are increases in transport costs like fuel.
Failing to do this will cause margin squeeze. This means, your gross
profit suffers, due to increased costs associated with delivering the
goods or services.
Customers get a shock if you are forced to make a sudden large
increase, whereas regular small increases, are much easier for
customers to stomach.
Major fast food chains are experts at this. A company rep noticed
that the cost of his breakfast was $8.90, when on a previous
occasion it was $8.50. That's a 4.7% price increase.
It was barely noticeable and that person didn't see it as significant
enough to take his business elsewhere for the sake of an extra 40
cents.
businessnumbersmadeeasy.com
1
16
This increase is probably quite justified with increased costs to
deliver, present, market and sell the product. It?s a good lesson for the
rest of us and one way they can maintain profitability and hence
viability!
There's no reason why most other business don't do the same. And it's
not necessary to announce it to the world, as you see some business
owners do with signs such as: ?We apologise for the inconvenience, but
because of increases to our costs and staff wages we have to put up our
prices ? blah, blah, blah?
Don't fear losing customers by putting up prices. The reality is that
you may not lose as many as you think. We say adopt a quarterly small
increase method, small, regular and incremental price increases. If you
do lose a small number of clients, they may be the most cost
conscious anyway and it may not be such a bad thing. Our modelling
has shown that increased price and reduced overall revenue could, in
some circumstances, actually have a positive impact on your bottom
line.
Discounting Traps
You may be discounting some products or services in order to attract
business for other more profitable ones. If you are planning to
discount it?s vital to know what impact it will have on your profit and
cash flow. Here is a table showing how much more sales volume needs
to be achieved to cover the impact of a discount.
In this table you can see that a 10% discount would reduce our gross
profit to $500,000 or 55.56%.
To maintain the same gross profit dollar figure as before we offered a
discount, we would need to sell 20% more products or services.
This is important to know, because if increased volume isn?t achieved,
the discount is coming straight off the bottom line profit!
businessnumbersmadeeasy.com
1
17
Seven ways to achieve a Price Increase and when to do it:
1. Best customer service: Provide the best possible customer service
and value compared to your competitors ? not all customers buy on
price alone.
2. Promote your POD: Promote the perception of quality and make it
your ?Point of Difference?, make sure your customers know you are
different and better. Make the ?invisible? ?visible?.
3. USP: Emphasise your ?Unique Selling Proposition? ? is there
something that you do that others don?t? Don?t assume they know
just because you do.
4. Small regular price increases: Do small regular price increases e.g.
CPI at end of year and write it into contracts. These are much easier
to achieve than big irregular increases.
5. Track Margins to increase: Connect price increases with supply
increases ? keep track of your margins to see when to do this.
6. Know your customers: Ask how they value your product or service.
Happy customers should be happy to pay for good quality products
and services and appreciate that you have to run a sustainable
business.
7. Sack ?C? class customers: This may be a scary one, but there may
come a time when you need to ?sack? some customers. Price
focused, demanding, slow paying customers can take up a huge
amount of time and be less profitable than you think. The time you
spend on them could be more profitably spent on good customers.
If you feel brave and the time is right, it may be time to categorise
your customers and focus on the better ones.
Note: In our QuickCall business example shown earlier - every
1% increase, added $9,160 to the cash flow.
businessnumbersmadeeasy.com
1
18
Chapter 6
Key Number 3: Cost of Goods Sold %
Percentages tell you much more about your business than numbers
ever could.
One business man, who recently sold a sand haulage business told us
how the simple concept of focusing on percentages, changed his
whole future and was in a large part responsible for his success:
"I used to read the numbers my accountant gave me," said the owner,
of a $2.8 million dollar business, "and it drove me crazy. I knew we
were improving, but I wasn't sure how well we were managing costs,
relative to the growing sales.
?Fortunately I had a good accountant. He suggested he add
percentages against all the costs and income on the Profit & Loss, so I'd
know if we were up or down at a glance.
