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Six easy ways to increase profit in your business

Six easy ways to increase profit in your business

Business owners and senior executives are juggling many priorities right now however it’s fundamental to have tight processes and procedures around your accounting. A few key steps can tighten costs and increase the financial health of your business.

1. Know your cash flow and focus on cash forecasts

Cash flow is one of the most important areas that keeps you in business. Twenty Nine percent of businesses fail due to lack of cashflow. Your accounting system should be able to run you a report on your current cashflow and you should be preparing cash flow forecasts based on all known cash receipts and payments. Rule of thumb suggests a requirement to hold enough cash to cover two months of expenditures however this has extended to three or four in the current climate. How often should you be reviewing cashflow ? I have been known to plan & review daily cash flow forecasts when things are tight, understanding how much runway the business has at any point in time. As things become more comfortable you can extend this to weekly.

2. Review your cash conversion cycle

Review your current cash conversion cycle (days inventory/wip outstanding, days sales outstanding, days payables outstanding) and look at ways to adjust terms and timing to be more efficient with your cash. The aim is to shorten your cash cycle in days. The longer it takes for your business to collect monies from clients for example the more of your own (or borrowed) money you will need to use. I would suggest a review of your overall business model to enable fundament shifts in the way your business cash cycle operates.

3. Be on top of client payments

This follows from point 2. Look at ways in which you can tighten the timing around client payments. Whether that be via changing the terms of payment (upfront deposits, shorter payment terms). You should have a robust system around invoicing, review of outstanding accounts receivable balances and follow up with clients regarding late payments before they become an issue. An efficient and organised accounts receivable system saves payment disputes down the road.

4. Save money on late payments

Ensure you pay creditor invoices on time. One in ten invoices are paid late and this triggers interest charges which do add up. Ensure your creditor invoices are entered into your accounting system in a timely way and review creditor balances regularly. If you have issues with payment timing, it’s best to contact creditors and organise payments via instalments. Most creditors are understanding and won’t charge you interest.

5. Know your profit margins

You should be monitoring gross & net margins for your overall business but its also essential to monitor margins on each key business segment. Your accounting systems should enable you to track gross and net margin by segment. Where segment margins shift from forecast due to cost increases for example, you should be able to quickly make adjustments. An understanding of contribution margins is key to business profitability.

6. Identify the money leaks before they become a problem

When your bookkeeping is current and you are reviewing actual expenditure to budget at least monthly this will allow you to monitor the increase in any expenditures and take steps quickly to reduce or adjust accordingly. Your accounting system should include daily dashboard reporting of key expenditures and your month end management reports should include trend and ratio analyses for key expenditure items.

Accounting systems and process can make your business more profitable and take the stress out of running a business as you will be confident that you understand the financial health of the business and you can then make business decisions that will impact your cashflow and profit.

If you would like to know more or are interested in a profitability/cashflow review of your business please contact us via info@stewartsmithadvisory.com