Tagged: tips

But…. Where’s my Profit gone?!!?

Profit is what being in business is all about.  It’s what we all work so hard to improve and to grow.  Congratulating clients on the great profit they’ve made so far this year is a highly enjoyable part of what I do.

Invariably though, the next question is: “So, where is it?”

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Most business owners understand what the Profit & Loss Statement is and what it shows (albeit to different degrees).  Essentially, the profit figure on your P&L is the end result of revenue less expenses.  It shows how much revenue has come in, what expenses are required to run the business and how sufficiently revenue has covered the expenses.

On the other hand, not so many business owners know what the Balance Sheet is all about nor the essential information that it can tell you.  The Balance Sheet holds a lot of answers about the health of the business and it also shows where the profit has disappeared to.

2 of the usual suspects…

Profit often gets “caught” in a business in a number of ways (good & bad).  Here’s the common 2 culprits of tying up profit in a business:

Debtors: The business may be making great sales, revenue is growing and things look good on the P&L. If the Debtor balance grows relative to the growth of sales, than in most cases the cashflow of the business will track along fine.  However, perhaps insufficient Debtor Management practices are in place and customers are taking too long to pay forcing the Debtors balance to increase significantly in proportion to sales growth.  Slow paying customers and poor Debtor management unnecessarily ties up cash. It’s imperative for good business that invoicing is done both correctly and timely and that a system is in place to routinely follow up customer payments.

Stock: Businesses with stock need to have sufficient practices in place to ensure cash/profit isn’t excessively tied up in stock on hand.  If your stock purchaser is buying overs, or buying the wrong type of stock that isn’t selling or stock that isn’t required, then you are unnecessarily tying up cash in stock that could be used for something else.

If you would like to better understand your Balance Sheet and where your profit may be hidden, please get in touch today.

5 tips to get the best sale price for your business

You need to plan to get out of your business, just like you need a plan to get into business.

There are 3 ways to leave your business:

  1. Sell
  2. Merge
  3. Close

Planning to sell is actually more important in some ways and slightly more complicated than starting up business.  It requires foresight, strategising and careful implementation.

Your efforts will help get the best return possible for all of those years of hard work!!!

Sold 7.3.17 PixabayHere are 5 tips to consider when selling your business:

1)      Sell at the right time for the right reasons

In most cases you’ll get the best result selling your business when sales are climbing and profits are strong.  If you have a history of solid performance it would be a good idea to consider selling before trouble strikes.

On the other hand, if you’ve been through troubled times but things have turned a corner, you may be best to hold onto the business and get things in order to be able to provide at least 1 -2 years of strong performance history before looking to sell.  Remember, prospective buyers will not pay for potential.

External factors which may influence the timing of your sale include availability of financing, changes in tax and other relevant laws, industry changes, the general economic climate and interest rate trends.  How are they impacting your business?

2)      Decide what you’re selling

Determine what the assets of your business are that have value that someone else is willing to pay for.  Selling a business often includes assets such as goodwill, trademarks and client lists/history as well as the physical assets.

If you’re looking to sell to an existing business they may consider your client list to be the most valuable part of the transaction and may not even need to take on your assets.  On the other hand, a stand-alone buyer may need to take over everything required to make the business run.

If your business is incorporated, you also need to decide if you are going to sell your business as an asset sale (where you sell everything in the corporation but not the incorporated company itself) or a share sale (where you sell everything including your incorporated company).

3)      Determine what your business is actually worth

Buyers are interested in profits, not revenue, and cash flow is usually more important than profits when valuing small businesses.

Consider the business’s ability to sell, its readiness and your timing. There are many attributes that can make your business appear more attractive, including:

  • Increasing profits
  • Consistent income figures
  • A strong customer base
  • A major contract that spans several years

There are several different business valuation methods. No one approach can be used in isolation; the current market, economic trends and what other similar businesses have sold for also need to be taken into account.

4)      Make sure your house is in order

Prepare your business ahead of time, preferably at least a year or two beforehand.  The preparation time will allow you to improve your financial records, business structure and customer base to make your business more profitable and appealing to potential buyers.

Even if you decide not to sell straight away, you will personally reap the benefits and ultimately will increase your future selling price = win/win.

5)      Get professional advice

Selling your business arguably could be a bigger event than selling your family home, so do yourself a favour and get professional advice along the way.

 

 

Be all over your business like a rash!

Gross profit is a key indicator of your business’s overall health, so keep reading!

Measuring and monitoring your gross profit regularly will tell you a LOT about what’s happening in your business and how you can make more money.

So firstly, what is gross profit?

Gross Profit =

Sales Revenue

Cost of Goods Sold

It’s usually represented as a % of sales.

Generally, the higher the gross profit % the better.

Gross profit can be measured for your business overall and it can also be used on a more detailed level for eg. per product line, type of customer, location etc.

Why is gross profit so important?

Gross profit is the amount of money left over from sales to cover your overhead expenses (electricity, rent, insurance etc).  In most cases your overheads are relatively fixed and there’s not a lot that you can do about them.  Not the same for gross profit!

Measuring and monitoring gross profit and investigating significant fluctuations allows you to know exactly where, how and why changes need to be made so that you can make more money from each sale.

It’s imperative to understand what your most profitable and least profitable product/service lines are. You may use the information decide to stop offering unprofitable lines and/or decide to “push” your more profitable lines in your marketing for example.

What should you be looking for?

Gross profit should remain fairly stable over time.  If it fluctuates significantly downwards it’s an indicator to further investigate for things such as possible fraud, accounting irregularities, mismanagement or perhaps increased competition.  If any of these are the case, it’s obviously best to sort them out ASAP.

If your gross profit fluctuates in a positive way, it could indicate an improved product mix shift, better buying decisions or improved efficiencies.  It’s good to know these things so that you can keep doing them!

So it makes a lot of sense to keep your eyes firmly on your gross profit right?

Tips:

  1. Determine your overall business gross profit and monitor it regularly (eg monthly)
  2. Determine the gross profit of your individual product /service lines (and even by location, customer type, business divisions if possible) and monitor regularly.
  3. Make an effort not to discount or compete on price. Instead, look for ways to differentiate your offering on another basis eg. turnaround time, availability of support, ease to buy etc
  4. Review your supplier’s invoices regularly to ensure quantities and prices are correct and are reflected in your sales model (know in advance when supplier prices have been pushed up so that you can consider raising your sales price)
  5. Have strong systems in place for stock/materials. If stock goes missing for example or you have a lot of wastage it will affect your gross profit. If reporting is incorrect it will also impact your gross profit. If stock is obsolete or slow to move, then consider dumping it.
  6. Measure and monitor!!!