Why your Cash Flow and Financial Reports are a Big Deal
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Why your Cash Flow and Financial Reports are a Big Deal

Why your Cash Flow and Financial Reports are a Big Deal

As a business owner, you know that cash flow is important. It’s the lifeblood of your business, and you need to keep a close eye on it. That’s why Murray was recently interviewed on a podcast to help business owners get a better understanding of why your cash flow reports are a big deal.

In the interview, Murray stresses the importance of tracking your cash flow and explains how to interpret your reports. He also offers some tips on how to improve your cash flow and avoid common pitfalls.

Whether you’re a new business owner or an experienced entrepreneur, this interview is a must read. Murray’s interview is packed with valuable insights that will help you better understand your cash flow and take steps to improve it. If you’re serious about growing your business, don’t wait – read the transcript today.

How important is it to know your numbers in business? Things like turnover, gross and net profit, and customer lifetime value?

Very important. But before anything else, you need to know what are you measuring against. If you don’t have a budget, then you will not be able to measure how successful you’ve become. So, before financial reports, comes having a budget first.

Measuring yourself against that budget comes in the form of financial reports. Is your turnover adding incremental profit to your business? Are you making a sale at less than gross margin or breakeven point? Have you got a distinctive policy on getting rid of stock and therefore can afford to sell down? These are questions that can easily be answered by your numbers and would define the overall value of your business.

Another key number to look at is gross margin. Gross margin is the difference between your revenue and your costs of goods sold. Gross margin shows you how profitable your product or service actually is. This is important to know, because if you don’t have a high gross margin, it can mean that you’re not making money on every sale. You might need to raise prices or find ways to cut down.

A 2%-3% price increase every three of four months, especially in this current environment with COVID will be absorbed by your client. And at the end of the day, you don’t know if you’re at the top of your price ladder until you put your price up. If you priced up too high, then you will have some resistance, right?

It’s time to get real about your prices?

Getting your pricing right is essential for any business. But it can be hard to know where to start. That’s where Murray comes in. He’s an expert at helping businesses find the sweet spot between what they need to make and what their customers are willing to pay.

Sign up for a discovery call with Murray today, and you’ll be on your way to setting prices that work for both you and your customers.

In your view, as a former business manager, director, and now a business advisor, what are the most common mistakes that small business owners make with their numbers?

  • Two out of three, business owners would use their business bank account for their daily and personal expenses. What you have got to remember is, what I see is what the IRD can see. I don’t need to see you go shopping on a daily basis. Right, you should be setting yourself up a automatic payment and transfer money across to your own personal bank account. And then we don’t need to see it. I don’t need to see every time you go to Countdown, or you go to a liquor store or other activities. That’s your life outside of business. That is the number one mistake that people make.
  • The next one is a minor one, but it just happens way too often. Claiming GST on international transactions. It’s quite easy, if I’m using XERO, to actually go through and identify these transactions and change it there, but if you wait for too long before you do that, the cycle would have passed, and you could be in for a huge and inaccurate GST adjustment. Well, how did that come about? So, please, if you’re doing international transactions, make sure that it’s not coded with GST on them.
  • Look at your turnover. You’ve got an increase in turnover which hopefully means an increase in cash flow into the bank. But what happens, too often is, there is an increase in drawings as well, and if you have a downturn in your business cycle, then your drawings have exceeded the profit of the business and therefore you could potentially become into what they call an overdrawn current account. And with an overdrawn current account, you get charged interest by your accountant. It’s an internal entry, and it can be anywhere between $2 and $20,000 a year, depending on how overdrawn you are.
  • Business owners, who want to borrow money to purchase a new fixed asset, may look at an external borrower, and they say, ‘oh, that’s 3% above or 4% or 5% above the interest rate at that bank, what I could do instead is raise more money against my mortgage.’ The issue there is that’s a charge against your family’s dwelling, and therefore that’s exposed. Whereas if you pay the price of the additional increase in interest (with the external borrow), the risk actually carries with the fixed asset that you borrow against. So, if the business collapses, then it’s only a risk against that asset, primarily unless you have offered personal guarantees. My recommendation is always finance fixed assets against the asset itself, pay the increase in interest, and not risk your family home.
  • Another one is not knowing your breakeven point. How often do you sit down and assess your 10 fast moving items, working out what is the actual cost to make that sale? Too often, people don’t look at it, and they say, ‘Oh, we’re making 25% or 35% margin’. Everything’s all hunky dory. But what you don’t know in the background is if you don’t determine on a product-by-product basis what your individual margins are, then there could be a problem developing.
  • One that I have already mentioned, but let me mention again, is not increasing your price on a regular basis. Until you put your price up and you get some resistance, then you don’t know. So, you should be regularly reviewing your pricing.

