How healthy is your working capital?

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you will need to:

Proactively manage your cashflow

Cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.

Monitor and forecast your financial position

Running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.

Use additional finance when required

If working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

We can help. Talk to us about optimising your working capital.

How to use forecasts and scenario-planning

For centuries, accounting was all about reviewing historic information – but that only told you about the past, not what was going to happen in the future.

If you’re only looking back at past periods and historic numbers, that limits the insights you can achieve into your business. With a backward-looking ideology, it becomes difficult to plan, run through different scenarios or understand the path of the business.

Forecasting changes this. With the right data analysis and forecasting tools, you can project sales, cash, revenue and profits into the future – and get in control of your business.

A forward-looking view of your business journey

Forecasting switches the focus of your financial management. By moving to a forward-looking view of your business journey, you can see further down the road – and that helps to spot the opportunities and avoid the common business pitfalls.

Forecasting adds value by:

Highlighting the data patterns

A forecasting tool takes your historic data and projects it forward in time. This helps you and your advisers to spot the patterns, trends, gaps and opportunities, revealing the true ‘story’ behind your business accounts. For example, forecasting may reveal a predicted seasonal slump in the next quarter, allowing you to plan ahead and proactively take action to minimise any negative impact.

Giving you a future view of your business

Instinctively, business owners will look back at prior periods to assess performance. There’s value to reviewing your historic actuals, of course, but using forecasting helps you to look forward, rather than just backwards. Forecasting is the satnav, showing you the road ahead, rather than the rear-view mirror showing you the road you’ve already travelled.

Helping you scenario-plan

With a financial model of your key drivers, combined with accurate forecasting, you can quick answer your burning ‘What if…?’ questions. Forecasting lets you run different scenarios, with different drivers, to see how business decisions may pan out over time. If option B performs better than option A, that’s invaluable information when defining your next strategic move.

Making informed, evidence-based decisions

Having ‘the full picture’ of combined historic numbers, forecasts and longer-term projections aides your business decision-making. Forecasting gives you solid evidence on which to base your strategy, and helps to red flag any threats that are looming on the horizon – giving you the best possible information to keep your executive team informed and on the ball.

A deeper relationship with your accountant

Forecasting also helps us to get a far more granular view of your business. This helps to spot potential areas of performance improvement, and to give you the best possible strategic advice, all backed up by solid, empirical data and management information.

If you want to get in control of the destiny of your company, come and talk to us. Forecasting helps you highlight your future threats and opportunities – and create a proactive strategy to improve the performance of your business.

Talk to us about the benefits of forecasting.

Dealing with uncertainty – tips for business owners

Whether you’re in full lockdown, restricted trading conditions or back to ‘business as usual’, there’s still real uncertainty for business owners. We’re trading in challenging times at present. And knowing what step to take next is a key worry. We know that you invest more than simply time and money into your business. It is more than a job but part of your identity.

So, how do you get more clarity around your future plans? And how do you work on the short-term future of the business, when sales, income and cash are in short supply?

Focusing your efforts in the right places

Planning the next business move is difficult at the best of times, but it’s doubly problematic when we have so little clear idea of what a post-COVID19 business world will look like.

It's difficult to plan when we don't know what will be possible. What regulations will be in place once you can begin trading? Will the market have changed dramatically? Will you be able to trade over borders and continue to be an international operation? Will you have enough cash to actually operate?

As a business owner, you’ll be continually thinking of new business-critical issues to add to this list – but the reality is that you CAN’T control all these elements. This sense of mounting uncertainty is likely to raise your stress levels and make you more anxious.

So, how do you overcome these worries and find a practical solution?

Try to focus on the things you can control:

• Identify the things that matter to the short and long-term success of the business
• Find the things you can control and over which you have some influence.

It's too overwhelming to try and work on everything at the same time. Instead, try to focus on the one thing you can achieve each day.

Review your overheads and costs

One way to reduce your cashflow worries is to reduce your spending. Look at your controllable overheads and see if there are ways to negotiate better terms with suppliers, cut down on expenses or pause any subscriptions.

Talk to debtors and creditors

If you can bring down your aged debt, that will help your overall financial health. Talk to any late-paying customers and agree when these debts will be paid. And talk to suppliers about extending payment terms, if possible.

