Invoice Timing is important

One of the major problems private businesses face is cash flow. The problem starts with how quickly invoices are issued to clients and how soon clients pay their invoices. Most private  businesses  have a net 30 day policy for invoices to be paid. However, if  invoices are not sent to clients on time this may end up being invoice receiving date plus 30 days which then averages collection date between 45 to 60 days. In some circumstances businesses are failing to invoice altogether due one reason or another. A sale can not turn to cash if no money is received from the transaction, putting undue financial strain on the finances of the business. Processes can be put in place to make the generation of invoices a simple task and easy to do. The system should be such that invoices can be generated and sent from anywhere, including from the mobile, making it easy to keep track of all sales and outstanding balances. There are ton of software available to undertake this task at little or no cost.

Unlock the Cash

Credit Sales (Accounts Receivable) can be planned and forecasted and compared to actual results. By reviewing your accounts receivable monthly or at least every quarter, you will be able to identify where things have gone well or gone wrong and take the necessary steps to correct them. Make decisions on whether the business can collect payments from clients, faster than you currently do. Strategies such as charging late fees or offering discounts for immediate payments to give clients the incentives to pay faster can be implemented. In certain businesses factoring may be a possible choice of action, offering  for peace of mind not hassling or employing another head to collect or chase clients for money. (Note that this option comes with extra cost which will affect your bottom line.)

Vendor Confidence

Some vendors once told me that, the mere fact of sending us your remittance advice, showing the breakdown of the payment and when the money will be credited in our bank account gave us the confidence to do business with you. Review your current payment pattern to creditors and you can strategize to put in place better plans on how you pay your vendors. Strategies such as sending remittance advise to vendors go a long way to build trust and confidence in your relationship with your vendors.

Sample of movement in Account Receivable for the year 

How can you Afford to Spend when you don’t know what the future holds?

How do you know the business can afford to buy the new equipment, expand to the new location in the outskirts of town or buy that new car you have been dreaming off? Will there be enough cash in the bank within the next 12 months to sustain the business? No body can tell what is around the corner or in the future. Business is about taking risk, making returns and believing that things will turn out as expected.

Planning to strategize future expenses is the best way to ease the uncertainty surrounding whether there will be enough money in the bank. Creating a “what if” scenario to see the major impact a big purchase will have on your bottom line is one way of dealing with any concern. Planning is not only for knowing the answers you are asking and neither is it an attempt to predict the future, but it is used as a guide to help navigate you in any action you take. It is only when you start taking action that you will start seeing actual results. A comparison with the plan you have already drawn  puts you in a better situation to move ahead and in a better position than you would have been if there was no plan. This is similar to putting up a house. The builders are able to understand your intentions when they have the plan in front of them. When anything goes wrong with the building, the first point of call is usually the plan, to understand what was missed. If the plan did not take the issue at hand into consideration then another plan will be drawn with the necessary adjustment and then the work is carried on.

Going Bust whilst Profitable

Did you know 60% of businesses that fail in the US are usually profitable. We do not have the statistics for the UK but we won’t be far off. You may not believe it but do you believe it when we say its simply because cash is not equivalent to profit. Where as profit is simply the difference between gross revenue and expenses, actual payment of cash in and out of the bank is what affects the cash in the bank. Do you have to pay for things before the cash arrives? Do you have to order your supplies in advance and pay for them before you can sell to customers? Create an accurate cash flow forecast and understand how the current movement of cash is having an impact on your bank balance. Formulate strategies to collect money from your customers faster (way before your next order) and negotiate or delay payment to vendors in a way that won’t jeopardise the relationship you have them. Ensure that if you are cash rich your forecasted net profit will look healthy as well. Remember that whilst “cash is king” your forecasted increase in net profit equals growth.

Take Control of Your Spending Whilst Expanding

It is perfectly understandable that whilst our income increases our tastes also improves. Most people will stop going to Lidl when their income reaches the £100,000 mark. They will rather go to Waitrose or M&S to get their groceries. The same applies for businesses and this can easily spiral out of control if not checked. There may come a time when some expenses can not be accounted for. Healthy growth demands healthy investment so that the business will be in the position to be competitive and enjoy sustainable growth in the long run. The most effective way to track your spending, is to make sure it is in line with revenue expectations, and evaluate whether you can afford the expenses from a cash perspective. Develop a financial forecast, or plan to track and put in place a measuring gauge that depicts a roadmap for what success would look like for the next 12 months.

One of the most effective ways to measure how your actual compares with your plan is to have the plan side by side your actuals and compare at least each quarter or monthly if you can afford to. This way you are making sure the business is on track, strategize to keep it that way. Comparing what you actually spent versus what you were expected to spend will uncover any potential problems and can take measures to deal with the problem before it gets out of control. Keeping good records is always a good base for  planning for the year ahead including any spending goals you may have.

Sample Analysis of Expenses

Which of your product or service is the most profitable?

Dealing with sales team brings this question to light. Most sales executives are at their element when they sell because that is what they do best. But is the sale making a profit? One key accounting management tool is being able to work out how much gross profit each product or service is making. Every business owner will know immediately how much they will make from a sale if they understand these numbers. This line of questioning normally comes up in the BBC Dragon’s Den where business owners pitch their business ideas in return for investment from the Dragons. It will help every business if this tool becomes available to everyone. Further analysis will help if the amount of profit per customer, per supplier can be known.

What are the Profits of my 5 biggest clients?

A client wanted to know how much profit they were making from their biggest 5 customers. The reason was the demand for their services was so high they wanted to prioritize and increase their profits by meeting the demands of their most profitable clients. That is a very good position to be in, isn’t it, most business I have come across are constantly working out where to find their next customer. In other cases some products or services do not need to be profitable because they are sold together with other profit making products or services. Just chasing after sales isn’t going to make a difference to the bottom line, strategizing on the profit making sales will set you apart from the competition. Understand what the gross margin of your products and services are, having a handle on the margin will help you strategize your business. It is important to properly account for direct costs and overheads. When you have done that you will be able to look at your business differently and know what can be done to increase profits.

Sample analysis – Gross margin of a bike shop

Is Your Business Affected by Seasonality?

Almost every business is affected by seasonality. In most UK boardrooms the season and the weather is the most popular topic in the room. Economic and financial journalists are the same when it comes to reason for increases in sales or fall in sales. For the supermarkets and food sector, whenever there is enough sunshine in the summer it is expected to drive sales through the roof with some of the shops running out of BBQ stock. Whilst your business may not be as drastic as driving stock to its lowest level, almost every business experiences some form of seasonality. It is important to identify your business trends and plan strategically to make the most of your highs whilst making sure you remain healthy through the lows.

In order to check out the seasonality of your business, look at the revenue and expense trends for a 12-month period. What months have lower revenue than average? When do expenses spike? What stands out to you? Compare this with historical trends and delve into periods of expense spike and revenue drop, especially if you didn’t project or anticipate these increases or decreases. You can use applications to show your revenue and expense trends over the last 12 months on a line graph. You can take necessary action to deal with the seasonal trends. In some of the businesses we have worked with, we have managed to introduce other products or services during the low season to make up for the low revenue.

Sample of Seasonality in a bike shop