How to beat the cashflow crunch?

Approximate reading time: 1 minute

Background

We recently advised a wholesale and retail business that was experiencing large fluctuations in its sales, profits and cash flow. The business supplies goods to energy and rural businesses and is required to carry large stock holdings and significant credit accounts. Heavy rains also caused damage to the business’s stock and premises and it was unable to supply refrigerated goods for a period of 2 months.

The owners, William and Laura, wanted advice on how to improve their profit, better manage their cash flow and prevent the loss of income from future unplanned events.
This case study highlights the importance of small business owners understanding the true costs of running their business and factors influencing their profit and cash flow. It also provides guidance on how to structure funding arrangements for unique business circumstances and how to use insurance as a means of protecting business income.

Client Issues

• Unsure of breakeven sales level
• Not understanding the benefits of ratio analysis and budgeting
• Not enough working capital
• Inadequate business insurance

How Resolved

1. Breakeven Sales

William and Laura, with support from their accountant, completed a breakeven sales analysis enabling them to pin point the minimum sales required to cover their business expenses.

Total fixed business expenses	$350,000
Average gross profit margin	55%
Minimum weekly sales required	$12,250

2. Improving Profit

To better manage their stock, William and Laura, with support from their accountant, completed a series of key profit ratio calculations. This included Gross Margin Return on Inventory and Gross Profit Margin. It was agreed William and Laura would upgrade their stock management system to improve their gross profit margin and to reduce shrinkage.

3. Improving Cash Flow

To improve their cash flow, William and Laura, with support from their accountant, completed a series of key cash flow ratio calculations. This included Account Receivable and Stock Turnover and a Flow of Funds Statement. It was agreed William and Laura would prepare a cash flow budget every year to determine their funding requirements.

4. Improving Cash Flow

William and Laura’s Financial Adviser was able to  negotiate an extension on their overdraft limit to meet their working capital requirements. William and Laura’s Financial Adviser also purchased new Business Disruption Insurance to protect their business from a loss of future income.

Client Process

William and Laura completed a Business Life Plan to determine their business growth and succession objectives.

Buying or building a successful business

Approximate Reading Time: 2 minutes

Background

We recently advised Tim a business owner who had started a business providing specialised IT support to a range of government agencies focused on managing climate control. Tim left a lucrative job in the IT industry to fulfil his dream of becoming a small business owner. Tim has been working long hours and has established a good reputation with his customers by providing a quality service.

Tim wanted to know if he was earning more now than when he was employed and the steps he needed to take to grow his business. To grow his business Tim identified that he would need to employ specialist staff, purchase systems for quality assurance and job costing and would require funding for new equipment and working capital.

This case study highlights how small business owners need to examine the return their business is generating and the step required to create a business with easily identifiable value.

Client Issue

1. Staying employed or become a business owner

2. No plan for growth

3. Finance needed to support growth

How to resolve in 3 easy steps

1. Calculate the Earnings

Tim completed a comparison between the income his business is generating and his previous earnings in a Full time job. This involved the following calculation: 

Business salary	$80,000
Business profit	$150,000
Total earnings from the business (p.a.)	$230,000
Total earnings per week (avge. 55hrs/week)	$80/hr.
Previous contract hour rate	$50/hr.
Net gain	$30/hr.

Tim was pleased. In addition, a benefit that he and his family appreciated was the fact that he was now in control of his work/life balance.

2. Prepare a Business Plan

Tim agreed to complete a business plan to document his business growth objectives. Tim’s main planning objectives included creating systems to control his anticipated future growth, developing a plan for staff management with incentives and cash flow projections to secure bank funding support.

3. Finance and Insurance

Tim approached SJN Chartered Accountants to secure funding support. We were able to assist by firstly preparing a comprehensive cash flow forecast and then  referring Tim to a finance broker who suggested that Tim would be able to use the equity in his house to secure interest only funding support for the business. We were also able to refer Tim to an insurance broker who also updated his business insurance to include extra cover for the new debt. In addition, we were able to refer Tim to a financial planner to review all risk insurance needs for Tim and his family.

Client Process

The Business Life Planning Program was used to document Tim’s business growth objectives. Once completed new insurance policies were purchased for life, key person, sickness and accident and trauma insurance. Tim’s Bank provided a drawdown facility for Tim to manage his budgeted working capital requirements.

Phone: 8333 7300

Email: info@sjnca.com.au