‘How To’ Coaching series – Activity 19

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 19 – I know my monthly cash flow requirements

Have the you got the cash available to run your business today, tomorrow, this month, all year?

It can be the sort of thing that keeps you up at night….’have We got the money to pay our bills, buy the materials (or service) so that we can trade’?

When I say cash, it’s the available funds you have within your business; that can be funds in the bank + the size of your credit line (overdraft).

It may sound obvious, but I’ve seen people struggle to take on a really nice bit of work and then fund it until the invoice payment is received and cleared.

I have had my own frustrations with cashflow many years ago.  I was running a profitable landscaping business and had just been offered a lucrative contract with a reasonably sized housing developer. They offered me the opportunity to landscape the gardens and surrounding area for 15 houses.

A massive project for us.  I knew that we had the ability; I had enough people who were happy to work for me; I had all the right supplier contacts, who would supply the required amount of materials and equipment; We had CIS tax registration; I had HSE resources available…. BUT, what I didn’t have was… enough cash/credit to fund the job.

It was very frustrating, but I couldn’t get funding anywhere.  So, it was with a heavy heart that I turned down the opportunity.

It was all due to the fact I didn’t have enough cash (funds) to run my business before enough payment would be received.  If I had taken it on, I am sure my business would have gone under.

So, before you go getting grandiose ideas of expanding and taking on bigger projects, make sure you know your cashflow numbers so you will know that your business can fund them!

The ‘How to ‘bit:

Create an annual cashflow forecast. Then keep it up to date, on a weekly/monthly basis. Put all the current and forward ongoing payments into something like a spreadsheet, on the day they will be paid, plus any expected/anticipated outgoings that will come up to support work you have in the pipeline – plus any forecast from sales targets/forecasts.

Then record all income across the same period.  All the payments you are waiting for, plus those jobs in the pipeline & those based on the sales forecasts.

Then add your line of credit – i.e. if your business has an overdraft facility of £10k plus a business credit card of £5k, you would add £15k to the available overall operating cash.  Less any payments you are already committed to.

Note: be aware that you need to make sure that any credit facilities are paid as required.  It is a business risk that you need to decide you are willing to take.

If you do this on a weekly basis, you will know, given that your forecasting is relatively accurate and realistic, how much you have in the way of funds for that week and going forward.

If you would like help setting up your cashflow forecasting system, follow this link and Contact Us

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‘How To’ Coaching series – Activity 18

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 18 – We understand and have calculated the true cost of each of our products/services.

Do you know which are you best sellers?   Do you know how much profit you make from each? Are you actually making any money at all?  Or are you making a loss? Are you paying the customer to buy your products?

It is all too easy to look at competitors and think you need to price your products or services accordingly.

How can you know how much to sell for unless you know what it costs to produce, procure or provide your products and services?

I’ve often heard clients say, ‘but it’s so complicated!’.  Well the process itself doesn’t need to be. It can seem daunting, say you were one of the big 4 food retailers, there are lots of sales lines – I know of one company that holds 64000 lines (individually priced items).

It doesn’t matter how many ‘lines’ you stock/sell, it’s the same process.

Let’s take a widget, that often used example.  The widget has materials you need to purchase; plus specific manufacturing costs.  This gives you the direct costs.  Now you need to add the operations costs.  This is the bit most people struggle with at first.  It’s not that difficult, you just need to decide how you are going to slice up the operations costs to suit your business.

It is about consistency.  Apply the same rule across your business.

The ‘How to ‘bit:

Make a list of the costs that are directly attributable to the product/service e.g. cost of materials, shipping to you, storage.  Costs for providing services may be client materials (e.g. – printed workbooks), expenses – travel, refreshments.

There could be more costs, you will need to look at your specific business’ costs.

Then work out how you will slice up the operational costs.  For example, you could calculate it on an hourly basis. Add up all the expenses of running the business annually, such as salaries, rent, rates, equipment and tools, phones, electric….  then divide this by the hours you are open for business.

This will give you a number that you can add to the direct costs.  When split down to the level you are looking at, this is compared to the sale price you actually receive.

You will then see if you’re making a profit for that product/service.

If you would like help setting up your own process, follow this link and Contact Us

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‘How To’ Coaching series – Activity 17

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 17 – The company has an annual budget and reviews performance against it monthly

One of the benefits of setting your annual budget is that you can visualise all the income verses outgoings for the year.  Against this, a monthly review will help you see if you are meeting your financial targets. This information is useful in real-time and also for a historical view when setting future budgets.

Annually, this budget shows when expected costs will need to be covered by.  When you put this against your booked and anticipated income you can see what sales and effort is required.  By doing this monthly you have the opportunity to amend your efforts and spend rates in a whilst the changes can be more effective.

