7 key numbers ebook 2015

8/19/2019 7 Key Numbers eBook 2015

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Quick Summary - Why read this e-book?


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This eBook is not about dreams or rags to riches. What we would like toshare with you is a heartfelt, very firmly held view that business successis not just about making MORE sales or increasing margins.

It’s about getting the fundamentals right.

This eBook is about explaining the fundamentals that make a businesslast forever if you have the will. If you take to heart and enact what wepropose in this book, your business will be bulletproof - seriously andabsolutely impervious to peril and continually profitable, every day of itsexistence. We believe passionately that being bulletproof is about gettingthe financial structure right. For without that, you might have just as wellplayed your working capital through the pokies. You will last a year, two,even ten, but in the end any sustainable bulletproof business must haveits existence.

We built a business that for 15 of its 22 years had the wrong businessmodel and it survived, but it was seldom profitable. Then we at last hadthe courage to change the business model, using many of the techniqueswe’ll discuss in this book, and for the next 5 years, it proved a differentstory! For those 15 years, for every year we made a profit, the very nextwe had to borrow and kick in more funds to prop it up and that was veryuncomfortable.

Now after all this time in business, having helped over 20,000 other small

to medium businesses with their accounting systems, setting up theirmanagement accounts, fine-tuning their financial control and acting astheir part time CFO. We can genuinely say we have at last a reallyingrained understanding of what it takes to make a business bulletproof.

We sincerely hope you get huge value out of this eBook. It’s not very longbut if it helps you improve just one small aspect of your financialmanagement and gets you just $100 in extra profit, it would have beenworth our while. It has the potential though to make you more like$100,000 or $1M extra profit.

Thank you for reading this.

Warmest regards and best wishes for your financial future,

Sue Hirst & Stuart FrostCo-founders CFO On-Call


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Contents

Chapter 1 ............................................................................................. Page 4

Why Business People Don’t Get Tax Accountants

Chapter 2 ............................................................................................. Page 6

A $100,000 Reason to Read This Book!

Chapter 3 ............................................................................................. Page 10

The 7 Key Numbers and How They Work

Chapter 4 ............................................................................................. Page 12

Driver 1: Revenue Growth %

Chapter 5 ............................................................................................. Page 15

Driver 2: Price Change %

Chapter 6 ............................................................................................. Page 18

Driver 3: Cost of Goods Sold %

Chapter 7 ............................................................................................. Page 23

Driver 4: Overheads %

Chapter 8 ............................................................................................. Page 25

Driver 5: Days Receivable

Chapter 9 ............................................................................................. Page 27

Driver 6: Days Payable

Chapter 10 .......................................................................................... Page 29

Driver 7: Inventory or Work in Progress

Chapter 11 .......................................................................................... Page 32

Key Numbers Quick Summary

Chapter 12 .......................................................................................... Page 34

About the Authors & CFO On-Call


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Chapter 1Why business people don't get Tax Accountants!

Someone once said to us, "You know business accounting's simple

... just make sure your net income exceeds your gross habits!"

And in a way he was right. It can be simple if you know what to look for.

How many business people do you think, like reading, or readilyunderstand the typical financial reports they get from their tax accountantonce a quarter (if they're lucky), or more likely once a year? An educatedguess? 10%, 15%? Probably no more. Most business owners in ourexperience manage by "gut-feel". Often it's good "gut-feel" and theymanage and adjust their business settings or business model, becausethey're passionate about their business and are constantly looking forways to improve.

Think about this … a typical set ofbusiness financial accountsprovided by a tax accountant ... isprepared for tax purposes … ratherthan to really help you for

“managing the business” purposes.

How cock-eyed is that?

What's worse, some taxaccountants may only get the last set of accounts to you ... what ... ayear, eighteen months AFTER the end of the financial year ... and whatgood is that to you then?

The issue is, that modern business moves quickly, we're accustomed toinformation that's instant. You want to know what your business situationis today and what you can do about it now, not sort through a jumble ofnumbers from last year.

Typically tax accountants deal with history. What has happened, not whatis likely to happen. And because they're so busy complying with all therequirements of the tax authority, most just don't have time, (and despitebroad-brush claims about being all round ‘business advisors’), many don'thave ‘hands-on’ business training to do more than the regulatory bodyrequires. That is, their task ends up being ... to complete the accountsfrom the info you've provided ... and fill in the forms for tax andcompliance purposes.


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Has your accountant ever sat you down and said, "Right, I'll show you thekey numbers in your business that we can fine-tune, to give you an extra$200,000 in cash flow. Would you be interested in that?"

You'd climb right over the desk, grab him or her by the scruff of

the neck and scream, "Would I what!"

So, where do you find the info that will help you direct your business tobetter cash flow and profitability?

Is the answer to get more or better reports from your accounting system?Well, that may help you see what's happened recently , but it may nothelp you change or adjust what will happen in future months!

What is most important is to understand what numbers really ‘drive’ the

results. If you can fully appreciate what numbers ‘drive’ the results, youcan adjust the ‘numbers’ to achieve a desired, much better outcome,before, not after you've had a less than satisfactory result.

This eBook is a version of our printed book about those ‘Key Financial Numbers’. What they are (and they're pretty much thesame for most businesses), how they work and how a small timelyadjustment, to just one, two or three of the "drivers”, can meanthousands of extra dollars flowing back to the bottom line and into thebank.

