Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

INDEX

1. Why do Businesses Fail?

2. Drivers of Profit and Cash Flow

 

 

WHY DO BUSINESSES FAIL?

One of the number one reasons businesses fail is poor financial management. Paying strict attention to your finances and keeping, clear and accurate records of the money coming into and leaving your business is critical to your survival.

Top 5 business killers include:

1. Too much debt 

 Above all businesses need to identify a suitable level of gearing. Too much debt and you can overextend your ability to service the debt which increases the risk of default and ultimately the ability to pay your debts as they fall due. 

2. Poor cash flow management 

A cash crisis can be a death sentence for any business therefore, good cash flow management is vital. No matter how good your products or services are, or how well you meet your customers’ needs, if you don’t have enough cash coming in each month to pay your suppliers, employees and expenses, your business will surely fail, so above all you want to avoid a cash crisis.

Here are some tips on how to avoid this pitfall:

• Perform regular cash flow projections and forecasting, and budgeting is essential
• Monitor  working capital requirements
• Collect debts quickly- closely manage your debtors, take notes about contact details, be persistent with follow ups
• Make it easy for customers to pay you eg, by advising Bank Accout to pay to if not immediate pay customers
• Establish clear credit and payment terms with your clients

3. Inefficient debt collection or poor credit management

Due to the fact  that good cash flow is the lifeblood of a business  poor credit management will have a direct impact on  cash flow. Customers who have received  goods or services but have not paid as yet leads to a situation where our cash (working capital) is tied up and unavailable to the business.

4. Poor stock control 

Poor management of stock means, too much money is tied up in products (stock) that are slow to sell, such as raw materials or finished goods. Again this affects the cash flow of a business and may result in increased debt (gearing). 

5. Lack of management expertise

Even with the best accounting software and systems in place it is fundamental that business owners and senior managers are pro-active in their approach to gaining a good understanding of financial matters. A key element of running a successful business is to understand basic accounting principles, to stay informed, monitor and analyse financial results and consult a professional if you need specialist tax and accounting advice.

DRIVERS OF PROFIT AND CASHFLOW

Profit and Cashflow is the lifeblood of a business and significant factors in the success of any business. The following are significant factors related to these:

Revenue Growth Percentage

Allowance for the fact that invariably you have to pay for the stock/ Labour to produce the sale, before you make the sale.  You have to be in a position to fund the sale in these circumstances.

Price Change Percentage

This is a consequence of any price adjustments, be they increase , decrease or discount. Margins should be monitored to see when it is time to increase prices. Many business think they can't increase prices because they lose customers, but most people understand that prices go up- wages and fuel go up constantly.  When your suppliers prices go up use this opportunity to increase yours.  If you dont increase prices regularly, gross profit will reduce and your overall profit and cashflow will be significantly affected

Cost of Goods Percentage

This relates to the comparison of your sales price and the direct costs of the stock/ materials purchased to achieve those sales. The setting of the value of your sales prices by yourself,  your reaction to increased, decreased  prices charges by your Suppliers can increase or decrease the Cost of Goods Percentage, which is an impostant factor in Profit or Cashflow.  In your Financial Statements, the Sales less the Cost of Sales is your Gross Profit.  If your Gross Profit is less than your Overheads, as discussed later, you will make a Loss.  Therefore it is important to achieve a Cost of Goods Percentage which is to your financial favour.

Overheads Percentage

Overheads occur all the time e,g, wages, rent, power, telephone.  Your overheads will continue even if you are not achieving sales at the time.  It is therefore important to contol Overheads.. A good way to do this is to prepare a budget for the year, and regularly compare this budget against actual.  You should also be flexible and change your budgets if your business circumstances markedly change during the year.

Accounts Receivable Days

This is the number on days, on average, that customers are taking to pay. Regular follow up is one way of decreasing Accounts Receivable days.  It should be remembered that your customers supply all the cash to run your business

Accounts Payable Days

This is the number on days, on average, taken to pay suppliers. It is common to see this number at less than the Accounts Receivable days number.  Such actions can result in a cash squeeze. so Accounts Receivable days are important to avoid this.

Inventory and Work in Progress Days

Inventory days is the number of days, on average, stock sits in store waiting to be sold. Work in Progress days is the number of days jobs are in progress prior to invoicing.  You need to have stock ready to sell when customers are ready to buy, but not too long , as this will suck up working capital. With reference to Work in Progress (which would involve you paying out wages, buying stock etc. accordingly for same) , the longer it takes to complete jobs and invoice, the more working capital is needed , Speeding up job management and reducing Work in Progress days will have a positive impact on cash. Interim/ Progress charges may be appropriate and necessary, so that your business cash flow is not affected, if there is a reasonable lengthy period before completion of a job.