‘How To’ Coaching series – Activity 42

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 42 – I regularly review my P&L position … daily weekly monthly

So you know your Profit and Loss (P&L) situation from the accounts your accountant gave you for your last trading year. Now you know how well you did?!?

Well, know how well you did for a specific point last year. What about how well you’re doing against your targets this year?

I find many Small (and some not so small) companies that do not know what’s going on this year, let alone this month, week or day.

If you want to be in charge of your financials rather than try to operate on last year’s figures, you need to have a regular review process in place.

It’s not difficult, it just needs discipline to keep doing it.

The reason why it’s helpful to know your P&L position is that you can use the data in a timely manner to decide if you are on track or need to make changes to how your business is operating.

The HowTo bit:

First thing is to work out a schedule for reviewing your P&L. This depends on the size and speed of your business. For most companies, a monthly detailed review should work well; and not be too burdensome. A daily or weekly review of the high level numbers, especially when making a good number of transactions a day, will keep you aware of what is happening and highlight where changes/corrections/amendments are required.

If you have the tools, set up an automatic reporting system, showing detailed sales, detailed cost of goods sold, gross profit, detailed operating costs and net profit… before interest and tax. This can be done manually, just takes a bit more effort.

The key is to run the process at the same points in the monthly business cycle to see what is happening with your business. This will then be used to drive change or continuation of your current business processes.

If you would like further information on how to set up your P&L review process, Contact Us

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‘How To’ Coaching series – Activity 41

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 41 – I can predict my future cash flows

Where’s your crystal ball, that you can predict income, I’ve heard it said.

Well I don’t have a crystal ball, but I do have statistics, records and my trading history available on which to base my predictions.

At a very basic level, most business owners will know if there are pending transactions and upcoming sales meetings on the table.

If we expand on that, we can come up with a system that that will provide you with a pretty accurate view of future flows of the cash in your company.

The main thing is to record all the in/out transactions over time, conversion rates from prospecting to the sale, and planned marketing activity.

This will form the basis of your prediction process.

The HowTo Bit

Understand your outgoings by date over a given duration. This will help you predict the future outgoings.

List all the known and anticipated outgoings on a plan.  My plan is for the year ahead; I use a spreadsheet broken down into weeks.  This shows your outgoings by week.

Record all your expected and planned income onto the plan.

You now have a date for when you will run out of cash.

Include your credit line (overdraft & capital you would choose to invest into the business).

You now have a view of when your cash goes out/in and when you will run out of funds.

To predict the future cash flow, add a line of expected future income based on your company’s historical sales data, linked to the quantity of marketing that you are doing verses your conversion rates.

If you would like further information on how to set up your prediction tools, Contact Us

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‘How To’ Coaching series – Activity 40

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 40 – I regularly review my Cash flow position……monthly

The flow of cash through your business is it’s lifeblood.  Without cash, you don’t have a business.

So, if cash is so important, why do so few businesses run a regular monitoring and reporting system?

Some business owners are in denial (also the title of a book – Denial, not a river in Egypt).  It is easier to ‘hope’ things are ok.

You can make a loss in business many times, but you can run out of cash only once before it’s all over.

When you know what cash is due in/out and by when, you can make intelligent decisions for the success of your business.  You then know when you will be able to pay bills and make investments.  You will also see when you can pay yourself and still have money available to run your company.

The HowTo bit:

If you are using something like Xero, you can get a cashflow report.  You could then use a 3rd party app such as Float.

Personally, I use a spreadsheet that I load with known, expected and planned income/costs for the year ahead to give a forecast of how the cash is flowing in and out.  I update it weekly/monthly and roll it forward by one month at the start of the new month.

The key is to make the review process a habit – create a regular time in your diary.

If you would like a copy of my spreadsheet and/or to find out more about setting up your own cashflow review process, Contact Us

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‘How To’ Coaching series – Activity 39

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 39 – I regularly review my Margins – daily/weekly/monthly

Following on from blog 38, ‘I know my Margins’, it is a really good idea to monitor the results regularly, then you can decide what aspects of your business are best to develop; or drop/amend if that is your finding.

You can set up a simple report that shows the ongoing results of your margins.  These should be viewed as required to work with your business.

If you have a fast-paced business, you may review your margins daily.  A Stock Exchange monitors the results in real-time.  That’s because a prompt change/correction will have a dramatic effect on the outcome of the business transactions.

A company that works on a multi-year cycle, might review the margins less often.  They would use a different measure to see how they are doing – expected income vs costs against the planed budget to show the profitability of the offering.

 The HowTo bit:

As an example, build a spreadsheet showing income for a given time period and list outgoings (cost of sales & a segment of the operating costs) underneath.  This could look like the table below.

