3 Numbers Every Business Owner Should Know

3 Numbers Every Business Owner Should Know

If you are serious about developing and growing your business, then there are certain measurements that you should have in place so you know where your business is heading.

If you can’t measure it, you can’t manage it!

Break Even Point

This is the minimum level of sales that you need to make, to cover all your business costs and start to get into a profitable situation. Assuming you know your fixed costs (e.g. salaries, rents, rates – often referred to as overheads) and variable costs (these relate to the cost of production and vary with quantity e.g. raw materials) within the business, the simplest way to work this is as follows:

Work out your gross profit (GP) = Total sales – Variable Costs
Calculate your GP percentage = Gross Profit ÷ Sales
Break Even Point = Fixed Costs ÷ GP Percentage

For example, if your sales turnover is £500k, your fixed costs are £100k and your variable costs are £200k – your break even point will be £167k; meaning that once you have achieved £167k of sales revenue, you are in a profitable situation – below this number you are making a loss.

(Use the free break even point calculator to calculate your break even point)

Cashflow

Cash is the biggest killer of businesses – large and small. Knowing what money is coming in and when and what money is going out and when is vital. Unfortunately most accountants only provide historic information on your finances; often at least a few weeks if not months after the end of your accounting period. This doesn’t allow you to do much about a cashflow situation.

You should be able to forecast what cash is coming in through the orders that you currently have and hopefully can forecast. Be realistic about when the invoices will be paid and look at the worse case scenario rather than the best so you are not left with any shortfalls or surprises if money doesn’t come in on time. Likewise you can look at your outgoings, your fixed and variable costs for the business. Particularly take note of tax bills such as VAT or NI contributions as these are often a big chunk out of any business’s cashflow when these fall due.

(Forecast your cashflow using a free cashflow template)

Conversion Rate

In order to survive in business, you need new customers doing business with you. Only you know how many customers you want over the next 12 months – for some it will be 1000s, for others maybe only 10s. Either way, you need to be aware of your sales pipeline or funnel. This allows you to track a potential customer from the prospect stage right through to the point at which an order is placed or a buying transaction occurs.

Now whilst there may be a number of stages in the sales process for your business, for simplicity lets just look at prospect through to initial engagement, followed by proposal and finally order placement.

Working this backwards, the first important measure to know is your conversion rate. Of the potential clients that you get to make an offer to or engage with in a sales conversation, how many of those lead to business? For the sake of argument lets say you close 1 in 5.

Now, of the prospects that you initially engage, how many of those carry on to the next stage and are willing to accept a sales proposal. So, for example, if you are conducting a telemarketing campaign to your target market, where the aim is to get an appointment – what is your success rate here? Again, for this exercise, let’s say 1 in 10.

Finally, looking at the initial stage of the process – how do you identify your prospects in the fist place and is there a process of qualification before you start the telemarketing or next step of engagement? Maybe for your business only 1 in 10 actually get past these initial hurdles before becoming a qualified lead that you feel worthy of following up.

So what this now means is….if you want 10 new customers in the next 12 months and we use the above numbers by way of an example…you need to propose to 50 prospects, telemarket to 500 in the first place and have an initial prospect list of 5000.

Now whilst there will be variations for your particular sector, the principle is the same for any business and knowing these numbers for your business will help you much more effective in your marketing; as well as looking to improve your success rate at each of these stages.

10 Steps To Success in 2012 – Step 8: Cashflow

10 Steps To Success in 2012 - Step 8: Cashflow

Cash is the biggest killer of businesses – large and small. Lack of cash within a business (or extensive borrowing and the inability to repay it) cuts off the lifeblood within an organisation and ultimately will lead to its failure. Knowing what cash is coming in and out of your business and when is essential. Invoice regularly – there is no need to wait for the end of the month and chase invoices before they are due. 

Doing this ensures there are no issues that would prevent payment, that you are on the payment run and to keep your bill in the mind of the debtor – sometimes it’s who shouts the loudest gets paid the soonest. 

Manage relationships with creditors and negotiate better payment terms that benefit your business. Have a cashflow projection that looks forwards not backwards, so you can manage bills that will become due in the future; like VAT for example. 