?It was like someone turned the light on!
?I knew instantly how well one set of figures compared against the
previous one without even looking at the dollars."
?Cost of Goods Sold?, commonly
abbreviated to COGS% , simply
means the costs you incur to get
the product or service to the
customer, before taking into
account your day-to-day
operational costs or overheads.
(They are also called ?Direct or
Variable Costs.?)
businessnumbersmadeeasy.com
1
19
This is a really important number, as it has a huge impact on your
Gross Profit ? and an even bigger one on your Net Profit.
Many business owners focus a lot of attention on Revenue, but a small
reduction in COGS% can have as much impact on Gross Profit as a
large increase in Revenue. Understanding what makes up your
COGS%, and some negotiation or investigation with suppliers for
better prices, can make a big difference.
If you are a service based business, pay attention to work practices and
job management, as these can have the same effect on your Gross
Profit. This provides an opportunity to investigate differences and
tighten up processes. An example of this is knowing:
How many labour hours you are selling ? compared to those you are
paying for!
Too many ?unbillable? hours could be costing thousands of dollars
when you multiply them by your charge out rate.
Most basic accounting systems have a rudimentary job costing system,
but if your business does ?jobs? and contracts out labour, then we
suggest you get dedicated job-costing software that links with your
accounting system.
It seems obvious why you would want to decrease costs in business,
but many will not appreciate how big an impact this can have on the
bottom line.
Every dollar you save on your COGS ... goes straight to the bottom
line.
businessnumbersmadeeasy.com
1
20
There are generally two types of costs in business, being Direct
Costs or COGS (Cost of Goods Sold) and Indirect Costs or Overheads.
COGS are sometimes referred to as COS or Cost of Sales.
The difference between COGS and Overheads is that COGS only
occur when you sell something, whereas Overheads occur whether
you make a sale or not. For example Rent is an overhead, as this has
to be paid whether you make a sale or not, whereas purchase of
stock or paying service providers, only occurs when you sell
something.
It is important to differentiate between COGS and Overheads,
because every business needs to know what its gross profit is. Gross
Profit is calculated by subtracting the COGS from the Income figure.
It?s a vital indicator of business performance for both managers and
lenders. Gross Profit is also an important benchmark against which
to measure your business? to others in its industry.
businessnumbersmadeeasy.com
1
21
So what types of costs are classified as COGS?
- Purchase of stock to sell
- Movement in stock held i.e. what was held at the beginning of an
accounting period versus what was held at the end of the period.
- Freight costs to get goods into and out of stock.
- Labour costs relating to production of a service or product.
- Importing costs e.g. duties etc.
- Discounts given
- Stock adjustments/wastage
- Purchase returns and allowances
- Raw materials
- Manufacturing costs
- Packaging
- Other costs to get goods or services ready for sale.
COGS are often the most sensitive of the ?Key Financial Numbers? in
relation to both profit and cash flow results.
It?s possible, in some circumstances, to create a larger increase in profit,
by reducing COGS by a small percentage, rather than increasing sales
by a large one.
This is because when sales grow, generally other numbers grow too,
such as COGS and Overheads.
Also an increase in sales, creates a need for more ?working capital? to
fund your suppliers, additional inventory and ?Work In Progress? ? but a
reduction in COGS does not!
businessnumbersmadeeasy.com
1
22
The reduction goes straight to your bottom line!
If you?re in a service business don?t think that COGS doesn?t relate to
you because you don?t sell products. A factor in COGS for a service
business is ?Work in Progress? (WIP). Many service businesses have no
real methodology for handling WIP or Jobs.
We once asked a contractor:
?How often do you do your
invoicing to customers?? and
the answer: ?When I run out of
money!?
Ensure jobs get invoiced out as quickly as possible. By doing so you'll
speed up payment. There are systems available that easily speed up
WIP and jobs, and the resulting improvement in profit and cash flow
can be significant.