The best way to explain it is by way of example.

The business we’ll discuss in the next section has a turnover of $1Million and stock level of $80,000 and put $20,557 back into the bank … justby reducing the Inventory days by 10 days, from 42 to 32. (42 being theaverage number of days the stock was held before the change wasmade.)

This is just one of the seven numbers!

This is fact! It's not wishful thinking! We can tell you many case historieswhere business owners, who after making just a seemingly small tweak tosome of their Key Financial Numbers, doubled a profit result, or got rid ofan expensive loan or bank overdraft.

In the pages that follow, we hope you can see a great opportunity tounderstand what they are and then do something about it!


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Chapter 2A $100,000 reason to read this book!

Are you interested to see how a business, let’s call it QuickCall

Supplies, turning over $1 Million dollars in total revenue ... can add over$100,000 to its cash flow and improve its profit by $60,000 ...without selling one extra thing and still paying its suppliers in time?

What you’re about to read is genuinely possible and improvements, somesimilar, some smaller and some better could be made to ALMOST EVERYbusiness in the country!

The secret to good financial control is knowing what to control and by howmuch. In the chapters that follow you’ll read about the ‘Seven KeyNumbers’ and see how each number works in more detail.

In this section, we want to give you an early example and explain how the ‘Seven Key Numbers’ might work in this example business QuickCallSupplies - with a turnover of $1 Million dollars.

The ‘Seven Key Numbers’ is not anew concept.

They have been around sinceAdam was a boy. It’s just that

they have never been presentedand explained in the way we planto do in this book. They apply toall businesses and work to agreater or lesser extent,depending on the business type.In these pages we’re not going totry to explain how they impact onall types of business. It’s just

sufficient to know, that they are almost ALL you need to know to be a

good manager and controller of your own financials.

With QuickCall Supplies we will make small achievable adjustments,over the course of twelve months, to just five of the seven numbers andcalculate what a difference each makes individually and then to thebottom line in total.

Let’s explain them one by one and assume we’ve discussed and agreedthese changes with the business owner of QuickCall Supplies. Also, allof these calculations have been made by our diagnostic tool, that we

know from years of experience is 100% accurate.


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Our “map” of the Key Financial Numbers, as applied to this business,comes next and that’s followed by a short explanation of each number.

You will see the change planned to the Number in the box on the left andthe savings created by that change in the box on the right.

KEY NUMBER No. 1 is REVENUE GROWTH or more sales. In thisexample that is not going to change to demonstrate that making moresales is not always the answer to better cash flow and profitability.

KEY NUMBER No. 2 is COST OF GOODS SOLD%. We’ve agreed that we can decrease this by just $1 in every $100(1%) negotiating with suppliers on some items.

Note: That’s just 1% - improve this by 2% - double

this number!

KEY NUMBER No. 3 We’ve also agreed that we can reduce theOVERHEADS % by considering each line item on our Profit & LossStatement and will find at least 6% savings. This saving goes straight tothe bottom line.

Note: For every 1% improvement add an extra $3214 to profit!

KEY NUMBER No. 4 Next we’ll look at improving our ACCOUNTS

RECEIVABLE or Debtor Days, as it’s also known. Many small businessesare hurting, because their working capital is being used by theircustomers, rather than it being in their own bank account. A reduction of

just 11 days brings in an extra $32,275!

Note: That is $2934 for every one day improvement here!

KEY NUMBER No. 5 What about QuickCall Supplies’ stock level? DAYSINVENTORY that’s called.

Can they bring that down just 10 days? If they were a service or jobsbased business the equivalent to this would be Work in Progress. Thatmakes a positive difference of another $20,557!

Note: That’s $2055 for every one day improvement!

KEY NUMBER No. 6 The next driver is PRICE CHANGE! Let’s say we canput up prices (on average) by 2%. Not much. Costs have risen for us; fuelis more expensive etc so we agree 2%. See the improved cash flow.

Note: Even 1% would be good!


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KEY NUMBER No. 7 The last Key Number is ACCOUNTS PAYABLE DAYSand in this case there is no change.

That’s it. In this case we have shown, a BIG improvement in cash flowand profit, by adjusting just FIVE of the Seven Key Numbers ... without

the business selling one extra dollar of goods ... and still paying itssuppliers on time

The value now created for this business is that it improves cash-flow by $100,311 and creates additional profit of $60,383.

This is valuable cash that the business can use to reward its shareholdersand/or for working capital!

In your business it may well be that you can’t improve, increase or

decrease the same numbers as did QuickCall Supplies*, but it may bethat you can improve or adjust other drivers. You will need financialcontrol expertise to help. The chances are the cost of engaging such aperson would be just a fraction of what he or she could save you.

*QuickCall Supplies is a purely imaginary business the financial history ofwhich is to illustrate the value of the Key Financial Numbers. It is notrelated to any client or business known to the authors.

By making small but sustainable changes to these numbers ... aspart of a plan ... the results can be amazing!


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Chapter 3The Seven Key Numbers - How they work!

What are they and why do they matter? Let’s bring a little more clarity to

the subject.

In a typical set of financial reports i.e. Profit and Loss Statement andBalance Sheet, there are a lot of numbers. It can be a daunting task forbusiness owners to make sense of it all. Then to know which numbers arethe important ones. Of course some would argue they are all important,but that’s only true if you understand what you’re looking at and cancontrol them.

