And let’s kick off so you can see my screen. Okay? Financial Management for business owners and the name of the game is helping entrepreneurs survive, thrive, grow and execute successfully. I think anybody who is brave enough to become an entrepreneur, to set out to create
employment for other people to grow business is their hero, they are taking a huge risk, and they deserve all the help and support they can get.
This is all about growing your business and growing a business is about an outcome. And ultimately, you’re growing a business for a reason. Everybody is different, everyone’s something different. But what does success mean? Our success probably means creating wealth, creating
equity value in the business and ultimately being able to extract that equity value at the end. And in the meantime, having a suitable clothes,
both financially and health wise along the way.
These are the 12 steps to business growth and exit readiness.
This is what we’re going to cover over the course of the next 12 weeks. So today’s session, we’re gonna look at this one here, which is how to grow your business. That just gives you an overview of what comes next is session number two is all about the impact of compounding. So we’ll go into a lot of detail there about if you make small changes, small, seemingly insignificant changes, it can have a dramatic impact on the profitability and the equity value of the business and also the cash flow. You’ll be stunned to see how, how small changes make a huge difference. And then what we’re going to do over the course of the next weeks is look at each one of the key input drivers. And you’ll understand more about what the input drivers are as we go through today. And give you easy to buy. In most cases.
Sometimes very low cost strategies you can apply to improve each of the key business drivers. So the quick win cash strategy is all about looking at overheads. It’s not just about cost, it’s about getting more out of what you are currently paying for. Number four, improving cash flow or Week Four improving cash flow is cash is the lifeblood of the business. If you run out of cash, the business dies full stop. You can run with negative profitability for a while. But if you run out of cash, the business dies. So this is absolutely critical. And for most businesses, there’s so much cash just waiting to be collected.
But you need to know where to look.
Week five, we’ll look at the margin right now. Well, what we’re actually doing, as we go through each of the steps, we were looking at the things that the easiest the fastest to do first, and then we’re moving on to the things that are harder, take longer and have a lower impact on profitability and cash. So increasing gross margins margin cost control. That for me is the jewel in the crown of this thought that that’s a brilliant session on week five, Week Six customer attrition.
It is stunning, how much additional profit and equity value, you’re building your business just by holding on to your clients a little bit longer. For most businesses, they focus in inordinate amount of time and effort on new client acquisition. But very scant resource or effort or focus on existing customers, and reducing the impact of customer attrition and improving retention. And the impact on profitability of improving that can be profound. Click seven we won’t move into still focus on existing customers but gap analysis and cross that gap analysis looking for the gaps, the opportunities where existing clients are not purchasing services, and there is a need for an opportunity to go back and educate and plug that gap and deliver more value for customers and sell more to existing customers. It’s much easier to solve an existing customer by a factor of eight to 16 times than it is to go and find anyone but you’re also supplying more of your clients needs becoming more valuable strengthening your relationship. We Kate will look at strategies to increase the average number of transactions and the average transaction value. So that each customer becomes more valuable. And you become more valuable to your customer very similar ish to gap analysis and cross selling. But those two are two separate topics. And you’ll notice that you know week nine, almost the last last last thing we get to
is the thing that most business owners obsess about, which is new customer acquisition of a client acquisition. We do it last because you should really optimise the business. By optimising the business. It means that every new customer is that much more valuable to you. And you can afford to invest more to get them on board. So customer acquisition, week nine and then in theory, we know how to grow a business now it’s just a question of putting into practice. Now there’s a question how much is enough? And you might just want to grow the business and just keep growing ad infinitum like Amazon
or you might do
You want to hit a certain level of wealth and a certain lifestyle, and then then cash in and come out and say, How much is your number? How much money do you actually need to acquire for yourself to live the life you want to live for the rest of your life without ever running out of money, assuming you’re going to get a stop point at the end of this business rather than starting another, and then another, it’s absolutely paramount that you know your number, and it’s fantastically liberating to know what your number is, and when you’ve reached it, because that truly gives you options when you’ve reached your number, you have absolute financial freedom.
Week 11, we’ll look at all the reasons why you will not be able to sell your business. And that might sound a little harsh, but the unfortunate reality is is very, very few businesses actually successfully sell at all. And those that do sell frequently get nowhere near their expected or needed. Financial valuation. So achieving exit really all the things you need to do to be able to extricate the wealth that you’ve created from your business when the time comes.