Consider alternative revenue streams 

If your current business model doesn’t work well in lockdown, are there other online services that you could diversify into? Any new revenue streams will help to bolster your income and cash position.

Update your website and marketing

Having a great online presence is vital during this crisis, when most goods and services will be purchased online. Give your website a refresh and make it easy for potential customers to find and buy your services.

Catch up with your team

Maintaining contact with your employees is vital if you’re going to nurture team spirit. The more engaged your team is, the easier it will be to embrace change together.

If you’re uncertain about the impact of COVID-19 on your business, please do come and talk to us. We’ll help you get in control of your finances, prioritise the right elements of your business and find a strategy that prepares you for trading in the post-coronavirus market.

Talk to us about other strategies for dealing with uncertainty.

Cashflow and cost control

More than ever, cashflow is a vital part of staying afloat, whether your business is in recovery or growth mode.

Revenue, profit and your bottom line will all resume their importance when we’re back to “normal” (however that’s going to look), but keeping everything running is the priority for now.

Regular cashflow forecasts will help you keep that in focus. Here’s why:

Cost control  

If you can't reach your targets for income, reining in your costs may give you a little extra head room to manage cashflow while you plan your next move.

Visibility on outgoings 

Cost control can be a challenge when it’s hard to pinpoint hidden costs or where established ways of doing things cost more money than they should. You may also have been coping with unexpected expenses, as you’ve adapted your business for unplanned circumstances.

Improving business practice

It's more than just keeping an eye on outgoings (though that's important). It's about looking at each aspect of your business and business systems (or the gaps where there should be business systems) to see if poor practice is driving costs up unnecessarily.

It can be useful to break it down  

You can look at cost centres such as office supplies or freight. Or you can look at what those costs do for your business.

It can help to analyse costs in terms of cost of sale and overheads.

Cost of sale and overheads​​​​

Cost of sale (also known as Cost of Goods Sold or CoGS) is how much it costs you to make a sale. In a business which sells products, CoGS is based on the price paid for the product, plus any costs necessary to put the merchandise into inventory and make it ready for sale, including shipping and handling. You can even break it down to calculate the cost of sale of individual units.

Overheads are general business expenses. They can’t be tracked directly to sales. Overheads are what it costs you to open your doors (whether online or actual) every morning.

What’s your plan?

• Reduce unnecessary expenses - Now might be the time to trim every expense that’s not related to your core product or service.
• Suppliers - Are you able to work with your providers to ask for discounts or more favourable payment terms on either cost of sale or overhead expenses?
• Talk to the team - Analyse your costs and involve your team, including frontline sales staff.
• Advertising - It might be a false economy to cut back on advertising, as customers are online looking for bargains and price-checking alternatives. Targeted campaigns might work better.
• Prioritise - Can you pinpoint the products most likely to bring the fastest or best return and hold back on products that are a slower sell?
• Promote or discount - If you have old or slow-moving stock, can you discount it and convert old stock to cash? If you can attract customers now, you may be able to use it to spotlight your other products.

Every dollar you can pull back from your costs can go straight into cashflow.

Want to get a handle on cash flow in your business?

Whether your sales are boom or bust, you want to make sure that your costs aren't holding you back. We can help.

Talk to us if you'd like to review your costs and your systems to keep costs under control. .

Reduce your debtor days and improve cashflow

Managing the gap between the receiving money into your business and paying money out of your business is vital for sustaining viability.

Debtor days is the average number of days taken for a business to receive payment for goods or services. Keeping track of the average number of days for a business to receive payment is important in understanding the cashflow gap you might experience and the impact on cashflow planning and budgets.

How to calculate debtor days

(Year-end receivables amount ÷ annual sales) x 365 days = average debtor days.

Here's an example: An IT consultant has in her terms and conditions that payment is due 21 days after invoice date. But she is interested to know what the actual average payment time is.

Trade debtors at 30 June 2019 = $35,000

Annual sales for 2019 = $478,000

(35,000 ÷ 478,000) x 365 = 26.7 days

With this information, she can either alter her cashflow planning according to the actual time-frame or take steps to reduce the average number of debtor days.

Here are ten things you can do to reduce the payment times?

1. Update your payment terms

Make sure the terms are clear on every invoice issued. Don’t forget to include bank details on the invoice!

