Cash Drawer

Cash Drawer

Maximizing profits and Cash Flow for Your Company

Bay Business Group

180 South Washington Street Suite 200

Falls Church, VA 22046

Maximizing Profits And Cash-Flow For Your Company

What every business owner, CEO, professional or entrepreneur needs to know

 

 

Maximizing Profits and Cash-flow for Your Company

Spending just 10-15% of your time each month looking at the RIGHT financial indicators can add up to $30,000 - $300K to your bottom line.

  Why it’s important that the person who manages executive, sales, operations and administration should also worry about something the CFO or controller usually handles

 

You’ll probably agree that most people don’t go into business to be an expert at accounting or even wish to know half as much as their top financial person. But, as the man or woman who’s ‘steering the ship’ there are some key financial indicators that you should look at each month to maximize profits and manage the growth of your business.

This report will show you what areas to monitor or evaluate every month, described so it’s easy to understand and with minimal time investment. In a recent survey of business owners, it was found that nearly 7 out 10 said they spent 45 to 60% of their time on administrative tasks with a major portion focused on accounting issues. That represents 3 to 6 times over the amount required by the most efficient companies.

If you’re like most business people, you’d rather spend the majority of your time on getting the most sales and then efficiently fulfilling those sales to turn Maximum Profit. But, in the noted survey less than 2 in 10 actually did what we all set out to do in our business. I think this fact stems from two reasons. First, I’ll have to blame my own industry as part of the problem. Two, it’s the lack of knowing what items are important to the company and how to measure the status of a company. (how to read the company’s temperature so to speak).

 

Accounting industry to blame?

The first order of business is to prepare a job description of what you want your bookkeeper to do. Yes, my industry may be partly to blame. You know as well as the next businessperson that without accounting, there is No company. We all know accounting is an integral part of every business. However, over the years our industry has acquired a reputation for the ones that focus on small details and past history. But, business owners consistently say they want financial information that helps them make good business decisions to help maximize profit and avoid problems.

 

Unfortunately, most accountants have been slow to utilize the most up-to-date software and equipment to allow them to operate in the most efficient manner. As a result, there is too much of a fire fighting mentality, rather than being in a progressive, financial advisor role. Once the accounting department gets bogged down and into the mode of merely getting information recorded, the most valuable tasks they could perform tend to get put onto the back burner. The end result is that the business executive does not get the right financial information to make key business decisions that may influence the growth or decline of the company.

Today, accountants need to have a system and use the tools (software & hardware) that make the job of accounting extremely efficient, if utilized properly. A little preplanning allows the accounting department to not only record the required information, but also to produce the valuable decision making information for the business owner. Also, every accountant should provide the business owner or executive with a report that highlights critical information. We’ve identified ten critical pieces of information every business owner should focus on. We’ve name these ‘Ten Most Critical Indicators’. It’s a concise snapshot of a business automated each month and gives the business owner the right data for targeted and strategic decisions that need to be made. This valuable information can be the difference between extreme success and disastrous failure. Remarkable, if done properly, the accounting function in this new environment can cost 30 to 50% less and produce more and better information than the old school method that may frustrate a business owner and produce inaccurate and untimely information.

 

What you need to know

But where should we start this education?

Well, it would seem that the best place to start would be to accumulate some of the financial data that is discussed in the next section.  You may find much of this education to be pretty elementary. But the next person may not be clear about many of the sections we’ll discuss. So we ask that you skip over those items you already know.

Financial indicators to review monthly

1. Cash Balance and Reserves

Ultimately you’re in business to convert all other assets to cash. Even businesses with large profits have actually gone bankrupt, simply by not being able to convert other assets (such as inventory and accounts receivable) quickly enough into cash. If there is not enough cash, then the business cannot pay its employees, order new product, or pay vendors. In addition to reviewing the cash balance and reserves each month, the owner needs to focus on cash needs for the coming month.

 

2.  Liquidity Analysis

What is the proportion of your current assets to current liabilities? Do you measure that monthly? What does that tell you? It indicates your ability to payyour bills as they come due. Just as a good doctor will take your pulse and blood pressure, a good accountant will (amongst many other things) take the pulse of your business by measuring liquidity. Two ratios used to measure liquidity are the Current Ratio and the Quick Ratio. If they are too low, it will be a warning sign a pending cash crunch. By monitoring these key rations regularly, corrective action can then be taken before a crisis occurs.