And then we will
do whatever you want to do, however you want to do it, you need a plan, a robust plan. And when we’re talking about running a business and finance, we’re talking about a plan that maps out your profit and loss projections, your balance sheet projections, and the all important cash flow projections. And 14 very, very few businesses have a plan and without a plan as the same goes, failure to plan as a plan to fail. So let’s crack on. So let’s look at the how to grow your business.
So did I tell it tell story is in the Cheshire Cat. So those who have read Lewis Carroll’s book, Alice in Wonderland, will recognise this extract from the conversation between Alice and the Cheshire Cat. And it goes something like this. Would you tell me please which way I ought to go from here? asked Alice, that depends a good deal on we want to get to set the cat, I don’t much care. So that was, well then doesn’t matter which way you go, said the cat.
And if you think about it, it’s quite a strong message in there. What’s this got to do with you and your business? Well, if you genuinely don’t care what happens to you or your business or your loved ones now or in the future, then that might be okay.
But for everybody else with people depending on them. Most people will be employees, with their families, your family, your customers, your suppliers, everybody who will be negatively impacted. If your business struggles or fails, you really do need to have a plan for where you want to be in the future, both in your personal and your professional lives. And you need to be clear on when you want to get because a plan without a timescale is just a wish.
imagine an idea genuinely do do this. Now just just imagine, just think for as if we were to meet if we strive to meet in five years time.
Question What would have to have happened in your personal and your professional life?
For you to conclude that you have enjoyed outstanding success?
And if you really think about it, imagine it almost smell whatever it is you can smell, see whatever it is you can see taste it.
Yeah, how would your life be different? Would you still be doing exactly the same thing as you’re doing now? Or would you be doing something different? So it has to be your success, what you’re trying to achieve while you’re trying to go? And there’s there’s some things along the way that you need to be aware of? So what dangers are you aware of that that could knock you off track?
What opportunities have you got that you ought to be grasping with both hands and building on? And everyone’s got some superpower, my superpower something you can do better than anybody else? So what strengths have you got that you ought to be building on and capitalising on
any clear on when you want to get there?
Because in business, and I’m assuming that everybody in business wants to run a successful business does not want to fail. The unfortunate reality is, well, we just looked at the business survival rates. This is the Office for National Statistics. This is their graphic data for business that started in 2014. And you will note that 2014 2018 This is pre COVID. So I think things are gonna take a little bit of a knock and are taking a knock due to COVID. But the survival rate for businesses that started five years ago, only 42.5 will survive see your five that means the rest have failed.
Now question for you is not failing success.
Clearly, it’s not because many, many, many businesses are clinging on by the fingertips or on life support. So if we look at that in a different context and say, well, if
If successes articulated as getting to the end of running the business, having built the equity value in the business, and then being able to exit and extract the value from the business, the unfortunate reality for 90% of businesses 90% Is the businesses simply get wound up unsold. And to be fair, there are a lot of lifestyle businesses, where arguably there is no equity value, there is no business to sell, it’s somebody who effectively has a job. However, in that 90%, there are an awful lot of businesses that do have equity value in the business, even if that equity value is just the client base, which is frequently, you know, just allowed to just disappear.
Perhaps more worrying than that.
Let’s assume these 90% didn’t want to sell the business, they didn’t think there was anything to sell, they just wanted to wind it up the 10%, who did try to market their business for sale of them 80% will not sell successfully.
Now that should be a real wake up call. Because unlike if you put your house on the market to sell, you’re going to sell it, you might not get quite what you wanted for it. But ultimately, you’re always going to be selling able to sell a property etc. in exceptional circumstances, however, 80% of businesses don’t sell. And if you think about that, that’s a catastrophe, because it means they will have engaged a broker who will probably charge them, you know, five to 15 grand for a information memorandum to market the business. And ultimately, at the end of the day, the business doesn’t sell. So all that happens at that stage is the business owners, just given several 1000s If not 10s of 1000s away to a broker to market the business for a business doesn’t get sold. And that’s just money that is no longer in the in the bank to pay the business owner.