Of the seven numbers, four are calculated from the Profit and LossStatement and three from the Balance Sheet. How many business ownerslook closely at the Balance Sheet? It might be time, if the balance sheetdoesn’t always make sense to you, to seek advice from a good financialcontroller. Someone who looks at business issues from a managementperspective, rather than just a tax perspective!

Key Financial Numbers in business are what ‘drive’ the results. Thoseshown here can have a huge impact on profit and cash flow. A smallchange in any one, or a combination, of these can have surprising resultsas we have seen.

The ‘Seven Key Numbers’ we will discuss in this book are the most criticalto the financial success of just about every business. But there’s a BUT.Most are not contained in a typical set of financials, which is a frighteningthought, considering how important they are and how they literallycontrol your profit and cash flow!

But and vitally important, these are numbers you can do somethingabout. They are within your power to control and manage … and you don'thave to wait for your tax accountant to prepare your end-of-yearfinancials.

The numbers we’re about to discuss are ‘Financial Drivers’ rather than ‘Results’.

The Seven Key Numbers that Drive Profit & Cash flow are:

1. Revenue Growth (Shown as a Percentage %)2, Price Change (Shown as a Percentage %)3. COGS (Cost of Goods Sold) %4. Operating Expenses/Overheads (As a Percentage %)

5. Days Receivable (Average Days it takes to collect)6. Days Payable (Average Days to pay all suppliers)


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7. Days Inventory (The number of days that stock sits on shelves - orWork in Progress which is the equivalent in a service business)

Let’s explain these driver by driver to see why they're important.


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Chapter 4Key Number 1: Revenue Growth Percentage %

See how to calculate this number in section 12.

Business owners focus a lot of attention on Revenue.

“Let’s make more salesand the profit will lookafter itself!”

Heard that before? Makingsales is obviously important… but what is just asimportant … is what thosesales cost you to make andalso … what they cost you tofund.

As soon as you sell something, and often well beforehand, there are costsinvolved e.g. goods for sale, freight, labour, overheads etc. It’s critical toknow these costs, because if they exceed your price, then obviously youare making a loss and heading for cash-flow problems.

This driver is the most important of all the seven, because

business growth is often the killer of small businesses. What! Goback a second! It’s because there are many other numbers as wellas Revenue that relate to profitability.

If the other numbers aren’t well managed, revenue growth will justexacerbate cash-flow issues. If it’s not a good situation … it won’t getbetter with more sales … but it can get much worse. Revenue Growth is acause for celebration, but it’s also cause for attention to other ‘KeyDrivers’ because more sales can cause cash-flow problems.

The age-old question accountants get asked by their business clients is:

“How come I’ve made more profit but I don’t have any morecash?”

The answer to this lies in the ‘Cash Flow Cycle’ diagram following. The ‘Cash Flow Cycle’ is often not well understood by small business owners …until the business starts to grow and they begin to experience a cash flowsqueeze. Let's explain how it works. In the image below you can see atimeline of 365 days.


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It shows: Before you can sell anything you have to buy something i.e.stock or it could be labour

Depending on your sales cycle i.e. how long the stock sits in store, youmay hold onto stock for 60 days.

Depending on the terms you get from suppliers you may have to pay forthat stock after 30 days – which means you have 30 days negative cash-flow.

That is you’ve had to pay for it 30 days before you sold it.

Depending on your accounts receivable management you could wait 60days to get paid – which adds another 60 days negative cash-flow.

This adds up to 90 days negative cash-flow!

This is your money! You have paid for the stock on day 30. You have soldthe goods on day 60 … and then given credit to your customer who hastaken 60 days to pay for it.

Effectively another party is using your money to fund theirbusiness. What this illustration shows is that the money due toyou, has been somewhere other than your bank account for 90days.


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That is, it is in the bank account of your supplier and of yourcustomer.

This can cause a BIG problem when growth occurs. You now have to buymore stock and find more working capital ... and the issue just gets

bigger!

If a business isn’t working to minimise these things, that is the number ofdays stock that is held … and then the number of days a customer istaking to pay … then the problem just gets worse when sales grow.

Sometimes businesses get so focused on increasing sales that the issuesof stock movement and accounts receivable just get ignored, or it’sviewed as not considered worth investing in.

This is the reason growth can often kill a profitable business!A lot happens to cash on its journey from the sale to your bank account.If you are planning to grow your business, obviously it helps tounderstand this phenomenon and put in place measures to manage it.

Ways to manage revenue growth and see where the profit andlosses are:

1. More sales could mean more capital required. Understand theimpact of revenue on the other numbers. More sales may mean more

working capital is required.

2. Account for differentproduct/servicesseparately. Don’t lump allrevenue into one account inyour accounting system. Split itup by product/service groups,divisions, branches etc.

Also split the costs related toeach so you can see whichones are profitable and whicharen’t.

3. Find what categories make you money. Once you know whichcategories are profitable and which aren’t, you can work on maximizingthe profits and learning from mistakes where losses are occurring.

4. Measure profitability by jobs. Keep track of labour, materials etc. on jobs so that you can compare to revenue and see which jobs areprofitable and which aren’t.


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Chapter 5Key Number 2: Price Change Percentage %

This means the percentage increase or decrease of the price, at which you

sell your products or services.

