There’s never been a better time to turnaround a business
or improve its performance!

So here we are recovering from recession and the need to turn the businesses performance round or improve it has never been more pressing.

It might seem complicated and unachievable but in our view it’s just about adopting good practices so don’t give up. In this article Trevor Morley, one of our financial experts, gives some guidance in what to do and takes the mystery out of achieving improved performance.

If you want a quick answer whether your business is growing and/or facing trading difficulties, prudent cash management is essential to your company’s financial security. If you want to know more and understand the change then read on and get some ideas to

IMPROVE the profitability and cash position of your business and STRENGTHEN its ability to protect its assets

First let’s set the scene:

Why are we in business?
The answer ought to be:
To make a profit!

Realise this and don’t forget it - if you don’t make a profit, you won’t be in business for very long – ultimately you’ll run out of cash!

Cash is the life-blood of any business:

“More than 60% of small businesses that collapse do so because of cash flow problems and even profitable companies can be forced out of business because they’ve run out of cash”

So we need to understand the relationship between profit and cash in a business. Remember:

“Volume is vanity, Profit is sanity, Cash is REALITY”

Profitability

Improving it can be achieved by any or all of the followi

Increase turnover
Improve margins
Control of costs

The positioning of your business will govern which of the above you feel is most appropriate and achievable. Doing NONE of them in today’s climate is just not an option!

Preparing a trading forecast that shows a profit may not be enough for your business - ensuring that your trading forecast is cash positive often being of equal importance even to the banks!. Indeed, there may be circumstances where your borrowing arrangements dictate that being cash positive over the next 12 months is MORE important than showing a profit.

Cash

How can we measure the cash impact of our trading forecast?

First of all, we need to understand Working Capital and its effects. Lots of companies forget about this and then wonder why they run out of cash.
What do we mean by Working Capital? It’s the cash we need to run the business, more specifically:-

Working Capital = Stock + Debtors - Creditors
Working Capital % = Working Capital/Sales x 100
Working Capital will increase / decrease in direct proportion to Sales increases / decreases!

The turnaround or improvement

Having got those basic principles out of the way I guess you want to know how to improve you business performance.
In order to maximise profitability, it is vital to re-examine all aspects of your business model but in simple terms, the following two main areas are always worth considering.

Improvement in Gross Margin

(Gross Margin is the ‘Amount left in the business out of which Operating Expenses must be met’ and improvements could include)

Turnover:

Increasing volumes and/or pricing but this may not always be possible
Review existing customer base and eliminate customers who are expensive to service. This may be due to geographical location, extremely low margins, poor payment history or ones who have unrealistic service expectations.
Review gross margins by customer; establish rationale for low margins, examining scope for improvement.

Cost of Sales:

Review supplier terms, establishing whether buying gains can be achieved, either with existing supplier or switch selling.
Review the product mix, switching away from low gross margin products
If your industry gives sales rebates or retrospective discounts, create more sophisticated pricing models, linked to specific customers and/or products – do NOT offer ‘blanket’ discounts on everything.
If you have to allow sales rebates etc, try and link them to achievement of sales growth targets.

Control your costs
Implement a purchase order system, which includes both stock products and all overheads. Real control of costs starts with the authorisation of the expenditure - NOT by the cheque book at the end of the process.
Review ALL main overheads, specific areas to examine:

• Utilities (Electricity, gas, water etc)
• Telecoms
• Rates – there are many firms that will operate on a ‘no win, no fee’ basis and ensure that your business is paying the correct Unified Business Rate for its premises.
• Motor Fuel

Improvements in profits due to an increase in turnover will result in an additional working capital cash requirement. Profit improvements arising from ‘cost of sales’ and ‘cost controls’ will have a much more positive impact on cash.

Finally protect your assets:

Failure to protect your asset base will ultimately result in reductions in both profitability and cash. Here are just a few areas to consider:

Stock / WIP:
Regularly review condition and age of stock.
Keep slow moving stock and dated products to a minimum

Debtors:
Consider taking out a credit insurance policy to protect your business against potential customer bad debts
Implement a robust credit management policy that includes:
Review of trading terms and conditions
‘Education’ of customers to settle debts in accordance with payment terms
Ensure that individual customer’s clear their debts promptly and in full. Ensure that queries are resolved quickly to avoid giving customers a reason to short-pay.

Property:
Consider implementing a preventative maintenance programme
Ensure adequate insurance cover

To Summarise

The above are examples of some areas for you could consider that will ALL help you turn your businesses performance round and/or improve it i.e. more profitable and cash positive. It is by no means an exhaustive list!

If you would like help with exploring opportunities to improve or applying the above in your environment then contact us. All businesses are different but they can all be improved.

Prepare to smile more.

Written by Trevor Morley MICM