One might be forgiven for thinking that the remainder and you think about the percentages here, if you’ve got a 42.5% chance of making it to your five in this case, and only a 10% chance of selling that 4.3% chance of
getting that far. If you’re going to get through to the stage, have you actually sold the business, you’re up to naught point eight 6% or less than 1% of businesses that actually get sold less than 5% achieve or exit valuation. I’m real sorry to come up with this real dampener, but it is a very real problem is that businesses who are not prepared properly for exit frequently, either don’t sell or get completely annihilated on price, they don’t realise anything like the value they should be able to realise and extract from the business.
So that’s a one in 2222 chance of success. And you’d have to be absolutely nuts to gamble on those odds. So every entrepreneur, I salute you, we we are doing something really stupid, or we’re being really brave. And I think we deserve all the support we can get. So let’s get a bit more positive. So let’s talk about massive failure and talk about how we turned it around very quickly. So when David Brailsford took over the British Cycling Team in 2002, I’m apologise to the Americans that haven’t gotten American equivalent, there must be one. But Britain had only won one gold medal in our 67 year history. Now I’ve done about you I think that’s a pretty shambolic failure.
However, in 2008, when we went to the Beijing Olympics, the British Cycling Team won seven out of 10 gold medals and repeated that success.
Four years later,
we also went on to win three of the next four Tour de France events. Now, question, how did we achieve or how did the British Cycling Team achieved that extraordinary success? While they did it by breaking down everything that goes into competitive cycling, and finding ways to make small, seemingly insignificant one cent gains and these very rapidly
multiplied to deliver outstanding success. And this David Brailsford said When interviewed, trying to come back,
perhaps the most powerful benefit from the process was the contagious enthusiasm. Everyone started looking for ways to improve and there’s something inherently rewarding about identifying marginal gains. The bonhomie is similar to a scavenger hunt, people just want to identify opportunities, and share them with the group and the team became a very positive place to be.
I don’t know about you, but I want that for my business. I want everyone in my business striving to make small improvements, small improvement everyone can contribute to. So that’s what we’re going to try and do over the course of the next weeks. But we’re gonna focus on all the things that make businesses successful. So in business success, is there an optimum strategy? Well, yes, of course there is.
You need to measure what matters. Now unfortunately, and I’m going to slate the majority of
business advisors and the accountancy professional, this stages but most people measure the wrong things.
They mentioned the
lag indicators. So these are these are things that happen after something else has happened, these are outputs. And any engineer will know that you can’t control anything. If you try and monitor the outputs, you’ve got to measure something different. And this is this is reporting results after they have happened when it’s already too late. This is history. And unfortunately, from an accountancy point of view, history is your revenue, what you’ve sold the profit, how much profit you made on those sales, the cash in the bank, and ultimately the value of the business. So they’re all outputs, what are the inputs? Well, the inputs are the lead indicators, the inputs that drive the house first. And these are the things you need to measure, understand and control and improve if you’re going to improve the outputs. So you need to know what these inputs are. Now fortunately, for anyone in business, they’re all the same. It’s beautifully simple. There’s the rate of customer acquisition,
there’s the rate of customer retention. So if you think about it, this is number of customers acquired minus customers lost equals your net gain or loss in terms of absolute number of customers that builds over time. Every time those customers purchase something, you make a gross margin on those purchases. So hopefully, some of those customers are going to purchase more than once. So we’ve got to purchase frequency.
And building on that there’s the average transaction value. So the the size and the frequency, the purchase, margin multiplied by number of customers. And then ultimately, there’s what does it costs to run the business. So suddenly, running a business should have just got really simple, we’ve only got six things to focus on. There’s a bug, which I’ll come back onto in a minute.
So with those six things that we need to focus on, and we’re going to go through these quickly today, and I’ll go into a lot more detail on all of those over the course of the next weeks. So let’s look at a fictitious software companies based on real data. So this is not completely fictitious.
So here we have Alex Jones of a software company turnover, just a shade over a million, and it’s down slightly year on year, from 1,000,003 to 1,000,001.
Cost of Sales
were was 662. Last year, that’s down to 650 this year. So with cost of sales reducing but sales static, you can see that the gross profit effectively increased from 2412 Just over 350, Syria TENCATE improvement in profit due to
the reduction in the cost of sales
overheads. overheads have also reduced they’ve gone down from 21, down to 271. This year. So that’s another 10k reduction. So with 10k on margin 10k on overheads, you can see the net profit moved here from 60k to 79k.
