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How To Run Your Business More Efficiently

How To Run Your Business More Efficiently

“I can’t work any harder and I don’t know how my business is travelling.”

“I don’t feel like I understand my business.”

“I made $300k last year, was it a good year?”

“Numbers give me headaches”.

“My accountant tells me I have to $50k in tax as I made a profit last year. But WHERE IS THE CASH?”

These are some of the most common refrains we hear from clients. These are all heart-felt cries for help for no-nonsense, simple ways to understand their businesses, how it operates, its financial performance and its ability to provide for a lifestyle.

How To Run Your Business More Efficiently

After having worked with numerous businesses from many industries, we found that the following process works the best in helping our clients:

  • Having regular meetings with them to help to spend time working on their business, not just in it;
  • Providing them with easy-to-understand and yet at the same time, sophisticated reporting on the key metrics for the business; and
  • Providing them with a sounding board to make decisions.

The centrepiece in our process is our ability to provide easy-to-understand reports focusing on the key metrics for the business. These provide our clients with the “hard numbers” from which they can come up with options and make decisions.

For example, it is no secret that the hospitality industry has had a tough time lately due to the lockdowns. It is now even more critical for the owners of restaurants and cafes to keep a close eye on their numbers. Here are some of the screenshots from reports prepared for a restaurant client. Accounting and Management reports like these have proven to be extremely helpful in helping the client in making the right decisions to thrive and not just survive in the current downtown.

 

Here is another example from a what-if analysis we did for manufacturing client, whose business received a bump in sales as they supplied products which were in high demand due to the lockdowns. In this case, they asked us if they can afford to invest in a particular piece of machinery to keep up with the increased demand, and we were able to answer their question on the spot with an instant profit and cash forecast which our purpose-built software is capable of.

Numera have helped many businesses to increase their profitability and manage their businesses more efficiently. If you would like to talk to one of our senior team about how we can help you understand and grow your business and improve its profitability, give us a call on 07 3002 4800 today or fill in your details below and one of the team will be in touch.

How To Improve Profitability With Accurate Management Reports

How To Improve Profitability With Accurate Management Reports

Shrinkage in the retail sector has a major impact on the profitability of supermarkets and other stores. Shrinkage is the result of theft by customers and staff, and is also caused by damage to goods as a result of poor ordering and handling practices. It can be equal to three per cent of sales at some independent supermarkets. The shrinkage problem tends to be worse in smaller stores with an average shrinkage factor of around five percent. If retailers want to improve profitability they first need to understand shrinkage.

A recent case study revealed a supermarket business turning over 10 million dollars per year while poor shrinkage control contributed to losses of 10 thousand dollars per week off its bottom line. It seems the smaller a supermarket is, the higher the shrinkage problem. As independent supermarkets increase their turnover, the shrinkage problem reduces to an average of around 1.75 percent. Better quality systems, and better management of the factors that drive shrinkage, contribute to the lower figure in larger supermarkets. Best practice operations are achieving shrinkage levels of less that 0.5 percent.

In reality, most supermarket operators do not know the true cost of shrinkage. Often this is the difference between success and failure of the business particularly when profit margins are so tight. An improvement in shrinkage management of just one per cent of sales can improve profitability by thirty-three percent. This type of saving can enable retailers to channel their resources into areas which will make a positive impact upon their cash flow.

Identifying Shrinkage

Shrinkage can be defined as the loss in margin due to poor stock management procedures, reporting practices and internal controls. It is measured by comparing the gross margin from the Point of Sale (POS) Report to the financial accounts or internal stock management reports.

Some of the factors that contribute to shrinkage include theft by customers and staff in the supermarket, inconsistent pricing practices, excessive and uncontrolled discounting, absence or infrequent stock taking, as well as damage to goods as a result of poor handling and ordering practices. For managers and owners, shrinkage is a very attractive area to address as the benefits flow straight to the bottom line. We advocate benchmarking the store to identify the gravity of the issue.

Some of the best practice operators have achieved low shrinkage levels by implementing stock management systems, which are compatible to existing POS systems, allowing for automatic re-ordering, regular rolling stock-takes on high-risk items, and stock management procedures. These systems are supported by staff training and job descriptions and assigning responsibility to selected staff, thus delivering tangible benefits to the supermarket owner.

Just some of these benefits include improved cash flow from reduced stock levels, as a result of ordering of stock consistent with sales demand, reduced theft by making high risk items more visible to staff, and providing an early detection of pilferage through instant stock management reporting.

This type of improvement enables the retailer to then direct their resources into other areas, such as improving their supermarket layout and design. Shrinkage efficient supermarkets are most likely to survive and thrive in a competitive market. To improve profitability allows retailers access to funding for supermarket refurbishments, which is an essential part of competing for market share against national chains.

Shrinkage Reduction Planning

Financial benefits show as soon as a supermarket addresses its shrinkage problem. The best way to begin this process is for the retailer to talk to a professional adviser, or seek advice from industry specialists to develop an action plan to implement better operational practices.

