Accounting

Crash - WCP 2014

 “How important is profit?” this question in one form or another is one of the most common questions we receive from start-up owners or potential start-ups and surprisingly it’s not a simple answer.

Some time ago I sat down for a chat with a highly intelligent friend who had recently joined the board of a mid-sized family company. “I just don’t get it” she said “everyone tells me the business is booming, sales are up, profits are up yet from what I read the company is broke”.

My friend had sat down with the half year results and looked at the first two quarters performance against budget. Revenues were up by around 35%, Gross Margin was tracking, as a percentage, around 5% better than budget and operating expenses were around 11% lower than budget leaving a very healthy EBIT compared to budget and management applauding themselves all round.

Where is the problem? I hear you ask.

Cash or rather the lack of it was the problem. As revenues and revenue projections grew the funds allocated to the raw materials and finished goods needed to service such growth had increased exponentially as had the debtor’s ledger.

Yes the business was producing more at lower cost and selling every item produced at a profit but amongst the excitement no one had calculated the impact on future cash flows.

If you achieve an EBIT of 20% (which is on the generous side) it means you have to outlay costs, in advance, of at least $0.80c in every dollar of anticipated revenue. You may offset this to some extent by negotiating an extension to trading terms with your creditors but that is a very slippery slope and best avoided.

If you sell your product to a major retail chain, they will look to pay you in 60 days from the end of the month in which you invoice them. So you could easily wait 60 to 90 days for payment. For every $10 of widgets you sell them each month your cost is $8 and if you carry that and the subsequent monthly sales until you are paid, you are out of pocket by $24 before you receive a cent. On top of which you have had to lift your finished goods to 60 days stock to meet varying demand and raw materials by 45 days so you are roughly $50 out of pocket as you wait for the $10 to be paid of which you retain $2 profit or EBIT.

Yes you are still profitable but your short term cash burn is exceeding income and without a rethink your fast growing, profitable enterprise is going to crash.

“A profitable business without a cash flow is dead in all but name!”

My friend could see where the company was heading whilst the sales manager was elated by high revenues, the production manager proud of the COGS and the operations manager satisfied by the low level of OPEX. In all businesses good cash flow management and budgeting is essential.

There were several funding options available to secure this company’s future once the threat was identified. But within 60 days the company may have been in turmoil and no funder wants to lend into a panic.

So in answer to the question; profit is very important but it is just one of what I call “The Four Pillars of Business”: Revenue, Cost, Profit and Cash; and always remember that whilst the first three are very important CASH IS ALWAYS KING.

_________________________________________________________________________

By, Neil Steggall

 The Barking Mad Blog

Business Advice with Bite

http://wp.me/p401Wv-iL

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The Price is Wrong - wcp 2014

Your Pricing Is Wrong: And It’s Wrecking Your Business.

A friend of mine told me that she was “really getting on top of her charge out fees” this year. She proudly told me what her annual income target was. I asked if that allowed for full overhead recovery, car and travel costs, travel time, office expenses, telephone, computer, tablet, entertainment, sickness etc and was it inclusive or exclusive of superannuation.

After an embarrassing pause I realised her real income was in fact around 60% at best of the gross income projected and for a person of her qualifications, skill, experience and ability to deliver first class work it was ridiculously low!

Single person consultancies tend to bill by the hour and even larger groups calculate a charge out rate based around hours employed. This methodology works best where the supplier is in a strong position and the buyer has little or no idea as to the real time involved – let’s look at Corporate Law firms as an example of those who benefit from this.

Clients are also ignorant of how a consultant calculates a fee; “A thousand a day? ****** me they earn a fortune, how can they be worth that?” well more as to why that $1,000 is really less than $500 later on.

And that scenario completely misses the point.

When we buy a loaf of bread or a cake we don’t ask the baker how many hours were invested in its production before agreeing on a price, but we do look for subtle evidence of quality etc. and that is the crux of pricing by value not by cost.

Pricing by Value Not by Cost! Take this into your mind and really think it through because it could just change your life!

Pricing is one of life’s great balancing acts but it’s also about confidence. Never boast about how good you are or criticise your competition. You don’t need to, simply demonstrate quiet professionalism and your pricing will say everything about the value and quality of your service.

Spell your price out with confidence and pride. Speak value, shout quality, whisper differentiation, demonstrate results and the price simply doesn’t matter.