Now on face value that looks excellent, moving in the right direction. And if adequacy is like many
being tax efficient, it makes sense to pay yourself the minimum through paye and then make up the rest of your salary through dividends. So obviously, with an 80,000 pound profit, it’s reasonable to assume that Alex is looking forward to paying a respectable dividend, all things being relative.
So let’s look at some of the drivers. And we’ll come back to Alex in a moment. So transaction value, and it’s gonna give you some tips on things you can take away and do immediately. And some things to really bear in mind and ask yourself about your business transaction value. Question, What is your average transaction value?
What can you do to increase that value? And frequently, the easiest, fastest way to improve your business is focus on the things you want to control and just ask the right question, What can I do to improve this? What can I do to reduce that? How can you actually increase the average transaction value? The question, do you offer bundles?
Or do you leave your client do all the hard work? So bundles? Do you use scripts do does that help your client make a buying decision? So the absolute classic is do you want fries with that?
Everyone’s heard of Do you want fries with that?
Or do you want to go large that that strategy alone, just that one line that is used in just about every single McDonald’s restaurant up and down the country makes a monumental difference to the average transaction value and the profitability for McDonald’s?
Have you conducted a gap analysis to get a whole hour on this one in Week is doing gap analysis week seven.
Looking for the opportunities to actually sell more to existing clients but hopefully getting them over time to actually purchase more on day one key issue here is do you know what your average transaction value is? Because that’s the key metric. If you don’t know what that is, you can’t track whether you’ve made an improvement to take action to improve. And you don’t know whether the numbers have improved and you don’t know whether the action is having the desired impact.
So, transaction value, purchase frequency.
Do you know the average number of purchases each customer makes the information is in your accounting system, so you can pick that out relatively easily. How often do your customers purchase today?
Clearly, how often could they purchase? And if you know that there’s a gap between what they’re currently purchasing what they could be purchasing, you’re already 90% of the way to making it happen.
Question of you and your team we’ve got one is, what can you do to increase the purchase frequency?
Key thing thing here is you just have to have a metric that you track, so the average number of purchases made. So let’s move on and look at the next one that’s two of them looked at. So let’s look at the margin. This is a bit more interesting. And there are a lot of lots of mistakes made in margins. So this is somewhat invaluable. Do you know the percentage of margin you make on each sale or the average margin you’re making and the tracking over time,
you need to track that margin rate, this is absolutely critical. You need to know what you can do to increase the gross margins, I’m gonna give you some absolute classic takeaways in just a moment.
Do you know what the impact is of discounting? So let’s just take a slight diversion and look at
a typical business. So let’s let’s assume a unit unit costs. So we have a say a widget are a service that we sell for 100 pounds. Let’s assume that the cost of labour or the you know the cost of materials to actually get that 100 pound sale was 65 pounds, we’re making 35 pounds gross margin, or 35%.
Now, if we ramped that up, we’re gonna sell lots of these over the course of the looking at the bigger picture, if we’re selling lots of these, and let’s use the figures that we have previously, and we’re about about a million pounds turnover with 650,000 pound cost of goods, we’d be making a gross profit margin of 350,000. Way, right. But we know that we have to pay some overhead saw salaries, rent rates, etc.
So the real issue is the net profit is what’s left after we paid all the overheads, if anything. Now if we discount. Unfortunate, unfortunately, the human brain is quite a simple animal. And we can all we can all process 10%. Because it’s easy, we just move the decimal point one. So frequently, the unit of discount is 10%.
Factually, if you give people scope to discount, they frequently discount straight down to the maximum discounted rate. So if you give your sales team the ability to discount down 10%, you’re probably fine, your prices just reduced by 10 pounds, that doesn’t seem too bad, you’re going down from 100 down to 90.
The cost of sales, however, is still 65. That doesn’t change, which means it will make an a gross margin 25 pounds, or 28%. So slight reduction doesn’t look too bad until you consider this. The revenue reduction now is 10%. So we’re making 900,000 on 650 cost of sales. Gross profit now is 250. And for those that are thinking ahead, you’ve spotted the problem, our overheads are still 280.
And now we’re running at a loss. And at some point we’ve run out of cash and that will be game over.
By contrast, most people are not particularly motivated unless you’re extremely price critical market by prices. Other factors, I think price is typically about the number seven into the list of importance, customer service. Reliability, you know, come up way ahead of that one, it’s frequently frequently frequently possible to increase prices without having any material impact on
client attrition. So if you increase prices by 10%, cost of goods still 65 pounds, we’re now making 45 pounds on every sale or 41%.