 

3.  Accounts Receivable Aging

The longer it takes to collect your receivables the more pressure is brought to bear on your ability to pay your bills as they come due. This in turn will lead to increased bank borrowings or capital injections from the owners. Furthermore, the older your accounts become the more difficult it will be to collect them. The old adage is: “A sale is not a sale until the money is in the till”. Perhaps the sales department is selling to poor credit risks. Maybe better collection systems need to be implemented.

 

4.  Gross Profit Margin

This rate should stay constant. If it moves, it is a sure sign of potential trouble. If the change was expected, that is fine – but you need to measure and analyze your margin to  be sure it changed the way everyone expected. If it was not expected, immediate analysis is required to correct the situation. An example of an expected change in gross margin is Taco Bell. When they went to the low priced menu  several years back, their food costs were approximately 30%. They reduced their prices such that food cost was 40%. They counted on dramatically increased volume to make up the shortage and more. What they got was a windfall. Their sales increased significantly and profits increased as a result and the customers were happy.

 

5.  Sales Per Salesperson

This measures the effectiveness of each sales person. It also provides a barometer for when new sales people should be added (as sales increase). It also spots potential downtrends in customer buying which will allow the company to pursue other options or new marketing, advertising, product or service lines.

 

6.  Sales Per Employee

This measures the effectiveness of the entire company. When sales increase per employee, this is not always a good sign. Service may be suffering, so the company must make sure that if there is an increase that it was due to productivity gains. If merely because of sales gains, then hiring should begin or operational efficiencies put in play to avoid service or quality problems.

 

7.  Sales In The Pipeline

This is sometimes hard to measure, but critical to proper planning. The semi-conductor industry has long used the “book to bill” ration. It measures orders for products vs. amounts actually invoiced upon shipment. If the number is positive, growth is occurring, if negative, sales will be slowing down in the future. The same type of analysis can be done for any business as long as the measurement is consistent and real.

 

1. Sales Conversion Ratio

Since sales in the pipeline are usually not as well defined for most businesses (such as the “book to bill” ration), the conversion ratio is a good measure. This is a very key ratio for most businesses, and yet often overlooked. It can be calculated at each stage of the sales cycle, and then used to predict and plan future sales. For example, if you do telephone cold calling, you can count the number of calls made each week and the number of appointments that result from those calls.If your company made 100 calls  this week and 10 appointments were set up, you would have a 10% conversion ratio from phoning to appointments. Then if the sales reps closed 3 sales for each 10 appointments, you would have a 30% conversion ratio from appointment to customer. By tracking the conversion ratio at each point in the cycle, you can see where effectiveness is lagging and make changes, more importantly; you can predict sales volumes by adding additional appointments setters and reps and applying your average conversion ratios to project sales volumes.

 

9.  Job Costing

For certain industries, this is critical. For others, it is merely essential. It is imperative to know the costs of a job to make sure adequate profit is made on the job (or worse – to make sure there is not a loss). If the business does not track services or products sales by job, then there are still ways to measure the costs associated with groups of products or services. These costs must be tracked and evaluated for consistency and to evaluate if products and services are being sold at the highest price that customers will pay.

 

10. Net Profit Percentage

This is profit expressed as a percentage of sales. This number cannot be calculated correctly unless the entire accounting system is working properly and correct information is available. The percentage is generally consistent, but may change for various expected reasons. However, any changes should be evaluated and any remedial action required must be implemented immediately upon determining the corrective action.

 

11. Return On Equity

Based on your risk, and effort to run your business, are you getting an adequate return on equity, or have you just “bought yourself a job”. The business should always be focused on making sure that staying in business makes sense. Good Return On Equity (ROE) happens when the company makes more money doing what it does rather than investing elsewhere. Return on equity tells the owner if this is happening. If a business owner has $1,000,000 invested in the business and the business nets him $10,000 in profit, he may be better off quitting the business, investing the 1,000,000 in the bank and earn 3%. A target return should be established as to what the business owner expects to earn on invested equity and make sure that it’s happening. This can then be measured regularly against the target ROE rate.

 

12. Fixed Costs

Fixed costs continue each month regardless of the level of sales activity. Fixed costs include rent, lease payments on business space, equipment, and property taxes (if owned), etc. Each fixed cost should be carefully reviewed before being committed. Airlines have high fixed costs, regardless of the number of flyers. They have to make certain assumptions about occupancy and traveler miles to determine the number of planes they need. Each business should make the same analysis each year and determine if additional equipment or costs are necessary to provide the products or services they sell. Before a fixed cost is incurred, the method of repayment should be considered and evaluated for probability. It should then be measured against actual results each month.

