Welcome

Introduction to Seminar

What do you hope to learn in the next two hours:

Burning issues?

Topics of interest?

Opportunity to network

Have fun!

Section References

Maintaining Profitability – Section Six

Improving Cash Flow – Section Seven

Improving Profitability

Profitability Measures Hint

Using the profitability measures provided will ensure that you are aware of any reduction in profit as it occurs and understand what level of sales is needed to ensure that the business will turn a profit

Profitability Measures

MarginThat your profits are not being eroded by increasing prices in stock or expenses

Mark upHow to set new selling prices when stock costs increase

Break even analysisHow much you need to sell before the business is making a profit

Page 23

Profitability Measures

Gross Profit MarginMeasures the percentage of sales dollars available to pay the expenses of your business

Gross Profit Ratio = Gross ProfitTotal Revenue

Net Profit Margin Measures the percentage of net profit to the sales dollars

Net Profit Ratio =Net ProfitTotal Revenue

Page 24

Profitability Measures

Mark UpIs the amount you sell your goods above what it cost to purchase or manufacture those goods.

Percentage Value=

Sales Less Cost of Goods Sold

Cost of Goods Sold X 100

Page 25

Profitability Measures

Break Even

The break even calculation shows how many sales have to be made, in either dollars or units, before all the expenses are covered and actual profit begins.

Percentage Value=

Expenses /1 Less (Cost of Goods Sold %)

Net Sales

Number of Units =

Unit selling price less Unit cost to producePage 25

Case Study

Joe’s Motorbike Tyres

Let’s look at Joe’s profitability measures

Page 26 of Workbook

Improving Profitability Tip

Compare your profitability measures to businesses within the same industry to ensure that you are being competitive and achieving maximum profit potential

Discounting Sales

Discounting goods or services to entice customers to purchase will erode your profits

Where discounts are offered you will need to sell more goods in order to achieve your gross margin

Should consider other alternatives to entice sales (e.g. supplementary services or products)

Page 27 of Workbook

Discounting Sales Hint

You may like to consider offering your customers “add on” services as an alternative to offering discounts

Discounting Sales Tip

Always calculate the impact on profitability before offering discounts

Expense Management

Good management of general business expenses will contribute to increasing profits

Identify where costs are increasing and take action to maintain your net profit margin

Continually monitor all expenses

What are some of the actions you can take to reduce expenses?

Page 28

Expense Management Tip

Look for opportunities to join with other businesses for “group” buying that can provide discounts on your expenses

Improving Cashflow

Working Capital:

Adequate cashflow to meet short term obligations

Setting strategies to ensure cash crisis is avoided

Utilising 'internal' cash to fund operations

Working Capital Cycle

Product/Manufacturer Provider Service Provider 

Page 29

Stock Management

Optimum level to ensure that customers needs are met

Minimum level of excess/aged stock

Holding cost of stock

Strong controls to avoid theft

Page 30

Stock Management Hint

Setting up good stock control procedures will ensure that cash is not tied up in holding stock unnecessarily

Stock Management

Efficient stock control requires a three step process:

Stock review

Buying policy

Operationalissues

Stock Review

Current level and value

Which are the good sellers?

Which provide the highest margin?

List slow moving, excess and aged stock

Update stock records

Make an action plan

Page 29

Buying Policy

Identify 'core' stock

Know what levels to order

Negotiate with suppliers

Beware of discount offered

Page 30

What Impacts Stock Management?

Supplier service

Advertising and promotion

Sales policy

Delivery

Any others?

Stock Days

Day’s Inventory

Shows how quickly stock is replaced

The less number of days, the quicker profits areearned

=stock on hand x 365

cost of good sold

Page 33

Stock Management Tips

'Just in time' delivery

Move excess or aged stock quickly

Keep accurate records

Regular stock count

Understand your stock

Use financial system to track stock

Page 32

Supplier Management

Often on start up, cash payment

Once up and running, negotiate improved terms

Make full use of terms

Supplier Management Hint

Setting up good management procedures will ensure that you get the most out of your suppliers

Supplier Management

Supplier selection

Payment terms

Managing relationships

Page 34

Supplier Selection

What is your priority from supplier?