In a highly competitive marketplace it’s tempting to sell for the cheapestprice possible. This is fine, but let’s state the obvious … if you’re notcovering your real costs with the price you’re charging … then you’re notgoing to make a profit!

A common trap is that many businesses fail to increase prices regularly bysmall amounts e.g. by the Consumer Price Index (CPI), or where thereare increases in transport costs like fuel.

Failing to do this will cause margin squeeze. This means, your gross profitsuffers, due to increased costs associated with delivering the goods orservices.

Customers get a shock if you are forced to make a sudden large increase,whereas regular small increases, are much easier for customers tostomach.

Major fast food chains are experts at this. A company rep noticedthat the cost of his breakfast was $8.90, when on a previous

occasion it was $8.50. That's a 4.7% price increase.

It was barely noticeable and that person didn't see it as significantenough to take his business elsewhere for the sake of an extra 40 cents.

This increase is probably quite justified with increased costs to deliver,present, market and sell the product. It’s a good lesson for the rest of usand one way they can maintain profitability and hence viability!

There's no reason why most other business don't do the same. And it's

not necessary to announce it to the world as you see some businessowners do with signs such as: “We apologise for the inconvenience but because of increases to our costs and staff wages we have to put up our prices … blah, blah, blah”

Don't fear losing customers by putting up prices. The reality is that youmay not lose as many as you think. We say adopt quarterly smallincrease method, small, regular and incremental price increases. If you dolose a small number of clients, they may be the most cost consciousanyway and it may not be such a bad thing. Our modelling has shown

that increased price and reduced overall revenue could, in somecircumstances, actually have a positive impact on your bottom line.


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Discounting Traps

You may be discounting some products or services in order to attractbusiness for other more profitable ones. If you are planning to discountit’s vital to know what impact it will have on your profit and cash flow.

Here is a table showing how much more sales volume needs to beachieved to cover the impact of a discount.

In this table you can see thata 10% discount would reduceour gross profit to $500,000or 55.56%.

To maintain the same grossprofit dollar figure as before

we offered a discount, wewould need to sell 20% moreproducts or services.

This is important to know,because if increased volume

isn’t achieved, the discount is coming straight off the bottom line profit!

Seven ways to achieve a Price Increase and when to do it:

1. Best customer service: Provide the best possible customer serviceand value compared to your competitors – not all customers buy on pricealone.

2. Promote your POD: Promote the perception of quality and make ityour ‘Point of Difference’, make sure your customers know you aredifferent and better. Make the ‘invisible’ ‘visible’.

3. USP: Emphasise your ‘Unique Selling Proposition’ – is there something that you do that others don’t? Don’t assume they

know just because you do.

4. Small regular price increases: Do small regular price increases e.g.CPI at end of year and write it into contracts. These are much easier toachieve than big irregular increases.

5. Track Margins to increase: Connect price increases with supplyincreases – keep track of your margins to see when to do this.

6. Know your customers: Ask how they value your product or service.Happy customers should be happy to pay for good quality products andservices and appreciate that you have to run a sustainable business.


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7. Sack “C” class customers: This may be a scary one but there maycome a time when you need to ‘sack’ some customers. Price focussed,demanding, slow paying customers can take up a huge amount of timeand be less profitable than you think. The time you spend on them couldbe more profitably spent on good customers. If you feel brave and the

time is right, it may be time to categorise your customers and focus onthe better ones.

Note: In our QuickCall business example shown earlier - every 1%increase added $9,160 to the cash flow.


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Chapter 6Key Number 3: Cost of Goods Sold %

Percentages tell you much more about your business than numbers evercould.

One business man, who recently sold a sand haulage business told ushow the simple concept of focusing on percentages changed his wholefuture and was in a large part responsible for his success:

"I used to read the numbers my accountant gave me," said the owner, ofa $2.8 million dollar business, "and it drove me crazy. I knew we wereimproving, but I wasn't sure how well we were managing costs, relative tothe growing sales.

“Fortunately I had a good accountant. He suggested he add percentagesagainst all the costs and income on the Profit & Loss, so I'd know if wewere up or down at a glance.

“ It was like someone turned the light on!

“I knew instantly how well one set of figures compared against the previous one without even looking at the numbers."

“Cost of Goods Sold”, commonly abbreviated to COGS%, simply meansthe costs you incur to get the product or service to the customer, beforetaking into account your day-to-day operational costs or overheads.

(They are also called “Direct or Variable Costs.”)

This is a really important number as it has a huge impact on yourGross Profit … and an even bigger one on your Net Profit.

Many business owners focus a lot of attention on Revenue, but a small

reduction in COGS% can have as much impact on Gross Profit as a largeincrease in Revenue. Understanding what makes up yourCOGS, and some negotiation or investigation with suppliers for betterprices, can make a big difference.

If you are a service based business, pay attention to work practices and job management, as these can have the same effect on your Gross Profit.This provides an opportunity to investigate differences and tighten upprocesses. An example of this is knowing:


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How many labour hours you are selling … compared to those youare paying for!

Too many “un-billable” hours could

be costing thousandsof dollars when youmultiply them by yourcharge out rate.

Most basic accountingsystems have arudimentary jobcosting system, but ifyour business does

“jobs” and contracts out labour, then we suggest you get dedicated job-costing software that links with your accounting system.

It seems obvious why you would want to decrease costs in business, butmany will not appreciate how big an impact this can have on the bottomline.

