CFO 11 Steps to Business Numbers
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11 St eps t o Business Numbers Made Easy 1 Break even Point An often overlooked but vital number in business It s the amount of sales you need to make to cover your costs and overheads i e to avoid losses This is a great place to begin making a profit BNME Members can download our Break even Calculator from the website 2 Cost s These are the direct costs of creating your product or service i e labour materials etc They can be directly compared against your sales to determine if say a job or service is profitable It pays big dividends to know the true cost of your product or service as this enables you to charge the right price to ensure a gross profit It s vital to understand your gross profit because if you can t make an acceptable gross profit you are not likely to make a net profit i e profit after running expenses 1 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
3 Pricing As mentioned above this is impacted by the costs of delivering your product or service If you want to make a profit you need to charge a price that will cover your costs and running expenses Often market pressure dictates price as you may need to compete on price If this is the case and you plan to be profitable your only room for maneuver might be reducing your costs Once you ve set a price it s vital to monitor profitability constantly to ensure you stay profitable It s very common for costs to creep up but price is kept the same and profit becomes eroded over time Many businesses fall into the trap of not maintaining a process for constant small price increases You can factor it into your contracts with customers or use increased costs as a reason for regular small increases Most reasonable people understand that you can t constantly absorb cost increases without passing them on If you deliver a good quality product service your customers should appreciate that you need to be profitable Raising the subject of a price increase can be a good time to subtly remind your customers of why they deal with you i e use it as a marketing opportunity to let them know why you re the best at what you do Make the invisible visible explain what you do that s better than your competitors and why it s actually more economical to deal with you despite you being a little more expensive e g they only have to do the job once with you whereas a shonky cheap competitor may cause them to do it more than once or it wears out etc 2 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
4 Running Expenses These are the expenses incurred in the day to day running of your business e g rent admin wages marketing etc This is an area that can get wildly out of control if not monitored closely and easily eat up your profit All kinds of non business related items can creep in which as well as being not tax deductible blur your view of how profitable or not your business is It s best to have a clear view of your business running expenses and keep your personal expenses separate That way you stay compliant with tax law and also get a more accurate picture of your business profitability At the very beginning of your business it pays to consider what your running expenses will be and factor them into your budget 3 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
5 Budget This is simply a document that sets out your future plan for sales costs and running expenses so you can see how much money you will make or lose Not having a budget in your business is like flying blind and just relying on hope and luck to end up with a profit If you don t have any plan for your profitability it s highly likely you will struggle to make any It s not that difficult to do BNME members are able to access our Budget and Cashflow spreadsheet template Once you ve worked it out you can enter it into your accounting system and compare each month your actual versus your budget to see how on or off track you are It enables you to make changes quickly rather than waiting until the end of the financial year to discover you ve made thumping losses and started to run out of money Being able to see a trend in month 3 rather than month 12 of the year gives you the opportunity to save 9 months of losses highly worth the effort All of the above is a great start to ending up with a profit in your business Profit is great and what is also vital to running a successful business is Cash Flow Following is a little more information on this side of things 4 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
6 Cust omer Payment s If you give customers time or terms to pay this can have a big impact on your cash flow Whilst there may be an agreement or understanding in place about when they should pay the reality is that not everyone sticks to it You need to have policies and processes in place to manage every step of the way from the contract to how and when you invoice what methods of payment you provide how and when you follow up arrangements you make for them to pay debts off sending them to the debt collector etc Every dollar in outstanding amounts owed by customers means that you have to find them from elsewhere i e delaying payments to suppliers borrowing putting your own money into the business etc We often see customer payment handling treated as an afterthought rather than being run pro actively The danger with this attitude is that customers get the impression it s okay to make you wait and you will be behind others in the queue who are more proactive about getting paid You just need to have a process in place and someone to stick to it constantly to ensure a constant flow of funds 5 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