Pricing by cost means that you determine how much a job will cost you and add a mark-up, however, this means that your client pays for your efficiency (or lack thereof) you turn yourself from a valuable resource into a commodity.

As Blair Enns, author of Win Without Pitching says: “Bury the billable hour.” Every client would rather talk about the value delivered than the hours provided.

Quantifying Value:

There are two simple ways for a consultant to provide value to a client. Either improve revenues, or reduce costs. In order to determine which of these your consultancy will provide (and implicitly price by value) you need to get to know and understand your client’s business, their market position and some basic facts about their customer value. Two simple and common measures are:

  1. The lifetime value (LTV) of customers for your client

  2. The client’s cost of customer acquisition (COCA)

It is vital that you understand the LTV & COCS  of your clients target customers because it ensures that their marketing spend is a commensurate amount to acquire that customer.

For example, a bespoke jeweller could presumably invest in a much higher COCA than a costume jewellery retailer. The LTV becomes increasingly important if your client is contemplating a future exit strategy.

Asking these questions and obtaining this data will help you determine how much value, in the form of revenue and positioning the quality of your work will contribute and thus the fee you charge.

Of course asking these questions of your client differentiates you and the detailed approach underlines your value proposition.

Finally irrespective of your business being a one person show or a 100 person show do not allow yourself to be judged on or compared to $(x) per hour. Why? Because less than 70% of your hours worked in any day are going to be billable, 10% to 20% of your time will be spent solving problems and another 10% to 20% will be spent thinking of or pitching for new business.

A thousand dollars a day sounds a lot. To the greedy client or just an unthinking client it is $365,000 a year whereas in reality it is half that at best and that’s before you make a profit.

As a self-employed consultant in the service industry you work long hours, you interrupt your family life, you worry at nights and weekends and you deliver a great product and service.

Wake up to this and let your fee reflect the quality and value of your work. Most SME professionals I see are really working for very little financial reward indeed and telling yourself it’s just until you get established is WRONG. You are established and that is why you can offer such quality and value in your work.

 If your pricing is wrong your business is stuffed! In 5 years’ time 85% of SME’s started in 2014 will have failed – poor pricing will play a large part in their downfall.

By: Neil Steggall

The Barking Mad Blog

SMS Advice with Bite

http://wp.me/p401Wv-f6

www.wardourcapital.com

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Positive Pricing WCP 2014

The Power of Positive Pricing!

And how to use positive pricing to double your profits $$$

 

When discussing management theory some subjects are greeted with much more enthusiasm than others and recently I addressed a group of SME owners on “Improving Profits” a subject dear to all and a topic pretty well guaranteed to ensure rapt audience attention irrespective of the speakers skill.

Yes profit was in everyone’s mind and the subject was greeted with enthusiasm, yet as I probed, few participants really understood what profit is, how it is calculated and what profit really means.

After some general discussion I threw open three questions:-

  1. Do you know what your profit was last year?

  2. Do you know how to define or calculate your profit?

  3. Do you want to double your profit next year?

Let’s leave question 3 aside for now as I reckon you can guess the answer. Disappointingly however, few participants could provide a clear and accurate answer to questions 1 & 2, so we spent some time discussing the calculation and meaning of Gross Profit, Operating Profit, EBIT and finally Net Profit.

We covered off a little basic accounting and financial theory before agreeing that for everyday use EBIT (earnings before interest and tax) was perhaps the most relevant and practical “measure of profit” and that most companies operate within a rough ratio of EBIT of to revenue of between 5% and 20%. SME’s tend to perform a little better (in my experience) at between 10% and 20% and so we chose 15% as our optimum target.

Obviously question 3 brought about an enthusiastic if predictable response…….everyone wanted to double their profit! The reasons for wanting to increase profit were many and varied spanning those who were currently unprofitable and struggling to those who saw profit as the ultimate measure of success – more on that later!

So given the enthusiasm for the subject the doubling of profit was discussed as a group and the group ideas noted. Those ideas or suggestions for improving profits emerged in roughly the following order of importance:-

a)      Reduce costs

b)      Lift sales

c)       Spend more on marketing

d)      Use social media to drive sales

e)      Improve/increase product range/service

f)       Buy better/lower costs (stock, raw materials, etc)

g)      Improve efficiencies/productivity

h)      Expand/take on more staff

We work-shopped these 8 ideas until we collectively agreed that lifting profits this way wasn’t as easy as it looked and so I asked a very simple question.

