In today’s blog, here at Tulip Thistle Accountancy, we are going to take a look at 5 ways to increase the Profit & Cash Flow your business generates.
No matter if you are a small business or a well established company, whether you are a sole trader, a partnership or a Limited company, you can use the following techniques:
1) Make a Plan & monitor progress against it.
Ever heard of the five “Ps”?
“Poor Planning leads to Pretty Poor Performance”*
Knowing what you are aiming to achieve in a certain period (your goals & objectives), helps to focus the mind and allows you to check-in at regular intervals whether you are on track to deliver.
For example let’s assume that you need to replace some machinery next year as it has reached the end of its useful life. How will you know that you will have enough cash in your bank account to buy the machinery outright or reduce bank loans/other financing required? Planning things out allows you to reduce the amount of management time & distraction involved to the minimum.
Having a monthly (or quarterly) plan for sales, cost of sales, margin, administration & overhead costs, as well as cash flow that is generated by the business will give you assurance that you can afford to make the required investments. It will also allow you to plan other major cash outflows (for example buying of stock, replacement of vehicles or an upgrade for your business premises). In addition you can then track on a monthly basis how you are doing against the plan & make adjustments if you are off track.
A business plan does not need to be hugely complex. For different businesses different aspect may be more important to focus on. For an example if you are a consultant your administration & overhead costs are likely to be less important than fully planning out expected revenue & associated margins by customer. In addition building a capacity plan which includes allowances for time spent on securing business (contracting negotiations & associated administration activities) means you understand what capacity for creating revenue you have as a business. Overall aim is to have targets you can compare actual performance against & get an early warning when financial performance goes off track, so you have time to intervene & correct problems pro-actively.
In a future blog we will go into more detail around how to create value adding business plans.
2) Understand the profitability of your products & customers
Sounds simple, right? You know the price you have agreed upon so just deduct your costs. But are you recording the full cost of providing your product or service? Do you figure in time to set-up contracts, negotiations as well as ongoing management? Do you track time spent & cost incurred for business you did not secure?
These administration type costs may be widely different between customers too (some can be much more time demanding).
Understanding the full cost of the product or service you sell may lead you to price the same product differently due to associated administration costs.
Do you have a list of who your 10 most profitable customers are & do you understand what puts them there? Can you draw any lessons from why these customers are more profitable for you and how can you move your other customers to be more like your top 10? To improve Cash Flow you could also consider offering early payment discounts or offering payment through PayPal and other fast payment streams.
3) Cost control. Do you buy from the same supplier(s) year after year? Do you competitively tender? Have you ever asked your supplier how they can help you save money? Buying larger quantities may lead to a volume discount, but also remember that your specific requirements may lead to additional cost for the supplier, leading to higher prices.
When is the last time you sat down and critically reviewed your cost base?
Remember any money you save here goes straight to the bottom line!
4) Review your systems. Can your financial system provide accurate, up to date financial information, or do you need to wait to the end of the month or even the end of the year when your “traditional, compliance focused” accountant comes & discusses your firm’s numbers with you?
Michael Welch, the founder of Blackcircles.com, used to review sales data daily & would take corrective action using promotion & other pricing tools as required.
With Cloud Based Accounting Packages such as Quickbooks and Xero you can not only review your businesses’ up-to-date financial information instantaneously, you can also monitor customer & product profitability. One further key advantage of cloud accounting software is it you can raise quotes & invoices in any place and at any time that suits you. This can allow you to provide quotes more quickly, reducing cycle from initial contact to firm order, and allow you to do invoice immediately upon completion of the agreed work. No need to wait to the end of the month to do the invoicing as a batch job – the system will do the hard work for you, resulting in invoice going out sooner & you getting paid sooner too, which will improve Cash Flow. See my earlier blog on Cloud Based Accounting packages for more information.
5) Engage your team in helping you deliver your business’ targets. Look at your business process with your team and look for improvement opportunities and efficiencies. How many steps are there in the process from sales enquiry to order placed up to and including product or service delivery? There are a range of continuous improvement techniques which can help you streamline your whole operation. Again this subject warrants a longer discussion, so look out for a separate blog on this topic.
Working with a business focused Accountant & using a Cloud Based Accounting Package can help you transform your insight into your business’ financial performance and help you to increase your business’ profit and Cash Flow.
Until the next time!
Charles Donkers (ACMA), Tulip Thistle Accountancy
* “stronger” versions of the acronym are available…..
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