Budgeting for COGS will help you monitor profitability. COGS can very
easily ?creep up? without you realising it.
These increased costs need to be passed onto customers regularly, or
they erode profit margins.
Keeping track of such costs may seem like a pain, but the resulting
control over margins and profitability, far outweighs the cost of
maintaining such control.
businessnumbersmadeeasy.com
1
23
Here are eight ways to reduce your COGS:
1. Reduce wastage: Reduce materials used on jobs by managing wastage and
write offs. Review ordering methods and introduce systems such as job
cost sheets to track goods used on jobs.
2. Increase productive time: Maximise efficiency of contractors and staff e.g.
check any ?non chargeable? time spent. Incentivise the staff by sharing the
savings. It may be that some work can be outsourced, even overseas. Try
www.elance.com for skilled inexpensive techs, artists, designers and
business services worldwide. This could free up a more costly person to
focus on more chargeable work.
3. Review and negotiate with suppliers: It?s easy to get into a ?rut? and deal
with the same old suppliers and do things in the same old way. Technology
has opened up all kinds of opportunities to improve efficiency.
4. Innovate: Look for innovative ways to change the way you perform
processes. Research your industry to find out what new ideas are available.
Create a ?one-small-improvement-a-week? policy.
5. Industry benchmarks: Check to see what the top performers are achieving.
Benchmarks for your industry/business could be available online.
6. Exchange rates: Lock in good exchange rates with forward cover on foreign
currencies.
7. Manage your margins: Regularly looking at the percentage of Cost of
Goods, so that you know when is the right time to renegotiate or look for
alternatives.
8. Use ?Purchase Orders?: Don?t just allow anyone in the business to spend
your money. One piece of paper in the form of a purchase order could save
you thousands of dollars. The person ordering goods or services may not
know something you know about a change or potential obsolescence.
Note: In our QuickCall business example shown earlier,
a 1% decrease added $9,872 to the bottom line!
businessnumbersmadeeasy.com
1
24
Chapter 7
Key Number 4: Overheads Percentage
See how to calculate this number in Chapter 11.
Many business owners focus attention on the Overheads in a Profit and
Loss (P&L) Statement, but they may not compare them relatively, (by
percentage) to the Revenue. This has an impact on the profit.
Here?s an example ? if you just look at
the Overheads dollar figure ? it could
be that you?re making more Revenue
but not increasing your Net Profit.
It?s much easier to focus on one
number being the Overheads% say,
rather than getting too bogged down
in all the numbers you see on a P & L.
If you don?t have a budget it can be
very difficult to know if overheads are
reasonable anyway.
A business without a budget is like trying to find a new destination
without a roadmap!
Yet very few businesses have a budget, which makes it difficult to know
how the business performs month by month. So do you need a budget?
Ask yourself ... are you planning to reach a goal in business ... then you
definitely need a budget.
It?s obvious why you would want to decrease your overheads, but it?s
sometimes overlooked how big an impact this can have on the bottom
line.
businessnumbersmadeeasy.com
1
25
Here are Nine Ways to reduce Overheads:
1. Simply shop around: It?s so easy to ignore potential savings because
you don?t have time. The time spent saving on overheads could far
outweigh the value of time spent on other things in business. Have
a three quotes policy when purchasing any goods or services.
2. Create competition: Shop around for more suppliers for your
business. Don?t underestimate your value to suppliers as a
customer. Look at what business you?ve done with them over a
period and use that knowledge to seek better terms and pricing. If
you are a good customer they should want to keep you.
3. Reduce fixed costs:
Rather than locking into
fixed costs, try to utilise
non fixed solutions like
outsourcing or sub
contract labour. That
way you aren?t paying
costs during downtime.
4. Don?t pay high skill
rates for low skilled
work: Get the right people into the right jobs with clear job
descriptions that meet the overall objectives of the business.
Regularly review staffing levels in line with business development.