Every dollar you save on your COGS ... goes straight to the bottom line.

There are generally two types of costs in business, being Direct Costs or

COGS (Cost of Goods Sold) and Indirect Costs or Overheads. COGS aresometimes referred to as COS or Cost of Sales.

The difference between COGS and Overheads is that COGS only occurwhen you sell something, whereas Overheads occur whether you make asale or not. For example Rent is an overhead, as this has to be paidwhether you make a sale or not, whereas purchase of stock or payingservice providers, only occurs when you sell something.

It is important to differentiate between COGS and Overheads, because

every business needs to know what its gross profit is. Gross Profit iscalculated by subtracting the COGS from the Income figure.

It’s a vital indicator of business performance for both managers andlenders. Gross Profit is also an important benchmark against which tomeasure your business… to others in its industry.

So what types of costs are classified as COGS?

1. Purchase of stock to sell


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2. Movement in stock held i.e. what was held at the beginning of anaccounting period versus what was held at the end of the period.

3. Freight costs to get goods into and out of stock.

4. Labour costs relating to production of a service or product.

5. Importing costs e.g. duties etc.

6. Discounts given

7. Stock adjustments/wastage

8. Purchase returns and allowances

9. Raw materials

10. Manufacturing costs

11. Packaging

12. Other costs to get goods or services ready for sale.

COGS are often the most sensitive of the ‘Key Financial Numbers’ inrelation to both profit and cash flow results.

It’s possible, in some circumstances, to create a larger increase in profit,by reducing COGS by a small percentage, rather than increasing sales bya large one.

This is because when sales grow, generally other numbers grow too, suchas COGS and Overheads.

Also an increase in sales, creates a need for more ‘working capital’ to fundyour suppliers, additional inventory and ‘Work In Progress’ … but a

reduction in COGS does not!

The reduction goes straight to your bottom line!

If you’re in a service business don’t think that COGS doesn’t relate to youbecause you don’t sell products. A factor in COGS for a service business is‘Work in Progress’ (WIP). Many service businesses have no realmethodology for handling WIP or Jobs.

We once asked a contractor:


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“How often do you do your invoicing to customers?” and the answer:“When I run out of money!”

Ensure jobs get invoiced out as quickly as possible.By doing so you'll speed up payment. There are systems available that

easily speed up WIP and jobs, and the resulting improvement in profit andcash flow can be significant.

Budgeting for COGS will help you monitor profitability. COGS can veryeasily ‘creep up’ without you realising it.These increased costs need to be passed onto customers regularly, orthey erode profit margins.

Keeping track of such costs may seem like a pain, but the resultingcontrol over margins and profitability, far outweighs the cost of

maintaining such control.

Here are eight ways to reduce your COGS:

1. Reduce wastage: Reduce materials used on jobs by managingwastage and write offs. Review ordering methods and introduce systemssuch as job cost sheets to track goods used on jobs.

2. Increase productive time: Maximise efficiency of contractors andstaff e.g. check any ‘non chargeable’ time spent. Incentivise the staff by

sharing the savings. It may be that some work can be outsourced, evenoverseas. Try www.elance.com for skilled inexpensive techs, artists,designers and business services worldwide. This could free up a morecostly person to focus on more chargeable work.

3. Review and negotiate with suppliers: It’s easy to get into a ‘rut’and deal with the same old suppliers and do things in the same old way.Technology has opened up all kinds of opportunities to improve efficiency.

4. Innovate: Look for innovative ways to change the way you perform

processes. Research your industry to find out what new ideas areavailable. Create a ‘one-small-improvement-a-week’ policy.

5. Industry benchmarks: Check to see what the top performers areachieving. Benchmarks for your industry/business could be availableonline.

6. Exchange rates: Lock in good exchange rates with forward cover onforeign currencies.


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7. Manage your margins: Regularly looking at the percentage of Cost ofGoods so that you know when is the right time to renegotiate or look foralternatives.

8. Use ‘Purchase Orders’: Don’t just allow anyone in the business to

spend your money. One piece of paper in the form of a purchase ordercould save you thousands of dollars. The person ordering goods orservices may not know something you know about a change or potentialobsolescence.

Note: In our QuickCall business example shown earlier - 1%decrease added $9,872 to the bottom line!


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Chapter 7Key Number 4: Overheads Percentage


Many business owners focus attention on the Overheads in a Profit andLoss (P&L) Statement, but they may not compare them relatively, (bypercentage) to the Revenue. This has an impact on the profit.

Here’s an example … if you just look at the Overheads dollar figure … itcould be that you’re making more Revenue but not increasing your NetProfit.

It’s much easier tofocus on one numberbeing the Overheads%say, rather than gettingtoo bogged down in allthe numbers you see ona P & L. If you don’thave a budget it can bevery difficult to know ifoverheads arereasonable anyway.

A business without abudget is like tryingto find a newdestination without aroadmap!

Yet very few businesseshave a budget, which makes it difficult to know how the businessperforms month by month. So do you need a budget? Ask yourself ... areyou planning to reach a goal in business ... then you definitely need a

budget.

It’s obvious why you would want to decrease your overheads, but it’ssometimes overlooked how big an impact this can have on the bottomline.

Here are Nine Ways to reduce Overheads:

1. Simply shop around: It’s so easy to ignore potential savings becauseyou don’t have time. The time spent saving on overheads could far

outweigh the value of time spent on other things in business. Have athree quotes policy when purchasing any goods or services.


