How we resolved the cashflow crunch
For this client, the first step was a range of detailed analysis to understand the current financial situation of the business, and determine key profit and operating ratios. Once this was completed, we could then assist with recommending and implementing a range of strategies to improve cashflow. The four areas we focused on were breakeven sales, improving profitability, working capital management, and funding options.
1. Breakeven sales
Problem: Unsure of breakeven sales level
A breakeven sales level is important because it represents the point at which a business's revenues and costs are equal. It helps the company determine the minimum level of sales necessary to cover all of its costs, including fixed costs such as rent and salaries, and variable costs such as materials and labour. Knowing the breakeven point helps a business make better decisions about pricing, production, and marketing, as well as identify when it needs to increase sales in order to become profitable.
Solution: A detailed review of the sales mix, profit margins and annual outgoings was completed to pinpoint the minimum monthly sales required for breakeven.
2. Profit ratio analysis
Problem: Not understanding the benefits of profit ratio analysis and budgeting
Undertaking and understanding financial ratio analysis has wide range of benefits for businesses. In the case if this particular client, ratio analysis has provided:
1. A benchmarking tool: Ratios can be used to compare a company's performance to that of other companies in the same industry or to industry averages, which can help identify areas where the company is excelling or underperforming. Once ratios are determined, we can provide a comprehensive SME Benchmark analysis as part of our Business Advisory Services.
2. Identification of liquidity risks: Financial ratios can assist with identifying low liquidity - a key red flag for a cash flow crunch.
3. Informed decision making: Ratio analysis can provide valuable information for decision-making, such as determining the best pricing strategy or identifying potential investments. By analyzing ratios, management can also identify areas that need improvement and take corrective action to improve the company's financial performance.
Solution: To better manage stock, a series of key profit ratio calculations were completed, and an upgrade of the stock management system was scheduled to improve margins and reduce wastage.
3. Working Capital Management
Problem: Not enough working capital
Prudent working capital management is important for a business because it helps ensure that the company has sufficient resources to meet its short-term obligations and maintain ongoing operations. It helps maintain liquidity, improve cash flow, increase efficiency, enhance profitability and improve creditworthiness.
Solution: To improve cash flow, a series of key cash flow ratio calculations were completed, and monthly cash flow budget was prepared to determine funding requirements (including timing). Customer payment terms were reviewed, and credit terms were re-negotiated with key suppliers.
4. Growth, Funding and Protection
Problem: Inadequate business insurances
For any business looking to expand, and protect income, the correct type of business insurance is critical. A business can use insurance as a means of protecting income by purchasing policies that provide coverage in the event of a loss or interruption. For example, a business might purchase property insurance to protect against damage to its physical assets, liability insurance to protect against legal claims, and business interruption insurance to protect against loss of income due to a covered event such as a natural disaster or pandemic. Additionally, key person insurance can be used to protect a business from loss of income due to the death or disability of a key employee.
Solution: in the case of this client, funding options (both capital and debt) for growth opportunities were analysed and business insurances were reviewed and updated.
By working closely with our Business Advisory team, our client was able build a strong baseline analysis from which to work from. This informed a targeted range of financial tactics targeted at improving the cash position of the business, and greatly reducing the likelihood of a cashflow crunch. Not only did we assist our client with tactical implementation, we also upskilled their financial acumen, better placing them to understand and manage the business as it moved into a new national stage of growth.
Understanding the local market is one thing, understanding the national market is another. The financial ratios we established were then used in our SME benchmarking process to assist the client with understanding how, and where they would need to perform in comparison to national competitors to ensure their expansion would be a success.