financial management

By Ben Youn

Copyright 2014 Quantum Business House

WELCOME to QUANTUM BUSINESS HOUSE

2 hours for each session 10 minutes tea time Bathroom & Kitchen Today’s Speaker Please network each other Future Plan- Business Forum- Networking Events- Business Mentoring


House Keeping Time

1. Setting up business structure (June 04) 2. Buying a business (June 11)3. Business Planning (June 18)4. Marketing (June 25)5. Raising Finance (July 02)6. Financial Management (July 09)7. Tax system and compliance issues (July 16)8. Risk management (July 23)9. Financial Health Check (July 30)10. Business Evaluation (August 06)


Start-Up Business Seminar 2014

2.Financial Management


Sales – Cost of Goods Sold = Gross Profit Gross Profit – Overhead = Net Profit Cost of Goods Sold = (Opening Inventory +

Purchase) – Closing Inventory Cash at Bank vs. Profit - Timing difference between sales and

collection and between purchase and payment


Profit Calculation

Direct Costs vs. Indirect Costs (Overhead) Direct Costs- Directly related to your production

(materials and salaries for direct labour) Indirect Costs- Rent- Payroll- Utilities etc


Costs

Fixed Costs vs. Variable Costs Fixed Costs- Those remain relatively constant regardless

of level of sales (rent, insurance etc.)

Variable Costs- Those that move relative to sales (e.g.

freight, casual labour and some marketing costs)


Costs – Cont’d

1. Pricing Right price should cover costs and profit

margin Find out loss leader Level of competition and relative pricing Discount may entice higher sales volume

but lower profitability Discount should be recorded separately.


Maintaining Profitability

Tips for improving Pricing Include comparisons of both gross and net

margins against previous periods and industry benchmarks in the review of sales.

Fully understand the impact on profits and customer behaviour before offering discounts. In addition, record all sales discounts separately to provide transparency on sales invoice.

Consider alternatives to discounting to maintain profitability.


Maintaining Profitability

Implement and regularly review a mark-up policy to ensure current selling prices match that policy.

Analyse sales regularly, with a focus on identifying those sales that provide the highest margin.

Use key financial ratios to identify potential operational issues that may impact sales. The relevant key financial ratios are cost of goods sold margin, gross margin, average stock turn, mark-up, destroyed stock as a percentage of stock held and staff productivity.


Pricing (cont’d)

Increase level of sales to existing customers (leverage)

Sourcing new customers Tips for increasing volume Understand the buying patterns of existing

customers Set marketing strategies in place that increase

sales volume Introduce marketing strategies that encourages

customers to increase their volume of purchases, such as loyalty programs, and increase the customer base through referral rewards


2. Volume

Train staff to “up-sell” products and services and ensure they are aware of what high margin products and services to offer.

Use break-even calculations to set sales targets for staff

Use visual display by placing products in groups or consider special offers such as discounting bulk buys to entice volume buying.

Undertake regular research to tap into new markets and customer base.


2. Volume

Dollar Value- Overhead expenses / 1 – (Cost of Goods

Sold/Total Sales) = Total sales value needed before a net profit will occur.

Number of Units- Overhead expenses / (Unit Selling Price –

Cost to produce) = total number of units required to be sold before a net profit will occur.


3. Break Even Calculation

Fixed Cost Management

Regularly review all fixed expenses and compare against other suppliers’ pricing to ensure that the business is paying competitive prices for goods and services.

Salaries and wages are often classified as fixed expenses, however staffing levels should be reviewed regularly to keep these expenses in line with business activity.

Compare fixed expenses to industry benchmarks regularly to ensure that the business is not experiencing “cost creep”.


4. Cost Management

Variable Costs Business owners and managers must recognise

which expenses contribute to sales. If profitability is declining, then reducing marketing expenses should be approached with caution.

Regularly review margins, mark-up and break-even. This will highlight potential problems with variable expenses.