(Download a free cashflow template)

Download the full guide: 10 Steps To Success in 2012

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The UK needs alternative solutions for SME funding

The previous few years have been a rocky road for the UK’s banks. UK SMEs have felt the effects of the stumbles in the banking industry more than most, with bank lending to the SME sector becoming especially restrained in an economic environment that has heightened the need for working capital to support day to day business operations.

However, although generally failing to meet the credit needs of SMEs the big 4 UK banks (Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC still manage to retain nearly 80% of all SME accounts.

Read full article.

For some innovative funding solutions, take a look at the following:

£500k interest free loan

Funding from 0.9-2%

Lessons from a recession veteran: Cash is king and don’t you forget it!

It is possible, even desirable, to start up in tough times, but your chances of success increase if you are prepared to listen to those who’ve been there before and survived. For John Sollars, founder of Stinkyink.com, this is his second recession and he’s on his third business; the first two failed but the third is thriving. In a series of articles John highlights the lessons he has learnt. The first covers management of cash flow which is critical to keeping tabs on the health of a business.

Cashflow problems a persistent headache for UK business

The following article is interesting as cashflow is the biggest killer of businesses, small and large.

If you don’t have a handle on cash coming in and out of business then you are taking a risk with the future of your business.

Managing your finances is key and as a minimum you should have a cashflow forecast (free template download).

http://www.freshbusinessthinking.com/news.php?NID=9013&Title=Cashflow+problems+a+persistent+headache+for+UK+business

Related articles:

The Late Payment Cycle
Are You Still Having Cashflow Problems?

Profits down for British SMEs

UK businesses are seeing signs of distress increase across the board, with over half experiencing decreased profits, according to industry trade body R3.

R3′s second quarterly ‘Business Distress Index’, a barometer of financial distress, reveals increased signs of distress in December last year, with ‘decreased profits’ being the leading sign.

R3, the insolvency trade body, surveyed over 500 business owners, 54 per cent of whom recorded decreased profits, an increase of five per cent from September.

Read more: http://www.britishsme.co.uk/2011/02/16/profits-down-for-british-smes/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+BritishSME+%28Britishsme.co.uk+-+Financial+information+for+SMEs%29

Small Businesses Still Relying on Credit Cards

Nearly half of all small–business owners use a credit card to boost their firm’s cashflow, new research has found.

The survey of more than 700 UK small-business owners and financial directors by Hilton–Baird Financial Solutions found that 44% use credit cards as working capital, despite the high interest rates charged.

However, Institute of Chartered Accountants in England & Wales (ICAEW) head of SME issues, Clive Lewis, said that credit card use was acceptable in the short–term, provided debt was kept under control.

Read more: http://www.is4profit.com/small-business-news/20110218-small-businesses-still-relying-on-credit-cards.html

The Late Payment Cycle

Despite the Late Payment legislation UK businesses are taking the longest time on record to pay their bills.

Businesses are currently taking over two months to settle their debts according to the credit checking company Experian. This is an increase of two days in the last year.

As usual the larger companies are taking longest with an average of 82 days and smaller companies now averaging over 61 days. However it is usually the smaller companies who are most likely have cashflow problems.

The industries who have increase their payment days most are:

Electricity,

Property,

Pharmaceuticals,

Beers, Wine and Spirits,

Oil and Gas have all increased by over five days.

The longer a company takes to pay the their invoices could be an early warning indicator to cashflow problems. If you are running a business then you need to monitor the speed at which your customers pay their bills, because while the invoice is unpaid the money is at risk.

Remember a sale is not a sale until the invoice is PAID.

If the invoice is not paid then the money is at risk and could be lost.

Therefore businesses should press harder to be paid on time with in the terms of the agreement. Companies are all under pressure to hold onto cash for as long as possible.

This can lead to a battle of wills between the credit controller of the supplier and the purchaser ledger manager of the customer.

The figures indicate that the late payment culture is getting worse.

This can lead to a battle of wills between the credit controller of the supplier and the purchaser ledger manager of the customer.

Businesses should not be acting as an unpaid bank for their customers.

via UK Business Advisors Ltd | UKBA – Articles: Finance – The Late Payment Cycle.

10 Ways To Speed Up Customer Payments

Q:    WHAT ARE THE THREE MOST IMPORTANT THINGS IN BUSINESS?

A:    CASHFLOW, CASHFLOW, CASHFLOW

Cash flow is the life blood of any business and more businesses go bankrupt because they fail to keep the cash flowing than fail for any other reason.