Are you making any of these mistakes?

You’re not alone. A lot of businesses make these same mistakes, but it’s easy to avoid them.

Read on to find out how to avoid them, or skip ahead and schedule a call with Murray personally about how to fix them.

How can these mistakes be avoided?

Reach out to a business advisor. As a business owner, you see your same numbers day in and day out, and you don’t see what’s wrong in your business. Someone like myself as a business advisor, we come in, we’ll look at trends in your business and say, what’s happening here? What’s happening there? Please explain. You, as the business owner, will then go and do your homework and come back with a decent answer. And we won’t necessarily accept your answer and may have to make you go and explore further.

It’s all about understanding what your problems are. If one of the issues was that you have a high staff churn, we really want to know why, and will expect you to conduct or have external people conduct an exit employment interview. The employee isn’t going to tell you, the boss, what’s wrong with the business because they’re probably annoyed with you anyway. But an external adviser will ask any number of questions and it could come down to you’re too dictatorial, or you’ve got bad rapport with your staff, or the production process have a safety issue but you continually ignore it. Why? Because you don’t want to spend the money. And now that you know what the problems are, you’ll spend the money and that’s excellent, and you’re okay with it but by then it might be too late?

Something that I say to my clients and people I’m looking to have as clients is if I’m doing your tax and compliance, I’m an overhead because by the by the time I’m reporting your numbers, history, this and that has already happened. If I’m sitting in your business, working for you in developing forward forecasts for giving advice on how to grow your business and how to protect that financial investment well this is where the space business advisors come from.

I have clients who won’t make a decision, whether it’s HR or finance, or acquisition without my involvement. It’s all about what I call offering a sounding board solution. You (as the business owner) may ask, what do you think of this? What are the risks here? (As a business advisor/sounding board solution) I’m offering a different set of criteria to what my clients currently think, and they typically say, oh, I hadn’t thought of that. So, you know, we’re looking at the numbers and having had 30 odd years in commerce, I can understand and project all types of risks that are potentially there. Business owners, they won’t think about these risks, typically, they are too deeply involved in the production, they’re working in the business not on the business. And by being a sounding board for them. It’s quite a partnership.

In your view, what key financial knowledge does someone need when trying to grow a small business?

  1. Engage a business advisor – or virtual CFO. This doesn’t have to be a full-time position, but someone who can prepare your Cash Flow and Financial Reports on a regular basis.
  2. Get a business plan in place – understand where you are going, and use this to measure your progress
  3. A three-way cash flow forecast– which is a combination of cash flow, profit and loss, and balance sheet forecasts all integrated into one spreadsheet
  4. Gross margin – this is a measure of how much money you’re making from each product that you sell. It tells you whether your business is viable or not
  5. Stock turn – if you can get stock in 5 days total, why would you keep 6 months’ worth of stock?
  6. Interest – in relation to your debt borrowing and in relation to your net profit
  7. Current ratio – measures a company’s ability to pay short-term obligations or those due within one year
  8. Liquidity ratio – measure a company’s ability to pay debt obligations and its margin of safety
  9. Non-financial numbers such as customer retention rate
  10. Have a good cash or payment collection process

Are you numbers giving you a headache?

We know that keeping track of your finances can be daunting, but it doesn’t have to be. Insight CA is here to help make sense of your numbers and give you the insights you need to make informed decisions for your business.

Schedule a free consultation today and let us show you how easy it can be to take control of your business’s future.

cash flow management

If you want to learn what are the other financial ratios to look out for, click here.

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