Our revenue is now at 1.1 million, our cost of goods is still 650. So now we’ve got a profit of 450.
overheads are still telogen. At least now we’ve got the profit up to 170. I guarantee you one thing it’s much much much easier to increase prices by 10%. And it will go straight to the bottom line than it is to increase sales by 10%. When only a fraction of it goes to the bottom line. So quick tip if you aren’t discounting seriously consider whether it’s the right thing to do when we look at gross profit margin in week four. We’ll go into a lot more detail about exactly by how much do you have to increase sales to compensate for giving a discount and also how many customers can you afford to lose?
In order to make more profit by putting through an increase and you’ll be you’ll be shocked and probably delighted to see ya
out what what those numbers actually are. So on the margin key issue here is really you do need to know what margin you’re making on sales. If you don’t, then then you’re you’re not in control, you need to be in control.
Definitely want your overheads.
So so this is a bit more convoluted, it’s the first place to go, because it’s the one you can impact immediately. But are you using the best suppliers? The probabilities, you’re not not reviewing them on a regular basis? And the chances are that you could possibly get better suppliers or better terms from different suppliers that will have impact potential on cash flow, as well on just just the cost itself. Are you getting a positive ROI? And so some of your overheads will be investments that are designed to give you a return. So think about marketing, for example, you can argue as to whether it ought to go through cost of sales or overheads, but frequency and overheads, if you’re spending money on marketing that should be generating profits, are you getting a positive ROI on your expenditure?
Most of our costs are a lot of our cost is frequently staff.
Statistically, apparently 20% of all employees are completely disengaged.
If you can get your team to be more engaged, the productivity gains can be quite substantial. So you can get significant increases in production and output. very marginal increases in overheads if any increase in overheads. And the thing about overheads is stamen can only be made once. So this is probably something to come around and look at intermittently quarterly or every six months and put a major mission on it. But
the other drivers, I would suggest you ought to be obsessing about these almost every week or every month. This is definitely not something to do once a year, every week every month is where you want to be trying to make small, tiny incremental gains on overheads. The key word focus on here is getting a positive ROI. There’s no point spending money on something supposed to be an investment. If it’s just money down the drain.
Customer Acquisition or the the less attractive word is attrition. They are the same thing. So customer acquisition or losing customers. Same thing, but they both go together here. So key thing do you track leads and conversion. So from a financial point of view, just using financial data, we can just get new customers acquired. But the two underlying drivers is the number of leads you’re generating and the conversion rate.
What are your best lead sources. So some sources of leads tend to generate better quality
leads that are easier to convert and typically have greater loyalty and purchase more. So you need to look at your your, your fat and your financial data in more in more detail to understand exactly what’s going on.
You need to understand the cost of sales, how much it costs to acquire a customer with the Lifetime Customer Value. So don’t just look at the first transaction, you really need to understand how much revenue how much profit are you generating from each client interaction when you know that you know how much you can invest in acquiring new customer, obviously subject to cashflow, making it affordable.
As I’ve already alluded to, you know, all leads are not identical, some leads generate a far greater ROI than others. So it could be that you get really, really great leads that convert from word of mouth referral,
up to better than some sort of random quality or possibly pick up through visitors on your website.
Key thing here is you need to need to track the numbers. So key one here, obviously the one that most of us got a handle on how to use as our leads times conversion, how many new customers we’re inquiring or acquiring, but we need to drill down a bit deeper.
If I look at retention,
well do you track customer trencher attrition rates? From my experience? The answer is almost certainly never.
And yet is this is probably the easiest thing to look at rather than new customer acquisition. So do you have an effective feedback process? Do you take time to understand customer sentiment? Part of the customer sentiment might be linked actually to a asking clients for referrals. So your customer retention strategy might be integrated into your customer acquisition strategy?
Do you have an engagement strategy? So what ongoing activity do you have to stay top of mind with your clients to stay? The person they think of every time they have a need for which you are the solution? And if you think about most, most hospitality businesses as a for example, most shots, their engagement strategy. It’s a open closed sign on the door.
Absolutely no engagement strategy whatsoever. So you need to
take positive action to make sure that you develop a stronger relationship with client
wants to have greater loyalty and get more referrals, and a whole lot of other great things. And we go into a lot more detail on that in a few weeks time.
