FINANCIAL PLUMBING IDENTIFYING AND ADDRESSING THE FLOW OF FINANCE IN YOUR

BUSINESS

With thanks to The Open University, Profit Mastery and Tutor Doctor

All my life I have had a passion for cash

Goals of the session

Improve your financial literacy Understand some of the causes

and effects of doing business on your finances

Look at break evens To provide for you an approach to

financial problem solving

Profit is simply not the same as cash- Why?

Because you can’t pay your bills with profit you need some of these

Staying in business is about NOT ONLY knowing how to be profitable – It is about

how to be liquid

Let’s do a quick quiz – I know you love them!

Quiz

Q1 - Which of the following best describes the purpose of finance?A. Funds for businessB. Customers for a businessC. Profits for a businessAnswer

A – Finance relates to the inward and outward movement of funds

Q2 – Identify the most likely source of finance for a small businessA. A debentureB. An overdraftC. A mortgage

Answer B – most likely an overdraft – another could be a longer term loan or factoring

Quiz

Answer B – Short term assets provide vital daily liquidity to your business – Personal savings but not in isolation!

QuizQ3 – What is a good definition of short-term assets a.k.a. ‘current asset?A. Security that can be used for a loanB. All things the business owns and

which can be converted into cash within 12 months

C. Your personal savings

Q4. – Which one these is NOT a current liability?A. A bill from HMRC relating to payrollB. An outstanding invoice for stock that

is sitting on your shelfC. A balloon payment due on a car

lease that expire in 15 months

Quiz

Answer C – All the rest are items you must pay for (money out) within the next 12 months

Q5. What best describes your relationship to ‘working capital’?A. A goal to get a job in LondonB. The amount of ‘brownie points’ you

have to pay your partner to compensate for never being there

C. The difference between your current assets and current liabilities

Quiz – Last one!

Answer C – of course

Why is working capital important?The accountant says -

“Because it is a financial metric that indicates the level at which the current assets of a business exceed

its liabilities and can be applied to its operation”.

And the business owner says –If you haven’t got working capital it is likely that you

haven’t got work

Source: Boundless. “Importance of Working Capital.” Boundless Finance. Boundless, 02 Jul. 2014. Retrieved 09 Feb. 2015 from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-working-capital-17/working-

capital-122/importance-of-working-capital-502-1473/

Cause & Effects Low profits and low levels of cash are all

outputs of doing business. They are caused by something else

SEE THE CAUSE AND YOU HAVE CONTROL

Your business is “only ever complete when it is working for you, rather than

you working for it” (Scott Allen)

What do we use profit for?

1. To convert into income for the owners of the business – drawings / dividends

2. To meet existing liabilities3. To invest in new assets

If your business has low net profits it is likely caused by:

£

• Low retained earnings

• High borrowing costs

• High current liabilities

• Low margins – not knowing your price in relation to your costs

You should look at the following :

Pricing – are you too cheap? Have you looked at your Break Even level? Is it attainable?

Gross Margins – are you selling enough of the higher margin business? Do you know the difference between margin and mark-up?

Inventory – what are you spending the money on? How long is it sitting on your shelf? Are you being SMART about your supply chain?

Borrowing - how much and at what price?

If you business has low, volatile cash balances it will likely have:

£

• Seasonality - not fully understood

• Poor inventory controls• Check for book

keeping errors• Carrying too much

stock• Offering too favourable

terms of business

You should look at the following:

Cash-flow matching - How do your sales perform over each month? How do your costs come in? Are they misaligned?

Inventory / stock control – Do you know how to track your stock? When are your assets being used? Can you use QR Codes and Smart phone to help?

Numbers and forecasts - Check your numbers, right signs +/-; right checks and balances? Are you aware of those big outgoings and can you ‘save to pay’?

Terms of trade – too generous to customers – to compliant to suppliers? A few days of narrowing can make a big difference

Break-Evens – what we mean WHY THEY ARE IMPORTANT

This is the point at which your business covers its costs but makes zero net profit

Why is it important – well if the UNITS of sales are low for break even to be achieved then profitability should be quick to reach; it must be the case that the opposite is then true

You need to know how to do B/E analysis is if you want togrow

Example of Break-Even calculationTotal Annual Fixed costs = £250,000

Average Unit Selling Price = £375

Average Variable Cost per unit = £265

Question – How many units must be sold to break even?

Answer – Sale of one unit £375

Less variable costs -£265

Contribution margin per sale = £110

Fixed Costs = £250,000 / £110 ≈ 2,273 units

Q. Is that a realistic assumption?

Steps to take in any financial analysis

Make sure you have all the relevant information If you don’t know how to use a spreadsheet

learn because it’s the best tool for analysis Look at some key financial ratios – invest in a

book or seek advice from a Colbea Business Adviser

If you work for a franchise or an established industry look for what people consider to be industry standard – and measure yourself against them

Look for causes and effects for areas of concern TAKE ACTION – change to resolve but always

continue to measure

In conclusion

If numbers frighten you then don’t approach them alone, don’t attempt everything in one go – bit by bit is best

Think about your business from the ‘helicopter perspective’

Everything in your business is interdependent and connected

PLAN / TARGET AND MEASURE

Finally – name the three things we use profit for

1. For redistribution to owners in the from of drawing or dividends

2. To service liabilities3. To buy more assets

Being in Control is liberating

Here to help