5. Use new technology: Such as VOIP, Skype etc. Could a web site
save staff time in your business?
6. Have a budget and stick to it: Report on variances between actual
and budget each month and investigate. (Shown here is the CFO
On-Call One Page Snapshot report showing all the important numbers
on one page.)
businessnumbersmadeeasy.com
1
26
7. Review overheads regularly. Have an ?in depth? review of
overheads several times each year. It?s amazing how savings can
be eroded and increases creep back in again.
8. Use ?Purchase Orders?. Don?t allow staff to spend money
unchecked. You could save thousands of dollars by stopping
spending that maybe done smarter or cheaper before the damage
gets done.
9. Break-even Analysis. Understand your overheads, so you know
how much you need to sell to cover them.
Remember every dollar saved on overheads
goes straight to the bottom line!
Note: In our QuickCall
business example ? every
1% saved in Overheads costs
would add $3,214 to the
profit!
businessnumbersmadeeasy.com
1
27
Chapter 8
Key Number 5: Accounts Receivable Days
Also called Debtor Days, this is the number of days on average, your
customers are taking to pay invoices. Think cash-flow with this key
number. Managing this number can have a huge impact on cash flow.
If for example
your Accounts
Receivable is
currently 70
days and you
can get it down
to say 50, you
could put tens
of thousands of
dollars back
into your bank
account.
The way to improve this number is to focus attention on your
Accounts Receivable (AR) and debt collection procedures. It?s fine to
look at the report out of your accounting system, which lists all the
customers and how much they owe you. If your business is growing
rapidly, you need to know how much AR Days are changing compared
to Revenue growth.
If it?s not comparable ? you will experience a cash flow squeeze ?
and could run out of cash.
Chasing payment is often one of the least enjoyed jobs in business.
Think of it as your money sitting in other people?s bank accounts and
collecting it quickly can make a huge difference to your cash flow.
businessnumbersmadeeasy.com
1
28
Here are nine ways to speed up customer payments:
1. Create a terms of business document: Ensure you have clear and
documented terms and your customers understand what they are, at
the point of sale.
2. Credit Checks: Check who you are doing business with. Are they a
potential bad debt? Run credit checks and assess how they operate if
a business customer. If the account is a large one it doesn't mean to say
the client is solvent. Big companies go bad too and hurt more little
ones when they do.
3. Improve customer relations: Have good customer relations to
ensure your invoice is a priority.
4. Invoice immediately: Ensure the payment due date is included, so
there can be no confusion or excuse. Why wait to month end to invoice
and give customers as much as 30 days more to pay?
5. Manage credit better: Get a credit management system in place.
Report regularly on outstanding customer amounts, so that you know
who to chase and how hard. Measure who owes what and for how long.
6. Follow up appropriately: Small amounts by email and larger
amounts with a telephone call. Have one person in your business that
is responsible for doing this. A part-time accounts receivables clerk
could pay for themselves, because they collect more and improve the
cash flow. Calculate how much.
7. Make it easy: Make it as easy as possible to get paid. Credit card
merchant fees could cost a lot less than waiting for a cheque for 90
days. Have clear systems and processes in place.
businessnumbersmadeeasy.com
1
29
8. Progress Payments: Seek progress payments or deposits, if it?s a
job that takes a while.
9. Get tough: Don?t write off collectible debts too easily. This
happens far too often. There are good debt collectors around.
Personal Property Security Register : Visit www.ppsr.gov.au for more
information.
businessnumbersmadeeasy.com
1
30
Chapter 9
Key Number 6: Days Payable
See how to calculate this number in Chapter 11.
This is the number of days, on average, you are taking to pay your
suppliers. This number is just as important as Accounts Receivable
Days, as it can also have a big impact on your working capital
situation.
Have you noticed how it?s so easy for you or a staff member to oil the
?squeaky wheel? and pay the supplier who hassles you most for
money (sometimes before it?s due)? It?s also easy to ignore potential
better terms to be had from suppliers, because you get so focused on
revenue.