The Inland Revenue and HM Customs are much more aggressive in chasing monies they think are owed to them now that they have lost their privileged creditor status.

Insolvency

A company or business is insolvent if they cannot pay their creditors as the invoices fall due.`

In order to avoid this happening you need to ensure that you get paid on time by your customers so that you in turn can pay your suppliers when their invoices fall due.

The Ten steps you can take are:

1    Make sure your customers know your terms of trade. i.e. payment is due in 7 days. Many companies take 30 days to pay but make sure they know what your terms are and the reasons for them.

2    Make sure you raise your invoices for work done promptly.

3    Send out statements at the end of each month to all customers who have     outstanding invoices. Many Finance Directors will only pay when they have received a statement, so send it early.

4    Telephone the customers purchase ledger manager and ask if your invoice is on the next payment run. If it is good, if it is not ask why! And also find out what you have to do to get it onto the payment run.

5    Get to know the purchase ledger managers and talk to them regularly.

6    Find out when each customer does their payment runs and diarise them so you know when to chase your payments.

7    Where possible hand over the invoice when work is completed and let the customer know that you expect prompt payment as the work has been completed.

8    Where possible get either staged payments for a project or a payment up front for  materials etc.

9    If the relationship is ongoing ask for a standing order to be raised in your favour so that you get a regular monthly payment without chasing the customer.

10    Remember to have the Standing Order changed when you re-negotiate your charges each year.

via UK Business Advisors Ltd | UKBA – Articles: Finance – 10 Ways To Speed Up Customer Payments.

A Purchasing Focus

A purchasing strategy is not the domain of the larger company or corporation. Without an effective strategy to manage supply chains or coordinate the purchasing function you will never be in control of your costs.

The lack of strategy can result in poor customer service, missed delivery dates and reduced staff moral. This is largely never calculated but has a draining effect on the business.

Purchasing and supply chain management should never be seen as a back room function but a key area of business.

In today’s commercial environment purchasing can often redress the continuing lower price pressure from clients by maintaining or improving the cost of sale (COS) equation.

Cost reduction policies/ strategies over recent years have traditionally focused on what can be seen and touched,’ headcount’.

Their reduction has been the result of Productivity improvement, Automation investments, Outsourcing (sub contracting) and cutting out some activities see as unimportant. Headcount as a result has fallen and in many cases this has been a correct and modernisation process.

In some cases though it has been in blind panic to reduce costs and has obvious drawbacks. These polices have an effect of short-term cost increases, take time to administer and when not professionally implemented have a further drain on staff morale.

In many cases can also lead to industrial action and a skills shortage in the staff base. Once done Directors have to look else where for the next wave of cost reductions.

Procurement is the obvious place. Bought in services and material can amount to as much as 80% of the revenue base. With these sorts of numbers it is clear that a saving of 10% (which is very realistic) can have a     dramatic effect on the profitability of enlightened companies. As a model if a company spent:

•    50% on purchases,

•    44% on other costs,

they would have

•    6% profit.

By improving the purchase process by 10% the results are dramatic.

•    45% on purchases,

•    44% on other costs,

they would have

•    11% profit.

This doubling of profits has been achieved without any staff reduction or reduction in customer services.

In two of the recent cases we have been involved in, a small engineering company has improved the material purchase costs by 16% and in a larger company we produced savings of 26% the first year and 9% the second year.

A coordinated approach is needed to avoid supply failure. Increased rather than decreased costs are likely to result if the decisions are not consistent or inline with company ethos, structure and objectives. Companies should avoid jumping on the bandwagon of fads and fashions.

To get you thinking and moving forward to a purchasing strategy and lower costs here are six questions to ask yourself.

1.    What is the % ratio between bought in goods / services and staff/facilities costs?

2.    Who is responsible for purchasing, are they trained or qualified?

3.    Are the purchasing decisions made in a rigid policy or is there flexibility to adapt to situations?

4.    Are all purchases made centrally, does everyone involved know what is being purchased?

5.    Are you confident you have the right buying process for both low and high volume /value items?

6.    Are your confident you have the right policy to cope with the future needs and trends?

via UK Business Advisors Ltd | UKBA – Articles: Finance – A Purchasing Focus.