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Archive for May, 2010

Help! “My business is busy but I have no money”


It is not uncommon to find businesses that are very busy, yet they find that they don’t have enough cash. If you are one of these entrepreneurs who wonder where the money has gone to there are two “usual suspects”: Insufficient margins and poor optimization of resources.

When margins are not sufficient, you can tackle the problems by making changes to your pricing, volume, and costs. Making small changes in your pricing can have a considerable impact on your overall turnover and margins.

The key for many businesses is efficiency and encouraging your customers to drive your occupancy/utilisation levels up as high as possible.

Reducing cost of sales may be quite hard as it could entail either negotiating hard with your suppliers or reducing the input at the production levels which may well have an impact on quality.

The best way to reduce the cost of sales is to look for opportunities to minimize wastage or even theft. Simple but effective stock controls can make an enormous difference. If your business is based around delivering services, instead of goods, then you should monitor time spent on each job carefully.

Overheads reduction is an area that you can tackle without necessarily affecting the output of your business. Have a look at your profit and loss account regularly to identify areas which are not as necessary as you think. Even consider using an on and off system for certain items such as marketing.

Finally, in order to truly assess your business’ inherent and potential profitability you need to make sure that you take into account the cost of all of the resources that are utilized and that includes the value of the owner’s time.

In order to have a long-term successful venture in your hands the business needs to stand on its own two feet, potentially without you.

Our advice is, don’t just go with the flow, take the time to stop and carefully consider the financial information relating to your business. If you don’t do that you may well fail to identify and correct areas which will cost you either your ability to succeed or to sell your business once you are ready for it.

If your business is profitable, you are still at risk of running into cashflow difficulties if you don’t understand some of the key principles behind the difference between profit and cash availability.

In an ideal world our profit should be available for us to spend. However, as our business is a complex maze of transactions, even if we do make profits, the chances are that this profit will be locked into all sorts of assets which may not be turned into cash for a while.

You need to understand that purchasing fixed assets is not an expense. We often come across clients that complain that they have no profit because they have invested heavily on the business that year. I am afraid that because such assets are going to be used for a number of years the tax man does not allow us to claim full relief in the year we acquire such items. Watch out those of you making considerable investment in your companies, don’t spend all your money as you may need to set some aside for tax despite your efforts.

Current assets can also be a trap for your resources. If you are unable to collect payment for all your sales, your profit is still the same but some of this profit is locked into your debtor balances on your balance sheet, thus reducing the amounts available for you to use.

Similarly, if your business is in the early stages and pilling up stocks then the chances are that your book profit is much healthier than you feel in your pocket.

Once your year has come to an end, tax will arise on a book profit which by now you are well aware may not be readily available for you, therefore it is likely that you may not have sufficient reserves available to meet your tax obligations unless you make alternative arrangements.

Don’t forget, understanding your accounts can be a key tool to help you manage not just your business operations but also your cash flow requirements.

 
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