CFO The 7 Key Numbers that Drive
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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 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 100 000s 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 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Cont ent s Chapt er 1 Page 3 Int roduct ion Chapt er 2 Page 4 A 100 000 Reason t o Read This Book Chapt er 3 Page 6 The 7 Key Numbers and How They Work Chapt er 4 Page 7 Driver 1 Revenue Growt h Chapt er 5 Page 11 Driver 2 Price Change Chapt er 6 Page 15 Driver 3 Cost of Goods Sol d Chapt er 7 Page 21 Driver 4 Overheads Chapt er 8 Page 25 Driver 5 Days Receivabl e Chapt er 9 Page 28 Driver 6 Days Payabl e Chapt er 10 Page 30 Driver 7 Invent ory or Work in Progress Chapt er 11 Page 34 How t o Cal cul at e t he 7 Key Numbers Chapt er 12 Page 38 About t he Aut hors CFO On Cal l Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 1 Int roduct ion Most accountants financial and business people tend to focus on the results of a business This is obviously important but what is even more important is what drives the results The 7 Key Numbers aren t results they are drivers that impact results i e profit and cash flow You won t find them in typical financial reports they need to be calculated Nearly half of the 7 Key Numbers are derived from the Balance Sheet How many business owners look closely at this report or really understand it Scary thought Our objective in this book is to simply explain why the 7 Key Numbers are so vital for every business owner to understand and focus on improving We ve included very simple and pragmatic tactics to improve each one The sooner you focus on these numbers the sooner you will improve your profit and cash flow We sincerely hope you enjoy reading this book and put its concepts into practice in your business Enjoy 1 3 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 2 A 100 000 reason t o read t his book On the next page you will see a diagram showing an example of a business with 1m turnover If this business can achieve the realistic changes to each of the 7 Key Numbers it would be able to improve its cash flow by 100 311 and profit by 60 383 1 4 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
1 5 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 3 The Seven Key Numbers How t hey work 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 Growt h Shown as a Percentage 2 Price Change Shown as a Percentage 3 COGS Cost of Goods Sold 4 Operat ing Expenses Overheads As a Percentage 5 Days Receivabl e Average Days it takes to collect 6 Days Payabl e Average Days to pay all suppliers 7 Days Invent ory 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 6 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 4 Key Number 1 Revenue Growt h Percent age 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 Revenue that relate to profitability 1 7 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 It shows 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 1 8 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 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 1 9 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 Ways t o manage revenue growt h and see where t he prof it and l osses are 1 More sal es coul d mean more capit al required Understand the impact of revenue on the other numbers More sales may mean more working capital is required 2 Account f or dif f erent product services separat el y 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 cat egories 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 prof it abil it y 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 1 10 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 5 Key Number 2 Price Change Percent age 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 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 1 11 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 Modeling has shown that increased price and reduced overall revenue could in some circumstances actually have a positive impact on your bottom line 1 12 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Discount ing 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 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 1 13 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Seven ways t o achieve a Price Increase and when t o do it 1 Best cust omer service Provide the best possible customer service and value compared to your competitors not all customers buy on price alone 2 Promot e 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 Smal l regul ar 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 t o increase Connect price increases with supply increases keep track of your margins to see when to do this 6 Know your cust omers 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 cl ass cust omers 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 1 14 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 6 Key Number 3 Cost of Goods Sol d See how to calculate this number in Chapter 11 Percentages tell you much more about your business than numbers ever could One businessman who recently sold a sand haulage business said 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 numbers 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 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 1 15 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 un billable 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 dol l ar you save on your COGS goes st raight t o t he bot t om l ine 1 16 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 are directly related to the sale whereas Overheads occur whether you make a sale 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 directly relates to 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 So what t ypes of cost s are cl assif ied 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 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au 1 17
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 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 1 18 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 Here are eight ways t o reduce your COGS 1 Reduce wast age 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 product ive t ime 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 negot iat e wit h suppl iers 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 Innovat e 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 Indust ry benchmarks Check to see what the top performers are achieving Benchmarks for your industry business could be available online 1 19 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