Some small changes to procedures relating to Accounts Payable can
pay big dividends in your bank account.
If your business is growing this could be critical cash for funding
growth. We?re not suggesting stringing out suppliers beyond the
agreed terms, but we are proposing negotiating better ?agreed? terms
from suppliers. Paying suppliers too early and wasting credit
available could be costing you precious cash flow.
businessnumbersmadeeasy.com
1
31
These are eight ways to get the most from your supplier credit terms:
1. Systemise paying suppliers: Have a routine and stick to it, be
disciplined.
2. Do you pay early: Never pay early unless you are offered a
discount.
3. Credit cards: Use credit cards to maximise interest free days.
4. Payment system: Have a system for payments on the due date to
ensure you get the benefit of every day?s credit. Don?t just pay
everyone on the same day.
5. COD not on: Don?t pay cash on delivery ? ask if an account is
available. Most businesses will give an account to another
business.
6. Make ONE person responsible: Just one person pays suppliers to
avoid overpayments.
7. Check every invoice: Validate supplier invoices against quotes or
purchase orders to ensure you aren?t overpaying for goods or
services.
8. Good relations: Develop good relations with suppliers to
enhance negotiation effectiveness. Know how much business you
have done with them to assist with negotiations for better terms
and pricing.
businessnumbersmadeeasy.com
1
32
Chapter 10
Key Number 7: Days Inventory or Work In Progress
This is the number of days, on average, that goods for sale are sitting in
your storeroom, from when they are delivered by suppliers, to when
they are shipped out to customers. Where goods have to be paid for
before they?ve been sold, it means you have had to spend valuable
cash for the stock to sit there waiting!
If you can manage this situation
well, and reduce the number of
Inventory Days, it has a big
impact on your bank account and
cash situation. It?s very tempting
when a salesperson calls and
offers you a discount to buy
more stock, but try not to be
tempted, because it could cost
you more than the discount in
the long run.
Consider the amount of cash that will be tied up in that stock,
compared to the discount being offered. If you are borrowing funds, a
bank overdraft say, think of the amount of interest payable on those
funds tied up in slow moving stock.
Are you in a service based business? Then ?Work in Progress? (WIP)
Days is very similar to Inventory Days, in that your ?stock in trade,' is the
labour and materials you have to sell. Slow WIP days can be just as
dangerous to cash-flow as Inventory Days. Anything you can do to
tighten up your WIP and speed up the time work is ready to be
invoiced, will pay dividends in your bank account and reduce your
interest expense.
businessnumbersmadeeasy.com
1
33
Here are eleven (11) ways to reduce the number of days stock sits
on the shelf waiting to be sold:
1. Stock system. Have a good system for managing stock
2. Research lead times. Understand customer needs/lead times
and forecast sales and requirements.
3. Re-direct to customers. Get suppliers to deliver direct to
customers if possible ? avoid holding stock.
4. Buy for immediate use. Where possible purchase materials
for jobs rather than for stock
5. Because it?s cheap! Don?t ?impulse? buy when offered
discounts.
6. Track stock movement. Report regularly on what stock is
doing and measure your inventory days to give a target to
work at reducing.
7. Assign responsibility with targets. Make someone
responsible for managing it and incentivise them.
8. Seasons. Take into account ?seasonality?.
9. Industry Benchmarks. Check your industry benchmarks to
see how you compare.
10. Neat ?n Tidy does it. Have a tidy stock room to avoid
over-ordering
11. Are you a stock hoarder? Get rid of obsolete stock, so you
can use the funds to buy faster moving lines.
businessnumbersmadeeasy.com
1
34
We?ve also compiled ten (10) ways to reduce the time jobs are in
progress costing you money:
1. Job management system: Seek out a good quoting/estimating
system and measure actual costs against each job to see which jobs
were the most profitable.
2. Follow u