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2. Create competition: Shop more suppliers for your business. Don’tunderestimate your value to suppliers as a customer. Look at whatbusiness you’ve done with them over a period and use that knowledge toseek better terms and pricing. If you are a good customer they should

want to keep you.

3. Reduce fixed costs: Rather than locking into fixed costs, try to utilisenon fixed solutions like outsourcing or sub contract labour. That way youaren’t paying costs during downtime.

4. Don’t pay high skill rates for low skilled work: Get the rightpeople into the right jobs with clear job descriptions that meet the overallobjectives of the business. Regularly review staffinglevels in line with business development.

5. Use new technology: Such as VOIP, Skype etc.Could a web site save staff time in your business?

6. Have a budget and stick to it: Report onvariances between actual and budget each monthand investigate. (Shown here is the CFO On-Call OnePage Snapshot report showing all the importantnumbers on one page.)

7. Review overheads regularly. Have an ‘in depth’review of overheads several times each year. It’samazing how savings can be eroded and increasescreep back in again.

8. Use ‘Purchase Orders’. Don’t allow staff to spend money unchecked.You could save thousands of dollars by stopping spending that maybedone smarter or cheaper before the damage gets done.

9. Break-even Analysis. Understand your overheads so you know how

much you need to sell to cover them.

Remember every dollar saved on overheads goes straight to thebottom line!

Note: In our QuickCall business example – every 1% saved inOverheads costs would add $3214 to the profit!


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Chapter 8Key Number 5: Accounts Receivable Days

Also called Debtor Days, this is the number of days on average, your

customers are taking to pay invoices. Think cash-flow with this keynumber. Managing this number can have a huge impact on cash flow.

If for example your Accounts Receivable is currently 70 days and you canget it down to say 50, you could put tens of thousands of dollars backinto your bank account.

The way to improve this number is to focus attention on your AccountsReceivable (AR) and debt collection procedures. It’s fine to look at thereport out of your accounting system, which lists all the customers andhow much they owe you. If your business is growing rapidly you need toknow how much AR Days are changing compared to Revenue growth.

If it’s not comparable … you will experience a cash flow squeeze … andcould run out of working capital.

Chasing payment is often one of the least enjoyed jobs in business. Thinkof it as your money sitting in other people’s bank accounts and collectingit quickly can make a huge difference to your cash flow.

Here are nine ways to speed up customer payments:

1. Create a terms of business document: Ensure you have clear anddocumented terms and your customers understand what they are at thepoint of sale.

2. Credit Checks:Check who you are doingbusiness with. Are they apotential bad debt?

Run credit checks and

assess how they operateif a business customer. Ifthe account is a largeone it doesn't mean tosay the client is solvent.Big companies go badtoo and hurt more littleones when they do.

3. Improve customer relations: Have good customer relations to

ensure your invoice is a priority.


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4. Invoice immediately: Ensure the payment due date is included sothere can be no confusion or excuse. Why wait to month end to invoiceand give customers as much as 30 days more to pay?

5. Manage credit better: Get a credit management system in place.

Report regularly on outstanding customer amounts so that you know whoto chase and how hard. Measure who owes what and for how long.

6. Follow up appropriately: Small amounts by email and largeramounts with a telephone call. Have one person in your business that isresponsible for doing this. A part-time accounts receivables clerk couldpay for themselves because they collect more and improve the cash flow.Calculate how much.

7. Make it easy: Make it as easy as possible to get paid. Credit card

merchant fees could cost a lot less than waiting for a cheque for 90 days.Have clear systems and processes in place.

8. Progress Payments: Seek progress payments or deposits if it’s a jobthat takes a while.

9. Get tough: Don’t write off collectible debts too easily. This happens fartoo often. There are good debt collectors around.

Note: In our QuickCall business example – every 1 day

improvement here would add $2934 to the cash flow.


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Chapter 9Key Number 6: Days Payable


This is the number of days, on average, you are taking to pay yoursuppliers. This number is just as important as Accounts Receivable Days,as it can also have a big impact on your working capital situation.

Have you noticed how it’s so easy for you or a staff member to oil the “squeaky wheel” and pay the supplier who hassles you most for money(sometimes before it’s due)? It’s also easy to ignore potential betterterms to be had from suppliers because you get so focused on revenue.

Some smallchanges to procedures relatingto AccountsPayables can paybig dividends inyour bank account.

If your business isgrowing this could becritical cash for

funding growth. We’renot suggestingstringing out suppliers beyond the agreed terms, but we are proposingnegotiating better ‘agreed’ terms from suppliers. Paying suppliers tooearly and wasting credit available could be costing you precious cash flow.

These are eight ways to get the most from your supplier creditterms:

1. Systemise paying suppliers: Have a routine and stick to it, be

disciplined.

2. Do you pay early: Never pay early unless you are offered a discount.

3. Credit cards: Use credit cards to maximise interest free days.

4. Payment system: Have a system for payments on the due date toensure you get the benefit of every day’s credit. Don’t just pay everyoneon the same day.

5. COD’s not on: Don’t pay cash on delivery – ask if an account isavailable. Most businesses will give an account to another business.


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6. Make ONE person responsible: Just one person pays suppliers toavoid overpayments.