6 Exchange rat es 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 1 20 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 7 Key Number 4 Overheads Percent age 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 What is different about the Overheads is that it is a percentage rather than just a number A total of expenses is a useful figure for the Taxman to determine tax deductibility and it is also part of the equation in determining profitability i e Gross Profit Overheads Net Profit A percentage is a more meaningful indicator of financial health because it measures Overheads in relation to Revenue E g if you have Revenue of 1 000 000 and Overheads of 800 000 this looks OK because it means you made a 200 000 profit If your Revenue is 2 000 000 and your Overheads are 1 800 000 this may still look OK because again it means you made a 200 000 profit If you were measuring Overheads the first scenario shows a result of 80 whereas the second scenario shows a result of 90 This means you have more expenses relatively in the second scenario even though you are making the same amount of profit 1 21 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
The point is that it s taking up more resources to make the same amount of profit in the second scenario and undoubtedly more headaches for the business owner Perhaps it would be better to decide on an acceptable Overheads and strive for that rather than just focusing on Revenue and ending up with less profit for more headaches The aim in business is to make more profit with the resources you have Aiming for efficiencies and economies of scale should be the objective i e making more money with the same amount of resources This is what makes a business more profitable and more valuable 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 1 22 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 Here are Nine Ways t o reduce Overheads 1 Simpl y 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 Creat e compet it ion 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 f ixed cost s 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 skil l rat es f or l ow skil l ed 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 t echnol ogy Such as VOIP Skype etc Could a web site save staff time in your business 6 Have a budget and st ick t o it Report on variances between actual and budget each month and investigate 7 Review overheads regul arl y 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 1 23 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
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 Anal ysis 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 1 24 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 8 Key Number 5 Account s Receivabl e Days See how to calculate this number in Chapter11 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 are 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 1 25 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Here are nine ways t o speed up cust omer payment s 1 Creat e a t erms 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 cust omer rel at ions Have good customer relations to ensure your invoice is a priority 4 Invoice immediat el y 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 bet t er 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 Fol l ow up appropriat el y 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 1 26 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
8 Progress Payment s Seek progress payments or deposits if it s a job that takes a while 9 Get t ough Don t write off collectible debts too easily This happens far too often There are good debt collectors around Note In our QuickCall business example every 1 day improvement here would add 2 934 to the cash flow 1 27 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 9 Key Number 6 Days Payabl e 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 1 28 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
These are eight ways t o get t he most f rom your suppl ier credit t erms 1 Syst emise paying suppl iers Have a routine and stick to it be disciplined 2 Do you pay earl y Never pay early unless you are offered a discount 3 Credit cards Use credit cards to maximise interest free days 4 Payment syst em 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 responsibl e Just one person pays suppliers to avoid over payments 7 Check every invoice Validate supplier invoices against quotes or purchase orders to ensure you aren t overpaying for goods or services 8 Good rel at ions 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 1 29 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 10 Key Number 7 Days Invent ory or Work In Progress See how to calculate this number in Chapter 11 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 1 30 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Here are el even 11 ways t o reduce t he number of days st ock sit s on t he shel f wait ing t o be sol d 1 St ock syst em Have a good system for managing stock 2 Research l ead t imes Understand customer needs lead times and forecast sales and requirements 3 Re direct t o cust omers Get suppliers to deliver direct to customers if possible avoid holding stock 4 Buy f or immediat e 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 st ock movement Report regularly on what stock is doing and measure your inventory days to give a target to work at reducing 7 Assign responsibil it y wit h t arget s Make someone responsible for managing it and incentivise them 8 Seasons Take into account seasonality 9 Indust ry 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 st ock hoarder Get rid of obsolete stock so you can use the funds to buy faster moving lines 1 31 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
We ve al so compil ed t en 10 ways t o reduce t he t ime jobs are in progress cost ing you money 1 Job management syst em Seek out a good quoting estimating system and measure actual costs against each job to see which jobs were the most profitable 2 Fol l ow up syst em Have a system for following up quotes and tenders the quicker you get started the quicker you finish Review operations for efficiency and ask yourself Am I getting deals over the line quickly Create a sense of urgency 3 Just one person Have one person managing jobs who has a good understanding of status and progress to ensure jobs get finished 4 Manage l abour Manage resource allocation and track staff contractor time spent on jobs Schedule jobs and travel for efficiency 5 Cost f or variat ions Make allowances for variations to material prices on jobs to avoid hold ups 6 QC Have good quality control to avoid rework and investigate write offs to avoid them in future 7 Checkl ist s are vit al How many people do you know who don t use checklists and even worse rely on memory Use checklists and templates to maintain standards and improve customer satisfaction 8 Al l ow maint enance t ime Keep equipment well maintained to avoid down time 9 KPIs Have Key Performance Indicators for jobs such as number of quotes versus jobs won and lost 1 32 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