7 Suppl ier Payment s The time it takes you to pay your suppliers is another opportunity for managing cash so it spends as long as possible in your bank account If you give your customers terms and they take longer to pay you than you take to pay your suppliers you will experience cash squeeze This is a common situation where the person dealing with accounts doesn t like calling customers for payment but pays suppliers straight away because they also don t like dealing with them calling and asking for money My advice would be to have different people dealing with each one i e have someone who is good at calling customers with reminders to pay without getting them offside and have another person deal with supplier payments Have a policy of not paying suppliers before the due date i e take advantage of every day of credit that you can get Constant negotiation with suppliers for better terms pays big dividends for your cash flow Make it a policy to regularly shop around and keep good records of what business you ve done with suppliers for ammunition at negotiating time 6 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
8 Jobs St ock Jobs take time to finish and stock sits in store for some time before being sold or used on jobs During this time they are both sucking up cash i e jobs incur costs of labour and materials and you have to pay suppliers for stock to sit on the shelf The money to cover this has to come from somewhere The longer jobs are in progress without being invoiced and the longer stock sits on the shelf the more cash is needed So it s vital to manage jobs so they can be invoiced ASAP so you can get paid Progress payments and deposits are a must if a job is going to take a while that way your customer is helping to pay for the costs and you avoid having to borrow or put your own money into the business Your job management software will help you to manage jobs so they can be finished as efficiently and quickly as possible A good stock management system will enable you to handle stock so it sits in store for the minimum time necessary It gives you an insight into historical trends of stock movement and allows you to set lead times to ensure you have stock when customers want to buy but it doesn t sit there for too long sucking up precious cash 7 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
9 Taxes and Loans We may not like having to pay tax but unfortunately it s a fact of life If you want to run a sustainable business you need to manage your tax obligations e g GST PAYG Company Tax etc If you don t manage it properly the Tax Office will soon be on your back demanding payment when you can least afford it Try to set up your regularity of tax payments in the best way e g monthly quarterly or yearly Get some advice and do some planning on which will work out best for your cash situation It depends on your business turnover i e yearly sales figure how often you have to do a GST return You need to have a good understanding of how much tax you are holding until it s due to be paid because you may think you ve got great cash flow but then tax time comes and suddenly you ve got a problem i e your bank balance drops to nothing and you haven t got enough to pay wages and suppliers etc Some people put the tax into a separate bank account until it s due to be paid This can be good but if you manage it right the cash can be used to fund cash flow during the tax cycle so long as you ensure it s available when tax times comes Sometimes the funds just aren t there to pay everything that is due all the time Peaks and troughs occur e g seasonality sales drop suddenly expenses creep up beyond what can be afforded an unexpected disaster or event occurs Funds need to be found from somewhere e g borrowed from a lender or the business owner s 8 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
If you need to borrow from an outside lender e g bank you will need to provide good information to support your loan application They will want to see proof of your trading history and profitability as well as evidence of your assets and liabilities The information needs to be accurate and up to date If you ve got a good and accurately set up accounting system that will help as well as giving them comfort you ve got your finger on the pulse of your numbers They will almost certainly want to see a Budget and Cash Flow Forecast as well so they can be confident you have the capacity to repay the money when it s due 10 Owners Money If you can t or don t want to borrow from an outside lender you may need to put in your own funds or seek input from other shareholders in the business In this situation it s important to handle the transaction correctly in your accounts i e it needs to be entered as a loan and not income so that you aren t paying tax on the funds unnecessarily and the repayment needs to come from the same account We recently saw a business owner pay tax on the repayment which was incorrectly entered as wages by the person doing the books 9 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
11 Cash Fl ow Forecast As can be seen the cash management in a business can be quite complicated with money coming and going and amounts being due at certain times To try and manage this without a system can be very worrying and confusing for a business owner The best way to avoid worry is to manage the situation with a Cash Flow Forecast It simply sets everything out in black and white You can see when funds are coming in and going out and what will be your bank balance at any given time in the future if everything goes as you plan If you monitor it closely and compare actual events to your forecast you will be in a good position to take action when things don t go to plan to avoid running out of money BNME members will be able to download a template of the Budget and Cash Flow Forecast in Month two of their membership We underst and t hat what you need t o have in pl ace can be overwhel ming especial l y whil st you are working on your business but having t he right syst ems in pl ace wil l signif icant l y assist you in running your business more ef f icient l y and more prof it abl y For hel p wit h your business numbers pl ease f eel f ree t o cal l us f or a no obl igat ion chat on Aus 1300 36 24 36 NZ 0800 180 400 10 Copyr igh t CFOon Call com au by CAD Par t n er s Pt y Lt d www CFOonCall com au