Profit/Loss table

  Monday Tuesday Wednesday Thursday Friday
Income 1000 850 820 1250 915
Cost of sales 180 160 265 190 185
Overheads 300 300 600 300 300
Profit/Loss 520 390 -45 760 430

This table shows the income and costs per day for activity; it does not necessarily reflect the Cash Flow in the business.  The initial questions I would be asking are:  Why are the costs of sales and overheads more on the Wednesday.  It could be that a certain offering is not profitable.  Using the information gives you a reasonable starting point for your investigations.  In real life, the figures are probably not going to be so obvious, so a more detailed table then this example, maybe with the addition of a bar chart diagram, could prove invaluable.

If you would like help defining how you will regularly review your margins, Contact Us

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‘How To’ Coaching series – Activity 38

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 38 – I know my Margins

What margins are we talking about?  Gross profit margin or Net profit margin?

Gross Profit Margin is important to understand that your sales cover the cost of sales.  Net Profit Margin shows your overall profitability.

Margin is expressed as a percentage.  For example, a net profit margin of 10% shows that for every £100 of income, your business gets to keep £10 (in this case were focusing on EBIT – Earnings Before Interest and Tax)

What is the difference between gross profit and net profit?  The gross profit margin is the ratio of sales income, less the direct cost of those sales.  The net profit margin is the gross profit margin, minus operating expenses.

Knowing your overall Net margin is important; so is knowing the Net margins of all your individual offerings.  That way you can see what is feeding the company.  When you understand your margins, you can decide if you need to re-price (or even drop) profitable/unprofitable products/services.

The ‘HowTo’ bit:

As well as the calculation for working out your margins, define what margins you want to monitor.

The key is that you know what your margins are.  So, set up a regular reporting schedule and make sure you have the information to hand.

Have an easily accessible report; I use a spreadsheet, into which I feed the sales, costs of sales and a percentage of the overheads. The output is read as a percentage. This gives you a view of what is happening.  This is also useful for forecasting future profit/loss on individual items as well as for the overall picture.

If you would like assistance to define your margins and set up a consistent mechanism for readily ‘knowing your Margins’ Contact Us

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‘How To’ Coaching series – Activity 37

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 37 – I regularly review my average sales figures – daily/weekly/monthly

In the previous blog (#36) we looked at how you determine average sales value/price.

This is something that needs to be done regularly.  The schedule of measurement depends on how many products (or services) you sell in a given timeframe.

For instance, if your sales are high in number per day, you may choose to measure the sales figures daily.  Or, as some supermarkets do, hourly.

A big retailer will monitor sales of specific items to understand buying patterns and the impacts of marketing initiatives and other factors.  A large construction firm might monitor sales by month/year, to understand the income against a lower number of large builds.

Whatever your reason, if you don’t regularly measure the value you receive, you will soon lose sight of whether your business is charging correctly to make a profit.

The ‘How to’ bit:

Create a schedule of when and what to measure.  Give the responsibility to someone to ensure it gets done.  Produce the required reports and make sure the results are monitored, managed, understood and acted upon by the decision makers in the business.

If you would like help to set up the schedule and introduce your process, Contact Us

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‘How To’ Coaching series – Activity 36

Who controls your financials?

Chapter 2 – Financial Control – Rule your money

This is part of the ‘How to’ coaching series.  An ongoing series of activities to make your business successful.  Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.

Activity 36I know my average sale value

All you need to do to calculate the average sale price is to divide the total value by the number of products/services sold in a given time.

Sounds simple enough.

A question for you…

Do you want to know the average sale price before costs? Net of costs? Or the value overall?

Before we look at other factors, let’s take the usual measure of Number of sales over Net income for a given time.  For example:  if you sell 10000 items, and get a return of £50 each (after costs of production & overheads have been taken off) over 1 year, that would give a figure of £500000.

This would usually be calculated prior to EBIT (Earnings Before Interest & Tax).

There are other factors that impact ’value’.  Such as the LTV (long term value) a customer may bring over time.  Factors may include: You usually get a better take up of your offer when you market to your existing customers.  We will pick this up in a future blog on value verses price.

For this exercise, we’re focusing on understanding the return we get for a product or service.  When we know the average sale value, we can measure the effects of changes to price rises/reductions (both in terms of costs of production, or to us raising/discounting the price to the customers), changes in purchase quantities per order and other costs to the business.

The ‘How to’ bit:

The key is to choose what measure you are going to use and stick with it so that you have a level playing field on which to base your measures.

Typically, companies choose ‘total sales income per annum divided by sales invoices = average sales price’.  Depending on what you sell, you may want to go to a more granular level to understand the average sale price for each offering.

If you would like help to set up your process, Contact Us

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