10 Job management syst em Use a job management system to keep information easy to access and provide information for improving job profitability Note In our QuickCall business example every single day improvement here would improve cash flow by 2055 A Prof it and Cash Fl ow Tune Up f or your business Impl ement ing a project t o improve t he 7 Key Numbers may seem l ike a daunt ing exercise We are here t o make it easy f or you Take advant age of our Fixed Price Prof it and Cash Fl ow Tune Up service For just 399 we wil l review each area of opport unit y f or improvement and provide you wit h a t ail ored Report and Recommendat ions f or your own business It coul d be wort h 100 000s t o your bot t om l ine and cash f l ow Cal l us t oday f or more inf ormat ion or visit www CFOonCal l com au Prof it and Cash Fl ow Tune Up 1 33 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 11 How t o Cal cul at e t he 7 Key Numbers 1 Revenue Growt h Percent age This is the percentage by which revenue has grown from one year to the next Example 2 Cost of Goods Sol d Percent age This is the percentage of Cost of Goods compared to Revenue Example 1 34 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
3 Overheads Percent age This is the percentage of Overheads compared to Revenue Example 4 Account s Receivabl e Days This is the average number of days it takes your customers to pay you Compare this to your stated terms of trade Example 1 35 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
5 Account s Payabl e Days This is the average number of days it takes you to pay your suppliers Are you paying too soon and not taking advantage of every day of credit in your trading terms Example 6 Invent ory Days This is the average number of days stock sits on the shelf waiting to be sold Example 1 36 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
7 Work In Progress Days This is the average number of days jobs are in progress prior to being invoiced Example 1 37 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Chapt er 12 About t he aut hors CFO On Cal l Sue Hirst and Stuart Frost are a husband and wife team who in 1991 founded the Computer Accounting Doctor business which became CFO On Call by CAD Partners Sue was an accounting practice manager and Stuart had a business advisory background It seems improbable that two non accountants have set up what is regarded as the largest management accounting and CFO services business in Australia and New Zealand The st art of t his was t hat bot h had experienced a business owner s pl ight where an owner had t o make import ant st rat egic decisions based on account s t hat were somet imes as much as 18 mont hs ol d They passionat el y bel ieve t hat business owners need current management inf ormat ion on which t o make better decisions Set up initially to help businesses transition from manual to computer accounting systems they developed tools health checks and methodology to help business owners get instant clarity from their numbers that in most cases they weren t getting from their tax accountants Hence the CFO On Call service was born where a business owner can call upon the services of an experienced ex corporate Financial Controller or CFO for a fraction of the cost of hiring your own once a week or month or on an as needs basis CFO meaning Chief Financial Officer 1 38 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
In it s years since inception the company has helped over 20 000 clients set up systems reduce cash wastage improve cashflow and profit CFO On Cal l How can one hel p you As a business owner you may not need a full time CFO But you almost certainly DO need more expertise than you get from an in house bookkeeper number cruncher and more help and ongoing advice than an annual trip to your accountant So a CFO On Call advisor can become your Chief Financial Officer but part time They can help with internal financial control and direction for your business That could be every now and then once a week or once a month It s up to you You can have al l t he benef it s of your own CFO f or a f ract ion of t he cost of hiring someone f ul l t ime They will be always available face to face or on line to help plan strategic direction with you discuss new ideas and be your right hand financial guru whenever you need help Best of all they bring big company experience to your business All CFO On Call people are qualified management accountants from bigger businesses but unlike most tax accountants they ve worked as senior financial controllers in leading companies and know exactly how to improve financial performance 1 39 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
All CFO On Call people are qualified management accountants from bigger businesses but unlike most tax accountants they ve worked as senior financial controllers in leading companies and know exactly how to improve financial performance See www CFOonCall com au or www CFOonCall co nz To enquire call 1300 36 24 36 Australia or 0800 180 400 New Zealand 1 40 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
Fourt h Edit ion Intended as a guide for small businesses in Australia and New Zealand First Printed in Australia 2010 This e book edition 2017 CAD Partners Pty Ltd CFO On Call CAD Partners Ltd Limited NZ CFO On Call This book is copyright This publication or any part hereof may not be copied or published without the written approval of CAD Partners Pty Ltd All Rights Reserved Apart from any fair dealing for the purposes of private study research criticism or review as permitted under the Copyright Act no part may be reproduced by any process without written permission Published by CAD Partners Pty Ltd Trading as CFO On Call locations around Australia and New Zealand Tel ephone Australia 1300 36 24 36 or New Zealand 0800 180 400 Email info cfooncall com au or info cfooncall co nz Enquiries should be made to the publishers Disclaimer CAD Partners Pty Ltd and any officer agent or employee of CAD Partners Pty Ltd or associated companies do not warrant the accuracy or reliability in relation to any advice or information contained in this publication and accept no responsibility for any loss or damage whatsoever arising in any way from any representation act or omission including responsibility to any person by reason of negligence This book does not constitute nor is intended to constitute a definitive conclusion about cash flow financial control methods and related matters Advice about the Key Financial Numbers and related methods for your business should always be sought from suitably qualified Financial Controllers Chief Financial Officers and Accountants 1 41 Copyright CFO on Cal l powered by CAD Part ners Pt y Lt d www CFOonCALL com au