And it says Do you have a referral process I’d say do have referral processes, you should build into your your systems and processes within your business to how you drive your clients, strategies and methods to actually systematically request referrals when the time is wrong.
Key thing here is you need to know the input driver. So are you tracking your customer attrition rates? Do you know when your customer attrition rate is getting worse, you need to track it.
So let’s look at some some management information. So for those of you who have only ever seen a profit and loss and the balance sheet, this this this is management information, profit loss, and a balance sheet isn’t really what you need, you need something much more
informative. So what we’ve got here, he’s got new and existing customers and our fourth ones this this business, Amex is fictitious software business has retained something like clients. However, they have lost
So if I take that down, now, we can break that down a little bit more details. In the last 12 months, we’ve acquired 79 clients that compares the prior year when we acquired 98. So clearly, 79 versus 98 is a significant reduction and say we’re doing the math, it’s a reduction of 19, or 19.4%.
You might say, so what so we understand the impact on the business. So this sentence that you see here,
if the reduction in new customer acquisition experienced over the last 12 months continues, in other words, continues into next year. That means there’s a risk to revenue. In other words, revenue will be reduced by approximately 53,000. And its mass, so 100 132 pounds, or 5.3%. Now, revenue versus profit, revenue is vanity, profit is sanity. Cash flow is reality. If you apply the margin achieved over the last 12 months, which is 35%, then that equates to about 18,600 pounds of profit that was not generated, which translates to cash not in the bank, which translates to
money that you cannot draw as a dividend which translates to money, you can’t invest in growing your business. And
as this also has an impact on the value of the business.
For this particular business, it varies a lot. And we just take a three and a half times EBIT da multiple is probably reduce the value of the business by about 65,000 pounds. So as the business owner for this particular business, what it means is
this one metric here, new customer acquisition, which is probably the one that most people have got a best handle on,
that’s just reduced the value of the estate of the business owner by about 65,000 pounds. So now 65,000 pounds worse off this year, compared to last year because of this one number.
you realise why this is so important.
So we move on and look at retained customer statistics, just a couple of examples. Customer retention, in this case, we’ve retained 96 clients, that’s a retention rate of 51.1%.
Six fewer than last year,
and retention rate is down 4.2%. So the number of customers retained as reduced or the number of customers being lost as increase on losing customers faster, as well as I’m not acquiring them as fast. So I’ve got a double whammy going on.
And we can do the same again in terms of understanding the impact on the business. So if this continues next year, that could be another 45,000 pounds of revenue, another 15 16,000 pounds with the profit cash and another 55,000 pounds written off the value of the business. So suddenly, customer retention is a much more important issue than just a percentage retention rate.
This is real money
might be a slight element of double counting here with the previous stat and this one here, but on the average spend per retained customer. Now for most businesses, the vast lion’s share of all the profit generated in the business comes from the existing customers and the non segments out the existing customers to differentiate them from the existing and the newly acquired
average spend per retain customer is significantly down. And that’s how there’s an even bigger impact. So we put these these numbers together, three numbers, three of my key drivers, my key success drivers, my business, my inputs are going in the wrong direction. The combined impact of those three numbers is having a very, very, very significant difference or impact on the value of my business. So I’m going backwards on those numbers. But that’s that’s my
by the numbers that are going forwards, that’s why we need to understand in a more granular level, rather than trying to look at the very, very top with the big numbers.
So question, success. So here’s my business, the same business, I do apologise if anyone’s struggling with the numbers, here we go, we’ve got a revenue of a million gross profit of 350, overheads to seven one, and net profits of just a shade under 80,000. That’s where Panic was last year.
Let’s say hypothetically, that Alex has done some experimentation with with a marketing supplier
to the pump and put some investment into Pay Per Click
marketing, buying leads on Google or Facebook or LinkedIn, let’s assume that that worked. And that was really successful, I got lots of really great sexy leads, and those leads all converted, and I could grow the business by 50%.
So let’s look at what the impacts of a 50% increase would be. I think for most of us, that will be a whopping success. And sure enough, we got revenue here going up by 50% to one and a half million.
Clearly, the cost of sales is just a straight ratio. So my gross profit goes up substantially as well.