2. Regular admin

Schedule a regular time for your own administration and get your invoices out promptly.

3. Send to the right person

When you send invoices, make sure you address the email personally to your contact. Send the invoice to multiple addresses if possible, for example, your contact and the accounts department.

4. Use technology to your advantage

Use automated invoice reminders to notify customers when an invoice is about to be due and then when it is overdue. Do not wait to send notifications manually, let the software do it as soon as the invoice is a day overdue.

5. Make it easy for your customers

List the payment terms, for example, due in 14 days, as well as the actual due date.

6. Provide incentives for early payment 

For example, a 5% discount if paid within five days.

7. Offer several payment methods for clients

Make it easy to pay by adding an online option such as credit card or PayPal.

8. Offer instalment payment plans over a mutually agreed period. 

This allows you to plan for part payments, rather than being inconvenienced by the whole invoice being paid late.

9. Do not offer unlimited credit to customers

Make sure your terms and conditions include the right to refuse further supply if invoices are outstanding. Request part or full payment before supplying more goods or services.

10. Talk to your suppliers

Maintain good relationships and clear communications so they are more likely to help you if you need an extension on your bills. If possible, renegotiate supplier terms that suit your business cashflow.

During tough times it can be difficult to get paid on time. Use low activity phases in your business to update your terms and conditions, implement alternative payment options, think about ways of making it easy for customers to pay you and clarify information on your website.

Talk to us about adding payment options, updating your software and improving business systems to assist in reducing the number of debtor days to improve your cashflow.

We can also look at average debtor days of your business compared to industry averages and discuss ways of managing cashflow during difficult periods.

6 secrets to getting prompt payment

If you’re struggling with late payments, and about half of small businesses are, here are some simple tips to try.

Invoice without delay

Your customer can't pay until you've invoiced them, so make sure you send you bill promptly. Customers are also more open to paying when they've just recieved the goods or services that you delivered. Cash in the goodwill, there's no reason to delay.

Include all the information

Make sure you invoice has all the right information, including a description of the work or product, the date it was ddelivered, and any customer requirements such as a purchase order number. Some customers have very specific requirements so ask what they need to see on the invoice. Make the due date clear too.

Ask for prompt payment

Customers used to get weeks to pay invoices, but that's changing. More than a third of businesses now request payment within a week. Consider doing the same. Starting off at seven days will help set an expectation of prompt payment. 

Be easy to pay

Customers will pay faster if they can use their prefferemd method to hand over the money. Consider whether you can offer them a variety of options, like a credit card or PayPal.

Chase payments

Your job's not done when the invoice goes out the door. You'll need to follow up with the customer to make sure it's being processed. If the invoice goes past due, it's time to make a phone call.

Talk to us about your invoicing system, we can help you get paid faster.

4 Tips to help your debtor management

It’s not easy to request payment right now, but it is important to keep cash flowing into your business so you can cover expenses and meet your obligations to others.

As with all business dealings right now, a little empathy and a lot of open communication can go a long way.

The following tips might be useful to keep in mind when you are asking for payment.

Communication

Connecting with your customers is important. Try to make it personal to their situation rather than a one-size-fits-all email.

Connecting on a more personal level shows you value them and are conscious of the impacts that the current situation may be having on them. The empathy you show now will also be remembered when business returns to normal.

And, be proactive . Early communication will help you stay on top of cash flow and will also alert you, if you need to account for late payments.

Add value

Use your expertise to give something back. Surprise and delight your customers by offering something over and above your usual services.

It could be as simple letting customers know you want to help and being open to requests, offering a one-off discount or an offer just to chat one to one.

Offer flexible payment options

For customers who can’t pay in full, consider breaking invoices into multiple payments with payment terms moved to a longer timeframe.

Set up a credit card facility to give customers other options for payment. After all, the easier you can make it for them to pay you, the quicker you will get paid.

If you don’t have payment services set up in your Xero account, we can help you do this.

Offering a discount for early payment might provide the incentive for customers who can settle, to pay your invoice before others.

Set up debtor management apps

Debtor management apps allow you to automatically send payment reminders, provide cashflow forecasting, automate and tailor debtor communications, and more.

Dedicated debtor management tools help you to collect your debtors faster.

Keeping cash flow going is vital for your business so the earlier you can communicate with customers the better.

Talk to us about ways to improve your debtor management.

