“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.
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.