As with most businesses, this particular business puts their marketing costs through their overheads. So my overheads aren’t gonna go up, they’re not gonna remain static. So if they stay in kilter, we can see that we’ve got a net profit falling out of the bottom of 119 or 120 1000s, were up by nearly 40 grand, so 40,000 pounds, great result.
Or are you bankrupting the business? So we need to understand something else about the business in order to get a full picture. So this is the the other thing I said I’d mentioned earlier, when we looked at the six drivers, so there’s a seventh,
we need to understand the cash flow. Now they can only count at the cash flow is one thing, which is three key drivers here. So I look at three key drivers in the cash flow. Now think about it in when you when you run your business, you buy stuff
that could be labour, or it could be equipment or goods that you’re going to sell. Now, this is accounted for by the accounting profession as creditors.
antimony, you got to pay for this stuff before you do anything with it. So you pay for it, you get the goods, and they sit on your shelf. And now you will the proud owner of some stuff, which again, in accounting terms, we would call that stock, or work in progress. So typically, for a manufacturing business, for example, as a combination of both that’s, that’s money, that’s your money tied up on something that you got to turn into cash at some point. So hopefully, if you’re successful, Sonny comes on. Yeah, I’ll buy it. And maybe give crate term trade terms, you you sell it, but you haven’t got the cash yet.
That sits on the balance sheet as debtors, and you’ve got to wait and hopefully get paid at some point in the future. Now the problem is the time delay.
Now it’s all fine as long as your sales are static. But if your sales start to increase, then well what happens is the stock and work in progress builds up and builds up and this this bucket this represents cash, this is hard cash that you’ve got to find to run your business or working capital.
So this is the working capital cycle. Now.
Let’s look at paying suppliers. So look at the underlying drivers of this one. So it pays to think
Do you track the time that you take to pay suppliers?
You’d be stunned how much cash potentially you’re losing you’re paying suppliers faster than you potentially need to do ask for better payment terms. If you don’t ask you don’t get but if you do ask chances are you’re gonna get better payment terms from suppliers, you can probably come up with some sort of compromise which is good for you and good for them and and that will potentially significantly improve your cash flow or keep all of your cash for longer.
Part of your asking for better payment terms. Clearly he’s looking at alternative suppliers. So you know some people will supply on seven day trade terms others give
30 day trade terms some give even longer. That’s just people lending your money basically, as long as the goods of quality, then you’re fine.
Do other businesses get better terms buy don’t abuse your suppliers because you rely on these guys to keep your business running. But keep your supplier sweet. They’ll look after you when you need them. But you do need to track how long you’re taking to pay your suppliers where possible you need to push that out as long as possible.
So one key metric stop working progress again.
You need to track how much stock you are holding. And obviously as you increase and decrease revenue that stock holding will vary but do you have to stock everything very frequently. Businesses hold too much stock. The buyers get a bit excited by the fact there’s some big volume discount they buy less stuff
that sits on the shelf forever, you know, as possibly not sensible. That’s that’s cash that maybe you you need for other things. Could you reduce your lead time? So for example, you know, could you tell clients that you will deliver within 72 hours very, very frequently, businesses are bending over backwards to deliver immediately from stock. But actually, the client doesn’t need it for a little while.
There is a lot you can do about optimising stock, you ought to have a target for stock reduction, that obviously having a target stock with
stock holding in the first place. So you haven’t got a handle on that you need a handle on it.
Getting paid this for any business that gives credit terms this is this is huge. And let’s be honest, with an entrepreneurial mindset, we don’t really like chasing for money, because that’s fine. It’s great chasing for the customer to get the deal. Agree. But chasing for money can be a bit of a damper on the relationship. So do you track how long customers take to pay? Do you have a robust credit control process in place? Could you reduce your payment terms? So instead of giving 30 days credit, can you give 14 days credit? And you’d be surprised that the answer is frequently? Yes.
She put bad players on pro forma? The answer is yes. By the way.
You know, someone who doesn’t pay you is not a customer. They’re just bankrupting you.
So you want good customers. The key thing he needs to track this now let’s look at the numbers on this in a bit more detail. Because it’s this is this is key. So the impact of improving cash flow drivers.
So the very simple pictorial representation is if you can improve, improve the drivers, so the amount of cash that you’ve got tied up in stock reduces.