Consider using part-time, casual or job-share staffing arrangements to provide flexible expense against changing trading conditions.


4. Cost Management

Supplier Management- Enhancing business operation by minimising sourcing issues. - Improving business reputation- Payment terms

Tips for Improving Supplier Management

Leverage good relationships with suppliers to ensure that the business is receiving quality service and products at competitive pricing.

Implement a supplier selection policy that identifies the priority the business has in place for a supplier, such as quality, timely delivery and advice on new products.


4. Cost Management

Ensure your systems have good controls so that suppliers are not:

Paid early or late Overpaid Paid twice

Continually review supplier contracts for opportunities such as:

Improved pricing Effective discounting Improved delivery

Meet regularly with suppliers to discuss trading conditions and other industry-specific issues.


Supplier Management

Goal: Meeting all the short term business obligations by having enough cash.


5. Working Capital Management

CashPurcha

se

Supplier Payment

Work in Progress

Sales

Debtors

Key aspects of managing WC.

Managing inventoryManaging suppliers (Creditors)Managing customers (Debtors)Managing work in progress


5. Working Capital Management

Review current stock levels and sales volume of stock items

Determine the current level of stock held and the value of stock.

Look at sales record to find out which items are good sellers and which are slow moving.

Work out which items of stock sold make the most gross margin (focusing more resources and energy on these sales for improved profit.


Managing Inventory

Make a list of slow moving, aged and excess stock items and develop an action plan to move this stock immediately. This will generate cash to invest in new stock that will move more quickly.

Update your stock records with the current levels and then implement a policy to track all movement of stock. This will help with reordering stock only when needed and also highlight any theft or fraud that may occur.


Managing Inventory


Supplier Selection Payment Terms Maintain Creditor Relationship

Extend payment terms. Lengthening the payment days from 30 days to 45 days

could assist in smoothing out fluctuations in cash flows.

Some larger companies may accept quarterly payment, which can help in forecasting cash flow requirements.

Payment terms should specify that payment terms

commence from complete delivery.

Managing Suppliers

Where goods are returned either:

A new invoice should be raised and this is the invitation of the payment terms.

Or disputed invoices held over until a credit note is received.

Initiate a structured payment run, usually once a month (i.e. on the last day of the month) and stick to it.


Supplier Management

Ensure that your systems have good controls so that suppliers are not:

Paid early – where financial systems are used, ensure that payment date is automated from approved supplier details and no changes to automated date is possible without authorisation.

Over paid – all received goods are checked to purchase order and totals on invoices checked.

Paid twice – pay only on statement.


Supplier management

Continually review supplier contracts for opportunities such as:

Improved pricingEffective discounting Improved delivery Removing any incremental pricing included


Supplier management

Setup Credit Control Establish Payment Terms Maintain Customer Relationship

Tips for working capital cycle

Send out invoices as soon as work is completed, not at the end of the week or month.

Provide incentives to pay early – discount but know the impact on profit margin.

Make it easy to pay – direct debit arrangements, EFTPOS or credit card.

Where commission is paid to sales staff, pay on amounts collected, rather than on total sales amount booked.


Customer Management

Run regular reports to identify when payments are due – aged debtors report.

Identify slow paying customers and make contact early to discuss any issues – faulty goods, inadequate service, inability to pay etc.

Make arrangements for non-paying customers – payment plan to clear the debt.

Monitor non-paying customers and keep in regular contact.


Customer Management

Have a policy to stop supplying customer until all debts are cleared.

Send letters of demand for long outstanding debts.

If necessary, use a professional debt collector.

Consider cancelling credit agreements if they are unreliable with payment.


Customer management

Days inventories + Days Debtors – Days Creditors


Cash Conversion Rate

Tax system and compliance issues Risk management Financial Health Check Business Evaluation


To be Continued!!

financial management

Business

quantum business house

business evaluation

business structure

business planning

marketing costs copyright

sales discounts

review of sales

sales invoice