 

13. Actual vs. Budget Review

A budget should be prepared for every company. Once completed, the actual results should be compared to what was budgeted. When the budget is not met or is exceeded, the person responsible needs to account for the difference. This also helps the business to establish a specific person being accountable for every financial transaction in the business. The sales team explains any differences from budget for the amount of cash or payables, etc. Each difference is either accepted (such as higher sales) or an action item is initiated to correct a problem.

 

14. Inventory Turnover

For businesses that have inventory, it is critical to manage it correctly. If a business is efficient and has high volume, the more turns it will have in inventory. This means the business will have less invested in inventory. If the turnover is not high, then the business has to seriously look at inventory and determine if it is carrying too much.

 

15. Debt Of The Company

The amount of debt a company carries must be consistent with its needs. If a company is using debt just because it is easy or available, it may be wasting money. If it is using debt because of opportunities that require funds that could increase sales then the company must measure the results of the investment compared to the costs involved. Any pay downs or increases in lines of credit must be scrutinized to see if they conform to expectations, which can be determined from an estimated cash flow statement as part of the budgeting process.

 

 

Maximizing profits and preventing loss

A.  Where is my time best spent on the business?

There are four areas business owners or managers need to be concerned with in running their company.

1. 1) Executive decisions include strategic planning such as determining target markets, whether to expand, whether to change concepts, etc.         

2) Sales activities relate to generating revenue for your business including the marketing and advertising.

3) Operations relates to delivering what was sold, whether product or service.

4)Administrative functions obviously includes the ‘back office for all businesses’ – paying bills, sending invoices, payroll, making those important bank deposits, generating reports for government agencies, etc. Basically administrative is important albeit a rather unproductive tax on time.

 

The problem is that most business owners and managers tend to spend too much time on administrative tasks. This is probably because these tasks are easily identified and can be completed by the owner since he or she had probably done them from the business starting up. Instead, the focus should be Sales and Operations. You should let others whose compensation is more in line with these administrative duties complete them. Note the table below showing how time is spent by typical owners or managers vs. where time is spent by the most efficient best run companies.

 

Business Activity

Time Spent By Typical Owners

Time Spent Optimally

Executive

0-2%

5%

Sales

20-25%

40%

Operations

20-25%

40%

Administrative

50% (or more)

15% (or less)

 

B.  How Do I Increase My Profits?

There are only a few ways to increase profits and the business owner or manager must determine which ones he or she has control over and then concentrate on those areas. Increased profits can come from 1) Increased sales, 2) decreased expenses 3) increased efficiencies or 4) increased margins on existing and future sales. Usually the business owner or manager has already done what he can relative to item #2.

However, with increased efficiencies using current technology, many companies that have been around for a while may be doing things inefficiently and can focus on #3 to cut costs here. Never forget to be innovative in your business operations. This can be a fun and profitable exercise. We recommend a gathering of key members of your team for a meeting outside the workplace to roundtable ways to be more efficient in the delivery of your products or services. Do it every quarter and relish the reward at year’s end.

The best opportunities for increased profits are usually with item #1 or #4. Most businesses always concentrate on increased sales. This is usually a wise move since they try to leverage what they have already proven they can do. Item #4, increasing margins, is rarely reviewed or proactively chased. Here’s some FREE advice about testing price points… Do it and do it regularly! It can result in permanently increasing profitability.

 

C. Where Can I Cut Costs?

An analysis can be done to make sure your spending money according to norms for similar businesses. While cost cutting is a goal that is sought by many small and medium sized businesses, it is difficult to help a business cut costs, since the owner or manager is usually already focused on reducing costs. In fact, generally, the recommendation is for the owner to spend more money to generate more revenue.

Typically we see that most small and medium sized companies spend too little (some not at all) on marketing and advertising. We’re certainly not suggesting you buy a bunch of TV and Radio ads. But good marketing is a key to success for any sized business.

Take us for example, we have always provided this advice and knowledge contained in this report to our clients. To them, we are like no other accounting firm they’ve ever heard of or dealt with. We get many referrals but we had no other ability to let a prospect know what we did and how we did it. (unless they wanted to sit across from us in a consultation).