“What would happen if you increased your selling prices by 15%”?

The consensus was nothing much. It may lose some customers but by focusing on service standards and a strong customer contact and communication program customer loss could be minimised if not overcome altogether.

Let’s return to our earlier accounting theory and take the example of an SME with revenues (sales) of $500,000 pa.

After wages, costs and overheads, that hypothetical business will generate an EBIT, as discussed, of approximately 15% of revenues –so let’s say $75,000 per annum.

If we applied an across the board price increase of 15% the hypothetical business would generate additional revenues of $75,000 which if costs are stable (as they should be) w ould flow directly to EBIT thus doubling your profit.

If your selling price was lifted by only 5% then your revenues would be $525,000 and EBIT $100,000 giving you an increased profit of 33.33% and so on.

Surveys demonstrate three consistent failings in SME profits:_

         i.            A reluctance to charge what the job or service is really worth – remember your EBIT or PROFIT is only 15% of revenues the rest goes to cover wages and costs

       ii.            A willingness to discount by 10% or 15% when asked. This “wipes out” your profit – why give it?

      iii.            A failure to pass on cost increases as they occur. This means your profit is slowly eroding by at least CPI and possibly more.

The money you retain or take out of your business each week to feed your family and pay the household bills with isn’t profit. That is your wage.

Given the risk, stress, long hours and commitment you dedicate to building your SME you need to see a profit over and above your wages!

Your profit can be fine-tuned by attending to some of the points raised in a) to h) above but addressing your price points will give you the fastest and most efficient profit improvement.

Earlier I mentioned that some SME owners see profit as the ultimate measure of success. Profit is perhaps better seen as the fuel that can be used to build your business through:-

  • Improved conditions and training for employees

  • Providing the highest possible and most up to date services to your customers.

  • Allowing access to quality advisor’s and advice

  • Employing and retaining the best people

These four points will lead to the achievement of sustainable profits and when you come to sell your business sustainable profits are very valuable indeed!

Neil Steggall

The Barking Mad Blog

SMS Advice with Bite

http://wp.me/p401Wv-dA

www.wardourcapital.com

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Casual Business Meeting

Meetings – Less pose, more work!

A good friend of mine is a leading global advisor to life insurance companies, he travels extensively and consults at board level. Recently I asked where his London office is now situated, “any Starbucks” was his answer. “Why have an office?” was his question, “the people I meet are too busy to travel and yet they appreciate 30 minutes relaxing over a coffee”.

For more formal presentations and planning sessions he uses his clients facilities, very occasionally he rents serviced office facilities by the hour.

“Put simply” he said “I have a simple rule; does this cost money or make money?” and in 2014 expensive offices certainly dont make money.

Likewise does dress at work really matter? If staff are clean and appropriately covered all that remains is motivation and productivity.

Today’s workplace freedoms would have been unimaginable 30 years ago and yet look at what we have gained by adopting the important factors of respect and comfort and letting the formal pose and its associated ego/status go.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

http://wp.me/p401Wv-cr

www.wardourcapital.com

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SME's Going Under WCP2014

HELP! – I am out of cash & going down!

At which stage do you accept that without a cash injection your business is probably doomed? Looking at the ABS statistics they show that in any three year period around 42% of registered SME’s fail. So the answer is that we should look for and accept cash and or help a lot sooner!

It is very hard when investing the enormous time, energy and focus needed to start and build an SME, to then find the time (and to provide the mental distance needed), to properly analyse and re-assess your management and direction. Being naturally entrepreneurial, SME owners have a tendency to fight on, often to a very bitter end.

When I left the corporate world to start my first SME I got to the end of year one and realised I was emotionally drained, failing and down to my last eight weeks or so of cash. Everything I had was on the line and I had no answers.

Recognising that I was no longer thinking straight I bundled my worried wife and two noisy young children into the car and we headed off for a long (and very cheap) weekend by the beach. It was mid-winter and raining; you can imagine my despair.

Late in the afternoon of our second day I took a long walk along the beach, in the rain and asked myself three questions:-

  1. Is the business concept viable

  2. If its viable have you managed it well

  3. If you had sufficient resources available what would you do differently

My answers were 1) yes 2) fair 3) build a team to leverage revenues.

I returned to the shack motivated and excited for the first time in weeks and when back at work I went about raising the cash and partners needed. It was surprisingly easy and within a year we had a happy and booming business.