Inventory management best practices for retailers

Inventory management is incredibly important in retail and yet studies reveal that 43% of small businesses either don’t track inventory at all, or do it manually. Proper inventory management can be the difference between a lost sale and a lifelong customer.

Here are some quick tips on how you can stay on top of stock control:

Understand the relationship between sales and inventory

Look at inventory and sales data together so you can see the relationship between the two.

For example, if you pull your sales results and see that dresses are 20% of your sales, and jumpsuits have only generated 4%, the instant reaction is to buy more dresses.

However, if you simultaneously look at your inventory results, you may see that while dresses generated 20% of sales, they represented 40% of your inventory, while jumpsuits generated 4% of sales but on 1% of your inventory.

By considering the relationship of sales to inventory, you might discover you are over-inventoried in one item, and missing opportunities to sell another.

Manage residual inventory to control costs and preserve profit

Residual inventory is what remains at the end of one selling season and is carried into the next season. A few examples include wool apparel that is on sale in the spring season or outdoor furniture sets that are marked down after the summer season.

An effective way to manage this is to create season codes with style numbers when you enter items into your inventory management system. This can make analysing sales and inventory by season a significantly easier task.

Equip your business with the right inventory management tools

From choosing the right inventory management software to finding a POS solution that fits your business, it’s essential to implement tools.

The right ones will integrate together to streamline and automate processes, making inventory management more accurate and efficient.

In a competitive market, knowledge is key to business success.

We can help you understand and integrate inventory management apps into your retail business. Get in touch to discuss how.

How to create a cash flow forecast for your business

A cash flow forecast is an important tool for business planning. And right now, understanding the cash coming in and going out of your business is vital.

A cash flow forecast will show you how long your business can continue to survive on current sales levels, by showing you how much money you’ll have in the bank at the end of a period.

It will give you an understanding of what the revenue drivers are in your business, and give you visibility of your expenses and the things you can control. Having this information in a forecast will also allow you to plan for different scenarios, work out your priorities and understand the outcomes of different options such as diversification.

A cash flow plan can give you a proactive tool to deal with uncertainty. If you are seeking funding in the form of a loan, applying for business support or just establishing your long term survival, you'll need a cash flow plan.

What information do you need?

We can help you to create a plan for your business. The plan is only as good as the data you have. So here’s what you’ll need to get started:

Understanding where your cash is coming from

Start with revenue from sales - break your sales figures up by product line and across channels. This will show you where the cash is coming from. For example:

• Does 80% of your revenue come from only 20% of your products?
• Do you sell to different markets and does one deliver more revenue than others?
• Are some of your products high value but low volume or low value at high volume?

The data you collect will enable you to ask questions, such as can you reduce margin to lift sales, can you push volume up or are there other channels to sell through?

Make sure you include all other revenue streams, such as grants, tax refunds or investment in your cash inflows.

Understanding expenses - where is the cash going to?

This will include all the costs associated with your business, including rent, wages, supply materials, bank loan fees and charges, tax bills, and electricity.

If you have a bank loan, include the details such as the length of the term and the monthly payments.

Your cash flow plan should also include tax payments when they are due and any capital expenditures.

Some of your variable expenses will directly relate to revenue such as freight or materials. When your sales stop, these will drop too, so your cash flow plan should reflect this relationship in order for you to scenario plan.

Controlling expenses - what costs are fixed and what are the variable costs that you can control? You may not be able to stop fixed expenses like rent, power and internet, but you could reduce the cash going out on petrol and travel, cleaning, and even directors' drawings.

Making informed decisions in your business

A good cash flow forecast will collate all the data from your business in one place. It will allow you to plan and work out how long your business can weather a storm. It will also help you make decisions around staffing, purchasing inventory, ordering supply materials or investing in growth.

It’s worth remembering that a cash flow plan is a different tool to a budget. Here’s one example: a budget will show sales but a cash flow plan will show the cash benefit of those sales. If you offer credit to customers, your sales may not result in immediate cash flow.

Want to get a handle on cash flow in your business?

If you’re not certain of how to get this information from your accounting software, talk to us about which reports to run. You may need a combination of accounting software reports and projected figures.

Use the information above to source the data you’ll need and get in touch. We can help you build a plan that gives you cash flow projections to assist your decision making.