It was our marketing company that told us we had to put this knowledge into this report (marketing) and offer it on our website (advertising) to prospective clients. The website would let them know that this report existed. Whether or not they were satisfied with their current accounting situation, they might want to get a copy. It didn’t matter if they were going to do business with us or not, we just needed to publish our knowledge and expertise. So our advice to owners and managers… “Don’t be afraid to spend money on good marketing.”

 

D. Stop Loss: Know Ways Employees Can Steal

 

The following is a list of the most popular ways employees can steal from your business. We’ve seen many scenarios where employees from service managers and clerks to bookkeepers and CFO’s have stolen from their employers. In some cases it has resulted in the companies having to close their doors. Note the ways that may affect your company and install security, checks and balances to minimize your risk.

 

 

 

1.  Steal Inventory – For personal use or resale.

 

1. Phony Vendor  - Send in phony invoices and the company pays them, the employee takes the payments from the company issued to the phony vendor

 

1. False Employee  - Set up a false employee and issue a regular payment. The real employee collects his regular payment and the payment for the false employee.

 

1. Take The Cash From Cash Sales – Don’t ring up the cash sale in a register and pocket the cash.

 

1. Void a Sale – After an invoice is mailed out, void the sale and reduce the customer accounts receivable. When the customer pays, take cash from a cash drawer equal to the amount the customer has paid. Include the customer payment as part of the daily deposit so that the total deposit for that day agrees to the sales records for the day and the cash is not missed.

 

1. Signature Stamp Abuse – Obtain blank bank stock and signature stamp the stock, and then buy personal items using it.

 

1. Company Credit Card  - Use this for personal purchases.

 

1. Personal Supplies – Order personal supplies from established vendors and take these items for personal use. This can include anything from pens and paper to computers, software, and furniture.

 

1. Duplicate Payments to Vendors – Employees can easily make duplicate payments to vendors in error. Employees may be reluctant to admit this when they discover making a duplicate payment for fear of looking bad.

7

10.  Record Phony Bank Charges – The employee can record phony bank charges and then take the equivalent amount of cash from a cash drawer.

 

11.  Phony Receipts – Sometimes, phony receipts can be simply submitting the same receipts  twice. Many times, the objective is to turn in items so small they will not be noticed.

 

12.  Auto-Pay a Phony Contract – A regular payment is made out of the bank account to a phony contract vendor controlled by the employee by pre-authorized payments instead of the usual payment method that is scrutinized each time a payment is made. Usually, only the bookkeeper handles the bank account, so no one else would see this expenditure.

 

1. Phony Refunds – An employee issues a refund to a supposed legitimate customer. The employee does not mail the refund to the customer, but rather negotiates it himself.

 

Time = Money

(Or why it pays to outsource your bookkeeping need to a professional firm, like Bay Business Group.)

So now you have a pretty good idea of what information and reports you need to focus on to manage your business more effectively.  But do you have the data needed to do it? Or an in-house accounting department to generate the information?  At Bay Business Group, that’s all we do.  We take the raw data and provide accurate, timely and insightful monthly financial reports to all of our clients helping them make good business decisions that maximize profits and avoid problems.

All of our clients have both a full-charge bookkeeper and a CPA assigned to their account.  We offer our clients a level of professionalism and expertise that they just can’t find anywhere else.  We only hire the best and brightest. And we stand behind our staff and processes. 

And, we charge our clients a fixed monthly fee – no surprise bills.

outsourced accounting

So if you’ve come to the point in your organization that you need to hire someone to help with your businesses’ day to day, or even monthly finances,outsourced accounting call me today at 703-533-0888 or email me at david@bay-biz.com.  I’m happy to talk with you about what you should know about maximizing profits and cash-flow for your company.

About the Author

David is a seasoned professional with over 25 years’ experience serving clients large and small. David started his CPA career assisting small- and medium-sized businesses. He developed a deep understanding of the issues facing organizations and utilized these insights to provide practical and effective internal accounting and tax-reporting solutions.

Later, as an associate in the National Tax and Management Consulting practice at Deloitte & Touche, one of the Big Four public accounting firms, he developed a broad-based understanding of tax and accounting information systems.

As a Senior Manager, for Deloitte & Touche Management Solutions, he led teams focused on assisting small and emerging businesses achieve their visions for growth, profitability and stability.

Today, David serves clients that require and recognize the benefits of close attention from an experienced professional. Many of these clients may have utilized the services of an Accountant or Consultant in the past but now want something different, something more — a trusted business advisor.

David and his associates provide this level of service and focus on the needs of small, medium-sized and emerging businesses.

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