One key part of any budget is checking that what you have written down is actually achievable.  Do you have the resources available?  This could include personnel and the space/facilities/tools for them to operate.  I’ve seen the results of a sales team that overloaded the capacity of a multi-million pound business, so that it almost imploded.

The key is to set up the monthly (or other regular timescale) reviews with those who have an impact on the results.

The feedback can then be used to drive the business activities and tasks for the next month: also longer term.

The ‘How to’ bit:

Create a budget covering your financial year, showing known and anticipated outgoings.

It is usually relatively easy to list all the ongoing costs, e.g. insurance, rent, rates, phones, service costs etc.

Income usually requires a bit more effort to fill in for the year.  A good place to start is with last year’s results.  Then look at what is already in hand.  Next, add all expected and planned sales, plus a forecast based on goals and targets.

It is important to understand the maximum capacity of your business to supply products/services.  It is tempting to show a full order book all year, be realistic!

Depending on your business, you may also have costs associated with the provision of your products/services. Remember to include these on the budget.

There are some great tools you can use to manage your financials.  If you haven’t got this in place yet, the good old spreadsheet works well too.

To assess your progress against targets, record the actuals verses planned.

  • What was the actual income verses the planned income?
  • What was the actual costs for supplying your products/service against the planned costs?
  • What was the actual costs of overheads against the planned costs?

This will show you how each financial segment of the plan is performing.

Remember that plans are just that, plans… they may need to change to meet new opportunities or threats.

Even if you make a new version of your plan during the year, it is still useful to view the actual results against the original plan.  This will help with understanding the changes, and inform your numbers when planning for future years.

If you would like assistance in setting up your budget, follow this link and Contact Us

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‘How To’ Coaching series – Activity 16

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 16 – I have a Break Even forecast for the business

It’s very important to know what your Break-Even point is.  That will be the point at which it’s all profit from there on. That’s great, but how do you plan to make it to there; and when will it happen?

As with any forecast, your Break-Even point needs to be realistic.  Remember that this is only a forecast and is only as good as the data you fill it with.  At least a planned forecast is better than a finger in the air or a downright guess.

As a rule, I work on the premise that costs will be greater/sooner than anticipated, and income less/later than expected.  This is by a small percentage, it just covers any unforeseen transactions or late payments. Build your forecast on these assumptions and you will be reasonably well prepared for most eventualities.

The overall forecast ‘incoming’ is made up of what is happening, what should happen, what is in the sales pipeline, plus experience based on previous results and expectations.  Most costs will already be known and expected.  For long term forecasting it is also useful to look to see if there are supplier price rises on the horizon: maybe there are rate rises, utility rises and rental cost reviews coming up too.

The more all-encompassing you can make your forecast, the more helpful it will be.  Then the fun begins.  Use the forecasts as part of your overall performance program.

The ‘How to’ bit:

Build a line chart (as per the title image) covering 1 year.

Money(vertical) against Time (horizontal).  Use a range for income & expenditure that covers your numbers.

Fixed Costs– The ongoing costs to the business, Rent, Rates, Utilities, Phones etc

Sales Income– Built up of sales already made, in the pipeline and those planned.

Variable Costs– Costs of delivering the service/products that you have sold/plan to sell

Total Costs– Add Fixed and Variable costs together to show the total outgoing

Net Profit– This shows the financial situation of ‘income’ minus ‘costs’.  This starts off as a negative number.

Although it may seem obvious, Break-Even is when your income outstrips your costs. It is worth trying out a few scenarios to see how they affect the timings on your chart.

If you are looking for help to develop & implement your own Break Even forecast, follow this link and Contact Us

 

 

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‘How To’ Coaching series – Activity 15

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 15 – I have a Cashflow budget for the business

Cash is king!  I’m sure you’ve heard that before.  Though the concept has become less clear over the years as we now have credit offers coming at us from every direction these days.

Maybe it should be having ‘available funds’ is king.

When I start with a new client, one of the first things we look at is the cashflow situation.  Many business owners think that the bank statement is what shows the state of their finances; or last year’s accounts from their accountant.  The accounts show we’re in profit…

A leading figure in the business world came up with a sage truism…. In business, you can make a loss many times; but you can only run out of funds once.

Having a cashflow budget is the forecast of when your outgoings will be required against the income you have coming in, plus your credit

Solvency equals: income + available credit outgoings, for any given time. Never attempt to go into minus!

For example, if you have £500 due in from a customer this week, and you have a supplier who requires payment at the end of the week for stock of £250; then you are in credit to the tune of £250.  If your business has a credit line of £1000, then you have credit to the tune of £1250.