7. Check every invoice: Validate supplier invoices against quotes orpurchase orders to ensure you aren’t overpaying for goods or services.

8. Good relations: Develop good relations with suppliers to enhancenegotiation effectiveness. Know how much business you have done withthem to assist with negotiations for better terms and pricing.


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Chapter 10Key Number 7: Days Inventory or Work In Progress

This is the number of days, on average, that goods for sale are sitting in

your storeroom, from when they are delivered by suppliers, to when theyare shipped out to customers. Where goods have to be paid for beforethey’ve been sold, it means you have had to spend valuable workingcapital for the stock sitting there waiting!

If you can manage this situation well, and reduce the number ofInventory Days, it has a big impact on your bank account and workingcapital situation. It’s very tempting when a salesperson calls and offersyou a discount to buy more stock, but try not to be tempted because itcould cost you more than the discount in the long run.

Consider the amount of working capital that will be tied up in that stock,compared to the discount being offered. If you are borrowing funds, abank overdraft say, think of the amount of interest payable on thosefunds tied up in slow moving stock.

Are you in a service basedbusiness? Then “Work inProgress” (WIP) Days is verysimilar to Inventory Days, inthat your ‘stock in trade,' is

the labour and materials youhave to sell. Slow WIP dayscan be just as dangerous tocash-flow and workingcapital as Inventory Days.Anything you can do to tighten up your WIP and speed up the time workis ready to be invoiced, will pay dividends in your bank account andreduce your interest expense.

Here are eleven (11) ways to reduce the number of days stock sits

on the shelf waiting to be sold:

1. Stock system. Have a good system for managing stock

2. Research lead times. Understand customer needs/lead times andforecast sales and requirements.

3. Re-direct to customers. Get suppliers to deliver direct to customersif possible – avoid holding stock.

4. Buy for immediate use. Where possible purchase materials for jobsrather than for stock


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5. Because it’s cheap! Don’t ‘impulse’ buy when offered discounts.

6. Track stock movement. Report regularly on what stock is doing andmeasure your inventory days to give a target to work at reducing.

7. Assign responsibility with targets. Make someone responsible formanaging it and incentivise them.

8. Seasons. Take into account ‘seasonality’.

9. Industry Benchmarks. Check your industry benchmarks to see howyou compare.

10. Neat ‘n Tidy does it. Have a tidy stock room to avoid over-ordering

11. Are you a stock hoarder? Get rid of obsolete stock so you can usethe funds to buy faster moving lines.

We’ve also compiled ten (10) ways to reduce the time jobs are inprogress costing you money:

1. Job management system: Seek out a good quoting/estimatingsystem and measure actual costs against each job to see which jobs werethe most profitable.

2. Follow up system: Have a system for following up quotes and tenders- the quicker you get started the quicker you finish. Review operations forefficiency and ask yourself “Am I getting deals over the line quickly?”Create a sense of urgency.

3. Just one person: Have one person managing jobs who has a goodunderstanding of status and progress to ensure jobs get finished.

4. Manage labour: Manage resource allocation and track staff/contractor

time spent on jobs. Schedule jobs and travel for efficiency.

5. Cost for variations: Make allowances for variations to material priceson jobs to avoid hold ups.

6. QC: Have good quality control to avoid rework and investigate writeoffs to avoid them in future.

7. Checklists are vital: How many people do you know who don’t usechecklists and even worse rely on memory. Use checklists and templatesto maintain standards and improve customer satisfaction.


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8. Allow maintenance time: Keep equipment well maintained to avoiddown time.

9. KPIs: Have ‘Key Performance Indicators’ for jobs such as number ofquotes versus jobs won and lost.

10. Job management system: Use a job management system to keepinformation easy to access and provide information for improving jobprofitability.

Note: In our QuickCall business example – every single dayimprovement here would improve cash flow by $2055!


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Chapter 11Key Numbers Quick Summary

1. Revenue Growth Percentage

Most business owners focus their attention on Revenue and this is ofcourse critical. Equally as critical is what it’s costing your business toincrease your sales. When you sell something there are costs involvede.g. materials, staff and marketing. If the other numbers below aren’tbeing managed right, revenue growth will exacerbate cash flow issues.

2. Price Change Percentage

This means the percentage increase or decrease in price at which you sellyour products or services. In a highly competitive market it’s tempting tosell for the cheapest price possible. That’s fine, but if you’re not coveringcosts you will not be profitable. Many businesses fail to make regularsmall increases e.g. (CPI).

This can cause margin squeeze and gross profit suffers, due to theincreased costs of delivering the goods or services . . . compared to therevenue. Customers can get a shock if there’s a large price increase,whereas regular small increases are more acceptable and recommended.

3. COGS Percentage

Cost of Goods Sold means the costs incurred to get the product ready forsale. A small reduction in COGS Percentage can have as much impacton Profit as a large increase in Revenue and may be much easierto achieve.

4. Overheads Percentage

Many business owners focus attention on Overheads in the Profit & LossStatement without comparing them, (by percentage) to Revenue. If you

just look at the Overheads dollar figure, you could make more Revenuewithout increasing your Net Profit.

5. Days Receivable

This is the number of days, on average, customers are taking to pay.Managing this number can have a huge impact on cash flow. Reduction inAccounts Receivable Days could put thousands back into your bankaccount. To improve this number, focus attention on speeding upcustomer payments.