Prepare list of preferred suppliers

Credit check all suppliers

Regularly compare supplier pricing and service

One main supplier, ensure a back up available

Page 34

Supplier Payment

Negotiate payment terms before entering into the transaction

Document standard payment terms on each purchase order

Calculate benefit of taking discount for early payment

Regularly check that payment is not made early

Agreed process for damaged or return goods

Review the terms with each supplier regularly Page 35

Supplier Relationships

Meet regularly

Adhere to payment terms

Procedures for late payments

Communicate when delay in payment

Solid, reliable customer

Page 35

Creditors Days

Day’s Creditors

How well supplier payments are being managed

Payment before agreed term = decrease cashflow

Payment after agreed term = damage relationship

=accounts payable x 365

inventory

Page 37

Supplier Management Tips

Extend payment terms

Payment terms commence

after delivery of satisfactory goods receipt of credit note

Structured payment run

Tight controls over

early paymentover paymentduplicate payment

Continually review supplier contractsPage 36

Managing Work in Progress

Good record keeping system:

All detail recorded at order

Track and prioritise all outstanding orders

Send invoice with delivery

Record important dates:

orderestimated completion

deliveryinvoice

Page 37

Work in Progress Hint

The key to managing work in progress is to have a good record keeping system

Improving Work in Progress

Only order when needed

Identify 'bottle necks'

Review processes

Have adequate stock to complete order

Review progress cycle regularly

Request deposit for special orders

Page 38

Managing Debtors

Credit sales ties up cash

Wasted effort and time in chasing payment

Increased risk in bad debt

Page 39

Managing Debtors Hint

Ensure that you have good procedures in place to encourage prompt payment

Managing Debtors

Credit controls

Payment terms

Managing customer relationships

Page 39

Credit Controls

Credit check all customers before sale

Rank by credit risk

Set sales limits according to credit risk

Regular review of credit risk

Record outstanding paymentsexceed limits

Document proceduresPage 39

Customer Payment Terms

Document on each invoice

Ensure that they are adhered to by staff

Implement procedures to support terms

Policy and procedures for returned goods

Page 40

Customer Relationships

Meet regularly

Review actual payment with terms

Act quickly for disputed goods/services

If delay in delivery, notify immediately

Solid, reliable supplier

Page 40

Debtors Days

Day’s Debtors

The average number of days taken to collect fromdebtors

Payment received after agreed term = decreasecashflow

=accounts receivable x 365

sales revenue

Page 42

Managing Debtors Tips

Invoice early

Provide incentives to pay early

Make payment easy (payment options)

Pay commission on amounts collected

Review outstanding payments regularly

Page 41

Managing Debtors Tips

Identify slow paying customers and contact

Offer payment plan

Stop supply

Document all communication

Sack the customer!

Cash Conversion Cycle

Stock days + Debtors days – Creditor days

The total number of days in the working capital cycle:

Page 43

Working Capital Management

Working Capital Cycle

Stock management

Supplier management

Work in progress

Debtor management

Cash conversion cycle

Page 43

List 3 actions you will follow through with as a result of this

workshop

Then

List 3 things that you’ve learned in this seminar

List 3 actions you will follow through with as a result of this

seminar

List 3 things that you’ve learned in this seminar

Business mentors help you to identify a clear direction for you and your business.Business mentors can also advise you on how to:

conduct market researchwork out your break-even pointprice and/or cost your products or servicesdevelop an effective marketing strategyuse other business management tools

To arrange a session with a business mentor go to:

www.sbms.org.au/OurPrograms/SpecialistVouchers.aspx

and type in AFS as your code

Using your SBMS voucher

Questions?

Thank you for attending

Check outbusiness.vic.gov.au/workshops

for more workshop information