With the first calendar year quarter done and dusted, many small businesses can run into trouble at this time of year. Turnaround specialist Steve Hogan, from Annecy Advisory, has two pieces of advice for small businesses who may be struggling, and FactorONE’s head of debtor finance, Wayne Smith, has two tips on cashflow to overcome the first-quarter lull.
Steve Hogan advises clients to focus on profit growth by understanding what makes money and what doesn’t – sometimes the answer isn’t as obvious as many business owners think!
His top two tips are:
1. Drive for show and putt for dough; that is, sales are meaningless without profits
A successful business focuses on revenue that comes with an acceptable gross contribution. You might chase some low-value product revenue for tactical or marketing reasons, but such revenue should be at the fringes and not the mainstream of the business.
Analyse sales and work out which of your product sales are at an acceptable margin, then calculate each product’s gross contribution. Sometimes, it isn’t the gross margin percentage that matters, as the volume makes up for it – think Woolies or Coles.
Select the top five product contributors, and spend more of your time with those high contribution product sales rather than those which contribute little.
Too many SMEs talk about sales revenue rather than profit contribution. Focus on sales at an acceptable gross margin, which deliver profits and cashflow to the bottom line.
Sales with low gross margin tie up working capital. Spend your time making more meaningful sales with real gross contribution, and watch your profits and cashflow improve.
2. Forewarned is forearmed – cashflow forecasting is valuable
Taking time out day to day to look at receivables, payables, inventory levels and bank statements, and comparing this over time, is a great exercise is coming to grips with working capital. This exercise will show you how working capital moves through your business from sales order to cash receipts. When I’ve done this with some clients, it has scared the daylights out of them to see that the time from order to receipt can be 120 days!
There are trade facilities available to fill in this cash hole, which is great because if you are a small business owner knowing that your cashflow could go backwards as your sales go forwards can be alarming if not understood.
Wayne Smith says even solid small businesses can stress from March to May, because for many there is a dip in sales after Christmas, but the bills and BAS commitments keep coming.
His two tips to SME owners are:
3. Take control of cashflow
Keep on top of outstanding invoices and be quick to get on the phone to ensure trade terms are understood and adhered to. Managing cash closely and having cash flow forecasts in place, will give you a much clearer idea if your business will be able to cope during lean months.
Now’s a great time to look back over the past 12 months to track seasonal trends in your business. A close look at sales can help you decide whether some product lines should be pruned and others expanded.
It’s also a good time to focus on supplier and customer relationships. Improving your cash position by negotiating extra time to pay suppliers or persuading larger customers to pay early can help you weather future business storms.
4. Take a fresh look at funding options
Even though business circumstances ebb and flow, many businesses keep the same funding arrangements year in and year out, regardless of whether they are the best fit for their business.
Invoice finance is one of the most versatile funding options for startups and SMEs, because it is a line of credit secured against outstanding sales invoices, so the funding available grows in line with turnover. It also has the added advantage of not requiring the family home to be offered as security and it makes cashflow easier to manage.
It’s no secret that cashflow – or a lack of it – is a killer for many SMEs, yet there is still a lack of awareness amongst business owners around working capital options beyond the major banks. There are some great alternatives out there in the non-bank space which are worth researching.
Improving cashflow increases the working capital available to a business, which in turn increases buying power to seize opportunities or negotiate early settlement discounts.
These enhancements can put a business on a significantly improved competitive footing, opening up further growth opportunities.
Inside Small Business