Lucky bastard! I hear you whisper. Not really. In a now long career in and around SME’s I have realised a few truths about human nature:-

  1. By and large people want to help you

  2. There are more investors looking to invest than there are good ideas

  3. If your business is a good idea and you are honest, fair and hardworking you will find funding

  4. Investors are usually older, experienced, have suffered and recovered from failure – they understand your position

  5. By understanding your position and taking positive action you earn respect from your stakeholders.

So when do you put up the red flag and shout for help?

Assuming your business concept is viable and you are offering a product or service your customers want then consider the following danger signs:-

  1. Your business is growing, you are profitable and yet you are always short of cash. This happens in growing companies as to service higher sales you need more stock, labour, materials etc and your debtors ledger expands as sales grow. This all eats cash.

  2. You have more potential customers than you can handle and you are falling behind on paperwork and starting to knock back new business. At this stage you need to employ and or outsource more resources but how do you do this when cash is so tight?

  3. You know you could win larger more lucrative contracts and strengthen your business if you had more people, plant and equipment.

  4. Your debtors are slow payers and it is impacting on your ability to meet your payments as and when they fall due.

  5. The bank offers you an overdraft but only if you provide the family home as security.

If you are experiencing any one of the above your business is at risk, if you are experiencing any two you are in trouble and should seek help quickly.

In our company we see so many businesses fail which are fundamentally sound and indeed held so much growth potential.

When we analyse them we invariable find a point beyond which they had insufficient cash to maintain the business. Corners start getting cut, staff numbers are reduced, marketing budgets cut, bills go unpaid, staff morale falls, the staff start leaving and eventually an administrator or other court appointed official is installed

Possibly as many as 90% of the failed businesses (assuming no underlying fraud etc.) we look at could have been saved had appropriate action been taken early enough.

So what should you do if you are at risk?

First of all have an open and frank discussion with your advisors including your accountant and lawyer. Walk them through your business plan and figures and explain your concerns and the amount of investment you think you need to achieve a turnaround. Not only will they offer advice but they may well know of potential investors.

Look on line for SME Turnaround Specialists – a good specialist company should have all of the in-house skills you need and access to numerous investors. You may be able to negotiate an hourly rate or a fee based upon their success or a combination of both. A preparedness to complete some or all of the work on a success fee tells you a lot about their level of confidence!

What will I have to give away to attract an investor? Less than you think. A savvy investor will want to see you remain motivated and happy so as to help build a return on investment. If you are both fair, reasonable and above all offer each other respect you should enjoy a profitable relationship which sees the business turnaround.

Once you have an investor on board start to build a team of business mentors. Many SME’s have an advisory board of a couple of specialists who meet as a regular board would and help you analyse and guide the business forward.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

Article Shortlink:  http://wp.me/p401Wv-cb

www.wardourcapital.com

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Startups Wardour

5 Tips for a SUCCESSFUL Start-up

Starting a new business is an exciting and challenging task, one in which success brings a variety of rewards and yet failure can be a painful and damaging experience. Despite this there are 2.0 million SME’s in Australia and new start-ups opening every day.

This is the entrepreneurial drive at work, the human need to try new things and to stretch and grow. The SME is the economic life force and breeding ground of business. Of the many small start-ups some will go on to become multinational corporations, this isn’t everyone’s choice, or objective and statistically most start-ups will fail within the first three years of operation

Understandably starting a new business is full of challenges and I am often asked how I went about starting my first business and what tips I can offer. Starting a business for most entrepreneurs means a huge amount of sacrifice, hard work, risk and belief in your concept.

My first business came about via a combination of accident, hope and “nearness” to opportunity but if I was to start again I would take these points into consideration:-

1.       Think carefully about the business you choose:

Last week at a conference I was asked the question “what business would you choose if you were starting again?” A very good question and yet one I felt confident in answering. I would choose:-

  1. A high volume established industry with proven customer demand
  2. An industry with a relatively low cost of entry
  3. A location very close to an established business in the same industry
  4. I would price my product at the market price or slightly higher
  5. And this is the WINNER I would out-service and outperform the competition in terms of customer satisfaction.

2.       Market your business well – Marketing is your cash engine

If you have taken my advice and set up your business virtually next door to an existing similar business you already have potential customers passing your door so how do you convert them. You need a plan of attack:-

I.             Check out your competition and look at weak points in their product offering, customer service, display, staff training, customer handling etc. Then do the reverse and observe their strengths.