Most retailers are time-poor and work long hours so the most effective way to develop a shrinkage plan is to identify your immediate goals, determine what resources are required (money, people, and time) and allocate tasks to responsible persons. One of the biggest shrinkage issues is that supermarket owners do not compare their management account gross profit (GP) percentage with what comes out from their POS system. This is a big mistake. We found most retailers were unable to produce accurate management accounts on a timely basis and most often conduct stock-takes once a year for tax purposes.

Shrinkage loss really hits home when retailers compare their GP in the financial accounts provided by their Accountant to POS reports. The key is to develop a stock management system that allows for timely and accurate management reporting. Our industry manager recently saw supermarket figures showing a nine percent difference between the POS GP percentage and accounting GP percentage.

For example, regular weekly stock-takes of high wastage and theft items (e.g. meat and fruit/vegetables and tobacco) and cyclic stock-takes on other items will allow for effective monitoring of GP variances.

Adopting a standardised chart of account and journals will improve management reporting of shrinkage as scanning systems ignore the issue. Some supermarket chains have front-end systems that record all customer returns and place the reason for the return and reports at the back office each day and for the week. Further ‘reduced to clear items’ are also all managed via the front end.

Some chains also ensure its cleaners to place floor waste into a separate bin. This separate bin is then checked to see what products the cleaners have swept up and if these products can be reclaimed. It is important that staff take the time to monitor stock, even if it does mean checking the dairy fridge more frequently. You can use technology to keep track of perishables within the supermarket.

If you’re struggling to get clarity on your gross profit margins and want to improve profitability, talk to the team at Numera about our Virtual CFO and Accounting Reporting services.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Numera accepts no responsibility for any loss suffered as a result of any party using or relying on this article.

Fast growing businesses beware: It can all go wrong

Fast growing businesses beware: It can all go wrong

Fundamentally, there is only one reason that businesses go broke – they run out of cash.

So how do businesses (even listed ones) run out of cash and what can you do to make sure it doesn’t happen in your business?

There are three basic reasons business run out of cash

1. They are not profitable in the first place

They don’t have a cash flow problem; they’ve got a profitability problem. In other words, the lack of cash flow is a symptom of poor profitability (or even losses). If you have a profitability problem, unless you fix your business model and restore profitability, you’ll never get cash flow under control.

2. The second is that they use short-term working capital to fund the acquisition of long term assets

In other words, they use their working capital (short term funding) to purchase plant and equipment or property (long term assets). If your business is growing rapidly, this is a big no, no. You’ll need that working capital to fund your growth, particularly larger inventory holdings.

In most cases this issue can be fixed by sale and lease back of the assets (assuming funding is available). But the key is never to use your working capital to acquire long term assets unless you’re absolutely sure you have significant excess and know that you won’t need it in the near future.

3. The third reason that businesses run out of cash is that they grow too fast

Yes, businesses can grow too fast and it is a situation we see all too often. Make no mistake, a fast growing business is potentially in danger territory, particularly if it doesn’t have access to an endless supply of funds – and which businesses have that luxury?

For many fast growing businesses, this means holding more and more inventory. As the business (and sales) grows, more of the profits are required to be used to invest in more and more inventory to stock more and more stores. If you’re in a business where margins are tight – whammo! – you have lower profits to fund ever increasing inventory. Should inventory turnover slow you could also be in serious trouble.

If you also happen to have a business where you give credit terms to your customers, then not only do you have a build-up of inventory, but you also have a build-up of debtors. These have to be funded from somewhere. Unless the business is highly profitable, the profit alone may not be enough to fund that growth. This invariably means going to your friendly banker but at some point there will be a limit to which banks will be prepared to fund your growth.

How to avoid running into a cash flow problem?

There are three key measures every business should be checking on a regular basis, but particularly fast growing businesses, to make sure that they have a sound cash position. If you don’t currently know these you’re flying blind. Get a new accounts team!

Your Free Cash Flow
Your Free Cash Flow (or available cash) is simply that. It is the amount of cash you have left out of profit after funding the increase in size of your business. If you’re not measuring and monitoring this then you’re flying blind.

Your Working Capital Burn Rate
This is simply the amount of working capital (debtors plus stock less creditors) as a percentage of sales. If this is (say) 25%, then you know that for every additional $1m in sales, you’re going to need $250k in working capital to fund that growth.

Your Sustainable Growth Rate
This is simply the rate of growth the company can sustain without adversely affecting its proportion of debt to equity funding. It’s called “sustainable growth rate” for a reason.

There is a saying that goes ‘turnover is vanity, profit is sanity but cash flow is reality.’ We have worked with countless high growth businesses who have been stunned to learn that their financial position is unsound despite their growing sales.

It might sound crazy but at times it is essential to reign in your growth to ensure a sustainable journey in the long run. It might be painful to turn down opportunities at the time but trust me, you will be thankful when you come out with a sound business in the end.