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6. Days Payable

Means the number of days, on average, you take to pay suppliers. It’stempting to pay suppliers who hassle for money and ignore potentialbetter terms to be had from alternative suppliers, because you get

focused on Revenue. Some changes to Accounts Payables managementcan pay big dividends in your bank account.

7. Days Inventory

This is the number of days, onaverage, that goods for sale orraw materials are sitting in yourstore-room, from when they aredelivered by suppliers, to when

they are shipped to customers.These goods often have to bepaid for before they are sold.

This means you have spentworking capital to have the stockwaiting to be sold. If you canreduce the number of InventoryDays, this can have a big impacton your bank account and

working capital situation ... or ina service or jobs based business.

Oh ... let’s not forget the Work in Progress (WIP)

This is the number of days on average that jobs are in progress orunfinished prior to invoicing. Think of unfinished jobs as $100 bills piledup on the work-room floor! A good job management system helpsestablish good job processes and that can help you speed up WIP daysand improve cash flow.

If you have trouble working through these calculations, call a CFO On-Callwho will be happy to help.

Contact details follow.


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Chapter 12About the authors & CFO On-Call

Sue Hirst and Stuart Frost are a husband and wife team who in 1991

founded the Computer Accounting ‘Doctor’ business which became CFO*On-Call by CAD Partners.

Sue was an accounting practicemanager and Stuart had a businessadvisory background. It seemsimprobable that two non-accountantshave set up what is regarded as thelargest management accounting andCFO services business in Australia andNew Zealand.

The start of this was that both hadexperienced a business owner’s plight, where an owner had tomake important strategic decisions, based on accounts that weresometimes, as much as 18 months old.

They passionately believe that business owners need currentmanagement information, on which to make better decisions.

Set up initially to help businesses transition from manual to computer

accounting systems, they developed tools, health-checks andmethodology to help business owners get instant clarity from theirnumbers, that in most cases, they weren’t getting from their taxaccountants.

Hence the CFO On-Call service was born, where a business owner can callupon the services of an experienced ex-corporate Financial Controller orCFO, for a fraction of the cost of hiring your own, once a week or month,or on an ‘as-needs’ basis.

* CFO meaning Chief Financial Officer

In its twenty three years since inception, the company has helped over20,000 clients, set up systems, reduced cash wastage, improve cash flowand profit and today the business has more than 1000 regular clients.

It has over 60 “Partners” throughout Australia and New Zealand withmany now being shareholders.

The Partners are low overhead, with most working from a home office, all

have at least twenty years experience and are qualified managementaccountants, with economic, financial and business qualifications.


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CFO On-Call – How can one help you?

As a business owner, you may not need a full-time CFO. But you almostcertainly DO need more expertise than you get from an in-housebookkeeper/number cruncher, and more help and ongoing advice than anannual trip to your accountant.

So a CFO On-Call advisor can become your Chief Financial Officer – butpart-time. They can help with internal financial control and direction foryour business. That could be every now and then, once a week or once amonth. It’s up to you.

You can have all the benefits of your own CFO, for a fraction of thecost of hiring someone full-time!

They will be always available, face to face or on-line, to help planstrategic direction with you, discuss new ideas … and be your right-handfinancial guru … whenever you need help.

Best of all, they bring ‘big company’ experience to your business.

All CFO On-Call people are qualified management accountants from biggerbusinesses, but unlike most tax accountants, they’ve worked as seniorfinancial controllers in leading companies and know exactly how toimprove financial performance.

See www.cfooncall.com.au or www.cfoncall.co.nz

To enquire call: 1300 36 24 36 (Australia) or 0800 180 400 (NewZealand)

http://www.cfooncall.com.au/http://www.cfooncall.com.au/http://www.cfooncall.com.au/http://www.cfoncall.co.nz/http://www.cfoncall.co.nz/http://www.cfoncall.co.nz/http://www.cfoncall.co.nz/http://www.cfooncall.com.au/


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Second Edition:Intended as a guide for small businesses in Australia and New Zealand

First Printed in Australia © 2010 - This e-book edition © 2015

© CAD Partners Pty Ltd - CFO On-Call© CAD Partners Ltd Limited (NZ) - CFO On-Call

This book is copyright. This publication or any part hereof, may not be copied or publishedwithout the written approval of CAD Partners Pty Ltd. All Rights Reserved.

Apart from any fair dealing for the purposes of private study, research, criticism or review, aspermitted under the Copyright Act, no part may be reproduced by any process without writtenpermission.

Published by: CAD Partners Pty Ltd - Trading as CFO On-Call - 60 locations around Australiaand New Zealand

Telephone: Australia 1300 36 24 36 or New Zealand 0800 180 400Email: [email protected] or [email protected]

Enquiries should be made to the publishers.

Disclaimer: CAD Partners Pty Ltd and any officer, agent or employee of CAD Partners Pty Ltd orassociated companies do not warrant the accuracy or reliability in relation to any advice orinformation contained in this publication and accept no responsibility for any loss or damagewhatsoever arising in any way from any representation, act or omission (including responsibilityto any person by reason of negligence).

This book does not constitute, nor is intended to constitute, a definitive conclusion about cashflow, financial control methods and related matters. Advice about the Key Financial Numbers andrelated methods for your business should always be sought from suitably qualified FinancialControllers/Chief Financial Officers and Accountants.

7 key numbers ebook 2015

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