II.            Build your strategy around out servicing your competition; choose customer service and customer satisfaction as your point of difference. A company we have worked with “Chilligin” is a successful on-line and pop-up retailer of fashion accessories, scarves, handbags etc. Chilligin’s founder and director Nikki Gilhome decided from day one to offer Chilligin customers great products, at affordable prices and to package every item whether ordered on line or in store beautifully. “I wanted the customer to have a lovely surprise when they open their home delivery, or for in store customers something to look forward to when they return home” says Nikki. Small details such as carefully designing wrapping paper, stickers and ribbons, tags etc turn the ordinary into an occasion.  Effectively the customer gets a double hit of pleasure first the purchase decision and later a beautiful package to unwrap.

III.           Train your sales staff to meet and greet customers with genuine warmth, use quiet times to rehearse the perfect approach.

IV.          Wherever possible over deliver on customer expectations, the more a customer enjoys doing business with you the more they will return

3.       Employ the best staff: 

When starting a business we need to be careful of costs but a really good staff member is a key asset and a valuable part of your strategy. Don’t cut costs here.

Chose staff who share your vision, who want to grow, who will absorb your training and guidance. Respect and reward them. Encouragement and respect are amazing rewards, how do your competitors reward staff? There are many ways to reward beyond the pure financial and most people I know would rather work for a little less in a great environment than for more in an uncomfortable environment.

4.       Review Progress and Question – Can we do better?

If your business strategy is to outperform your competition by offering better service and customer satisfaction you must work hard at it to keep at the top of your game. Constantly check your competition, both locally and via the internet, overseas. Read everything you can find for new ideas, engage with your customers, listen and learn. Constantly review every single aspect of your business questioning how you can improve the customer proposal, to satisfy and engage more closely.

Your stock and services must always be current and adjusted as closely as possible to your customer needs. Use stock analysis tools so that you know which items are moving and which are slow. Respond very quickly to avoid wastage, move quickly to special out and move any slow stock. Slow stock is dead money and loosing you sales. Buy more of the fast moving items and consider expanding that part of your range with more options.

Change your web presence or store displays daily to build and maintain customer interest. Collect email addresses via direct questions as you input receipt data, small competitions, draws etc. Communicate directly with your customers, be innovative, informative and “the place to go”.

5.       Think carefully about finance & assistance:

Most businesses will involve you assuming responsibility for some level of debt, make sure you understand the obligations here and your responsibilities. Debt isn’t just a loan, it includes your supplier credit, your rental or lease obligations etc.

It’s important to know which type of financing is right for your business and always try to hold three to six months cash in reserve. Are you willing to give away equity in exchange for cash? Are you looking just for an investor or also for a mentor? Is your business plan solid enough to secure a bank loan?

All important questions to consider and remember with an investor you often gain an experienced mentor as well. If I was starting out again today I would look for an experienced investor who could guide and mentor me over any other form of external funding.

 

 

We are fortunate to live in an age when so much information, knowledge and experience is available for those who want to search for it. Eric Schmidt, executive chairman of Google, said: “There’s a new way to do marketing, and it’s to do it with numbers. People do marketing to bring in revenue, to have an impact, and with these new systems you can measure this. The technology the internet brings means you should be able to measure almost everything.”

If you are thinking of a start-up read and absorb, plan and then follow through and your chances of success are high.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

http://wp.me/p401Wv-au

 

Business-development

5 Tips for Business SUCCESS!

 

1.       Business Development Is Not Increasing Sales

Managing the development of your business has a lot in common with conducting an orchestra. It’s a case of encouraging and leading the various differing components of your business forward, in harmony, to the same point at the same time to produce an extraordinary effect. You need to develop your unique product or service to meet the highest level of customer expectations and you must do so at a price representing fair value and at a cost which generates a fair profit.

2.       Understanding profit does not equal cash

Profitable businesses fail every day. Many small business owners chase growth and revenues forgetting the basic facts of cash management. Profit equals Revenue – Costs but until you have received payment you are in a cash negative position. Ideally you would ensure that you have sufficient cash reserves to meet three to six months of costs. In the early days of a business keep fixed expenses as low as possible, use a virtual office and work from home if possible, keep full time staff to a minimum, pay cash or do without non-essential plant and equipment. This helps if you have a quiet month or even two.