So if we go back and look at Alex, here’s Alex, Alex, Alex. He and She though they’re running the business together, so they want to pay their dividend. Remember, they made 80 grand profit, so reasonable to pay what a 4050 grand dividend would be not unreasonable, except there’s a small problem called the bank overdraft. So there’s no way they’re paying a dividend. They’ve got no cash. Even if their accountant tells them, they can still put it through the books and they could pay it later. Well, that would just immediately incur a liability with HMRC. And that’s even worse, that’s more cash out where you haven’t got the cash in the first place. That’s not smart. So chances are, Alex is in a bad place.
And we can just ponder on what that will mean, potentially for them. So some numbers so apologies. Now for these numbers. These are the ones you’ve already seen this year last year, profit and loss, million turnover 80,000 pound profit 53k overdraft, we’ve also looked at this 50% increase takes us up to 1.5 million turnover and a
margin down there increased up to 119 of the 40k increase in margin.
We need to understand these things debtor days creditor day stop or accounts receivable Accounts Payable stop working progress. So for simplicity, I’m going to I’m going to look at debtors and creditors Dosia, because actually, this is business stuff is not a major issue. So last year, it was taking 61 days to get paid, and they were taking 31 days to pay suppliers. So the amount amount on the books as accounts receivable 89,000. Because the days 81
had moved by the end of this year. So this year versus last year, by amount of debt where people owe me has gone up with
the amount I owe my suppliers has gone down.
And that’s because I’m taking longer to get paid. I’m paying my suppliers faster. How much faster How much longer, well, three days longer to get paid. With a little bit of rounding and four days faster. I’m paying my supplier. So it’s all very low paying my suppliers faster, but we need to understand the impact on the business. So if we don’t do anything about debtor days, creditor days, it still takes the same amount of time to collect the cash after we made the sale. And we still pay our suppliers on the same terms. If we increase turnover by 50% Then my accounts receivable and my accounts payable will both increase. Now these are both pulling in different directions by the way. So what that means is I’ve now got to find an extra 98 99,000 pounds of additional cash just to fund the business whilst I wait for my increased number of customers who owe me money to pay me that’s cash out of the bank. Now I’m borrowing more from my suppliers. I’m actually borrowing 34,000 pounds more from my suppliers. But if you do the maths, I’ve got 40,000 pounds with additional profit, nearly 100,000 pounds worth of additional negative on debtors 100,030 4000 pounds on creditors well
net impact of that is minus nearly 25,000.
So Alex, if Alex is right on the limit and got a personal loan into the bank,
probably going to struggle to raise an extra 25 grand of working capital. But if he can’t find the capital, he can’t fund the business. So maybe making all those investments in Pay Per Click advertising for those leaves was not a good idea. You’ve potentially just bankrupted this business by by Alex.
So let’s move on quickly, what we want to happen. So let’s look at the impact of increasing sales. And at the same time focusing on better days just to have the seven drivers or nine drivers depending on account.
We still want the same thing happening in terms of sales, but we’re gonna focus on in reducing debtor days, we’re gonna focus on putting in place a robust credit control process. And you’ll see there we do that, we’re potentially reducing the
actual amount of debt. And instead of actually having more cash required, we can actually extract some cash. So now we’ve got plus 40, plus 32, plus 34, which means the impact on the bank balance is plus nearly 107,000.
That we’ve eliminated the overdraft. And we’re now in a healthy positive bank balance. Yeah, that is such a different situation. Now let’s be realistic, it’s probably going to be really, really hard, if not impossible, to increase sales by 50%. Only for businesses, that’s just maintaining revenue, a million, and maybe not sensible either. So let’s look at one more scenario. So let’s assume that instead of
focusing on growth,
not doing any more, not going to do any more work, not any more days at work and all the stress that goes with 50% increase in turnover. But all we’re going to do is we’re going to look at credit control, you can actually outsource this you get a specialist to do this for you.
So if we just focus on the credit control that would reduce the accounts receivable effectively collect the cash that is owed to the business to the tune of 87,000 pounds, that will go straight into the bank and the bank is now from minus 53 to plus 35. fantastic result. So you need to understand how your business works from a financial point of view and you need to understand the cash flow cycle. So these are the seven drivers for sales and increased profit cash flow margins, overheads or quick win cash is always quick opportunities in the overheads, the rate of customer acquisition, customer retention, the average transaction value and the transaction frequency and suddenly hopefully, the business looks quite simple. If those are the only numbers you really need to focus on. They’ll probably more but these are the main ones