On the other hand, given the same situation, except you have no credit line and you owe another supplier £300, you have a minus credit situation of £50. You have run out of money and unless you can find other funds, the business is over!

There are more businesses that fail, that are very profitable, but run out of cash than you might think.  Even large businesses! With some significant household names going to the wall or having a major restructuring in recent times.

So, that’s why I always advocate having a cash flow budget (forecast) in place.

When you plan ahead, you can see where the funds are going and where they’re coming from. As said by Warren Buffet; if you don’t know the score, you don’t know if you’re winning or loosing.

I have seen first-hand how this task can fail, if not managed properly.  This was in a multi-million pound enterprise.  It is all too easy to loose control of the costs!

The ‘How to’ bit:

Depending on the size of your business, you may use a spreadsheet, or have an accounting system.  Whatever you are using, make sure you watch the cashflow all the time.  One of my clients works in an industry where profit margins are very tight.  They monitor their cashflow daily.  This informs the board as to what work they will, or won’t, take on as well as what investments they will make; and when.

A simple approach is to set up a rolling annual forecast showing all your outgoings by the date they leave your accounts.  All due income is then recorded at the expected due date. Remember that some customers will pay at the end of the agreed terms (some may need chasing).

The next bit is the forecasting.  This is where you put in the projected figures.  To assess future income, look at work in hand, plus current sales prospects. You might also look at your previous history of sales success (needs careful assessment if you’re using this – I prefer to be cautious with income).  The company’s credit line is then added to the income number to give you the figure of your overall available funds.  The resulting figures will show, firstly, when you will run out of cash – for the actuals.  The second view shows the expected date you will run out of cash – this is the forecast – if you hit the targets.

If you would like a copy of a simple cashflow forecasting spreadsheet and to find out how we can help you set up a robust cashflow forecasting system, follow this link and Contact Us

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‘How To’ Coaching series – Activity 14

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 14 – I regularly measure my sales, customers, and money statistics

Lies, damn lies, and statistics, as the saying goes.

Well, properly recorded and understood statistics are useful in determining where you are with your business.

Are you recording the results of your efforts in running your business?  If not, how do you know if you are doing better, or worse, than last week, month, year?

There are many ways to measure your statistics. It can be a bit daunting, especially if you try to measure everything.  That’s when statistics become a nightmare.

Why would you need to measure your sales, customers and money?  Typically, by knowing a few facts about what you are achieving will help you understand where your business is now, and what you will need to do to get it to where you want it to be.

Some example statistics: (this is not an exhaustive list)

For Sales – how many products have you sold per given sale, or how many per given time.   The profit margins of each product, or service.

For Customers – how many customers for any given time period. How much spend per customer. The type of purchases.  How many times a customer makes a purchase.

For Money – what are your most profitable products/services. Time taken to realise a sale verses stock purchase.

The ‘How to’ bit:

Keep things simple and define what you need to measure.

Use a simple way to record the statistics you want, such as on a spreadsheet.  More complex tools are available when you have the capacity to make use of the more detailed information.

Regularly review the information to analyse the trends.  Make a change to your way of operating and see if it has a positive impact.

If you would like help defining and implementing your statistics processes, follow this link and Contact Us

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‘How To’ Coaching series – Activity 13

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 13 – I know how many sales, customers, or £££ I need to make per day/week/month to a Break Even.

At what point will your company hit Break Even?

Some significant businesses do not hit a break even for many years.  Looking at a more usual SMe, once the company is more established, around year 3 or 4, the break even point will at a point during the financial year.  A statistic of a few years ago was that average businesses usually hit Break Even at around month 7 to 8 of their financial year.

Typically, employees will be making the business a profit after around hour 5 of an 8 hour day.  So, when your staff go home early, you’re loosing their profitable time.  It’s not quite as simple as that, but certainly thought provoking.

For example, if you view Break Even on an annual basis, It’s when all your annual costs are covered and you are making profit.  What is Profit?, that’s a totally differentquestion we will look at in another blog.

When you know a statistic like your Break Even, you will understand what your targets need to be. You can then see what resources are required and the effort needed to hit target.

The Break Even statistic is useful to compare the trend of how the business is performing on a like for like time period.

The ‘How to’ bit:

Work out your income units (by Sales, Customer or £££) for a given time period (day/week/month/year) depending on how you maintain your records.  Work out the costs of running the business, including any associated sales related costs, for the month.

This will show at what point the income exceeded the outgoings.  Or how close you came to Break Even.

Collect this data so you can use the average to predict the Break Even for future months, years based on planned growth/increased costs.

If you would like help understanding how to determine how to set up your Break Even system, follow this link and Contact Us

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