3.       Intuition Versus Fact

Don’t build a business around a product or service you like or you would buy. Undertake sound quantitative research to determine what your prospective customers want and buy then see if you can develop an even better product or service at a price they are prepared to pay. Don’t be tempted to compete on price alone. If company A has been making its product for many years and you realise you could source and sell that product at a good profit for less that’s a good value proposition to you not your customer. The market is less willing to change supply on price alone but if you can offer a better value/service proposition where they get a better product and improved customer service you will have a much greater chance of success.

4.       Business & Financial Planning

There is an old saying “if you don’t know what you want you will probably never get it” and that’s certainly the case in business. A well thought through and documented business plan outlining your core objectives, market analysis, product development, marketing strategies and detailed financial budgets is essential. This is an area where you should consider the use of a mentor or an external consultant to help you get it right. Your financial plan should include linked budgets for P&L, Cash Flow and Balance Sheets. A beautifully bound business plan kept on a shelf is a waste of space it has to be a living breathing document understood and read regularly, reported against monthly and the strategies varied as needed to meet your actual versus budgeted position.

5.       Respect all Stakeholders

 A successful entrepreneur understands that the stakeholders in a business are not just the shareholders. The stakeholders include employees, suppliers, customers, shareholders and advisors and they are vital to the success of failure of your business. Spend time with each stakeholder, respect them, listen to their ideas, take their ideas, discuss your plans and your position with them. Take them on your journey as partners. Keep them honestly and openly informed and they will join your team and give you their full support. Again many businesses fail because they don’t earn the respect and support of their stakeholders. Building a successful company is hardit requires a lot of commitment and courage as well as a little luck and of course having a great product and team. Watching your idea become a product and a product generate revenue that becomes a successful company makes it all worthwhile. Working with your stakeholders and mentors, following and constantly updating your plans and finances will go a long way to ensuring success.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

http://wp.me/p401Wv-ao

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High Profits & About to Crash?

A relevant question for SME Management.

“How important is profit?” this question in one form or another is one of the most common questions we receive from new SME owners or potential start-ups and surprisingly it’s not a simple one to answer.

Some time ago I sat down for a chat with a highly intelligent friend who had recently joined the board of a mid-sized family SME. “I just don’t get it” she said “everyone tells me the business is booming, sales are up, profits are up yet from what I read the company is broke”.

My friend had sat down with the half year results and looked at the first two quarters performance against budget. Revenues were up by around 35%, Gross Margin was tracking, as a percentage, around 5% better than budget and operating expenses were around 11% lower than budget leaving a very healthy EBIT compared to budget and management applauding themselves all round.

Where is the problem? I hear you ask.

Cash or rather the lack of it was the problem. As revenues and revenue projections grew the funds allocated to the raw materials and finished goods needed to service such growth had increased exponentially as had the debtor’s ledger.

Yes the SME was producing more at lower cost and selling every item produced at a profit but amongst the excitement no one had calculated the impact on future cash flows.

If you achieve an EBIT of 20% (which is on the generous side) it means you have to outlay costs, in advance, of at least $0.80c in every dollar of anticipated revenue. You may offset this to some extent by negotiating an extension to trading terms with your creditors but that is a very slippery slope and best avoided.

If you sell your product to a major retail chain, they will look to pay you in 60 days from the end of the month in which you invoice them. So you could easily wait 60 to 90 days for payment. For every $10 of widgets you sell them each month your cost is $8 and if you carry that and the subsequent monthly sales until you are paid, you are out of pocket by $24 before you receive a cent. On top of which you have had to lift your finished goods to 60 days stock to meet varying demand and raw materials by 45 days so you are roughly $50 out of pocket as you wait for the $10 to be paid of which you retain $2 profit or EBIT.

Yes you are still profitable but your short term cash burn is exceeding income and without a rethink your fast growing, profitable enterprise is going to crash.

My friend could see where the company was heading whilst the sales manager was elated by high revenues, the production manager proud of the COGS and the operations manager satisfied by the low level of OPEX.  In all business management not just SME’s good cash flow management and budgeting is essential.

There were several funding options available to secure this company’s future once the threat was identified. But within 60 days the company may have been in turmoil and no funder wants to lend into a panic.

So in answer to the question; profit is very important but it is just one of what I call “The Four Pillars of Business”: Revenue, Cost, Profit and Cash; and always remember that whilst the first three are very important CASH IS KING. 

Neil Steggall

The Barking Mad Blog

SME Advice with bite!

http://wp.me/p401Wv-9D