by Elias Makris, Partner
This case study highlights how important it is for the owners of small to medium sized businesses (SMEs) to understand the true costs of running their business and the factors influencing their profit and cash flow. It also provides guidance on how to structure funding arrangements for unique business circumstances and how to use insurance as a means of protecting business income.
Background
– A wholesale and retail business was experiencing large fluctuations in its sales, profits and cash flow.
– The business supplies goods to energy and rural businesses and is required to carry large stock holdings and significant credit accounts.
– Heavy rains had caused damage to the business’ stock and premises and it was unable to supply refrigerated goods for a period of 2 months.
– The business owners, William and Laura, wanted advice on how to improve their profit, better manage their cash flow and prevent the loss of income from future unplanned events.Â
Client Issues
The business owners were unsure of break-even sales level; did not understand the benefits of ratio analysis and budgeting; did not have enough working capital; and held inadequate business insurance. Their accountant and financial advisor were able to help them achieve the following significant outcomes.
Outcomes
1. Break-even sales
William and Laura used a break-even analysis to pin point the minimum sales required to cover their business expenses.
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2. Improving profit
To better manage their stock, William and Laura completed a series of key profit ratio calculations. This included Gross Margin Return on Inventory and Gross Profit Margin. They agreed to upgrade their stock management system to improve their gross profit margin and to reduce shrinkage.
3. Improvements to cash flow, working capital and business protection
– A series of key cash flow ratio calculations helped William and Laura to improve their cash flow. This included Account Receivable and Stock Turnover and a Flow of Funds Statement. They agreed to prepare a cash flow budget every year to determine their funding requirements.
– Their financial advisor was able to negotiate an extension on their overdraft limit to meet their working capital requirements.
– The financial advisor also purchased new Business Disruption Insurance to protect their business from a loss of future income.
There are many other benefits of improving your business cash flow. To find out more, please contact your accountant at Rosenfeld Kant today: call (02) 9375 1200 or email gary@roskant.com.au, raul@roskant.com.au, elias@roskant.com.au