Optimise your earnings for better cash flow

Calculating costs and being mindful of break-even points can help your start-up keep its cash taps open

  
FILE PHOTO: A customer counts his cash at the register while purchasing an item at a Best Buy store in Flushing, New York March 27, 2010. U.S. consumer spending rose as expected in February for the fifth straight month, while stagnant incomes pushed savings to their lowest level since October 2008, a government report showed on March 29, 2010. Picture taken March 27. REUTERS

FILE PHOTO: A customer counts his cash at the register while purchasing an item at a Best Buy store in Flushing, New York March 27, 2010. U.S. consumer spending rose as expected in February for the fifth straight month, while stagnant incomes pushed savings to their lowest level since October 2008, a government report showed on March 29, 2010. Picture taken March 27. REUTERS

Jessica Rinaldi

Picture this: orders are pouring in, employees are working hard, deadlines are being met and clients are resoundingly happy. Sounds like the perfect company, right? Not necessarily.

One of the most common mistakes in business is confusing making sales with making profit, and while the scenario above may hold true for some successful SMEs, for many it’s a path to insolvency as managers clinch more and more deals with hefty discounts that cut profits to the bone. So, what steps can you take to optimise earnings and how should you go about implementing them?

According to Grant Bateman, general manager of Dubai-based TLB Business Advisory Services, start-ups tend to forego the services of an accountant, even on an outsourced basis, preferring to minimise outgoings and manage the books themselves.

For business owners with a strong financial background, this is all good and well, but for those with little experience of cost calculations and cash flow management, it’s a risky game.

“Most successful businesses are the ones who embrace accountancy from the start,” Bateman says. “Those who delay bringing an accountant on board are always playing catch up.

“To optimise your profits, you must understand your business financials and you can only do that if they’re being managed regularly and accurately. Those who embrace a culture of measuring and checking are the ones who succeed.”

Calculate discounts

In fully understanding not only what it costs to run your business, but also who your key clients are, you can calculate the size and frequency of discounts that you should be offering.

However, remember that these should only be given with good reason – to negotiate better payment terms, for example, or to win new business that will still yield a healthy profit margin. Discounting should never be habitual, but strategic and with a clear idea of how much more you’ll need to sell at the lower price to make up for the price reduction.

Also, make it harder for sales staff to automatically discount to make a sale. If you pay your sales team on commission, base it on gross margin, not top-line sales. This way, if they drop their prices to make the sale, it will be reflected in their pay cheque.

Set and measure gross profit goals

Be sure to also set a gross profit goal for your company, and measure it accurately. To do this, you'll have to compare your business to others in the industry and ensure your cost of goods categories match those of your peers. Try to source comparative data to establish what type of gross margins the profit leaders attain and use these to set your own gross margin goals.

Get profit and loss statements with columns that show your numbers in both dirhams and percentages. That way, when there is movement, you have the complete picture and can see all changes, not just the ones caused by sales increases or decreases. Track your gross margin every month, if not fortnightly or even weekly, so you can take swift action if necessary.

“You need to regularly review figures for sales, gross margins, overheads and net profit on a monthly basis, at least,” says Clive Lewis, head of enterprise at the Institute of Chartered Accountants of England and Wales.

“Cash flow should also be checked daily so you always know how much cash or unused borrowing you have and how it is forecast to change over the next three months.”

Reduce costs

The most basic way to increase profit, however, is to reduce costs. Identify the ways in which you can do this, such as by negotiating lower prices with suppliers, reducing energy use and minimising stationery wastage. Next, look at the main costs your business has to meet, such as staffing and rent.

"Businesses tend to see premises as a fixed cost, but consider whether you can rent out some of your space or move further out of town," suggests Lewis. “Equally, see if you can cut the cost of purchases by buying in bulk or renegotiating prices.”

There is a limit on the extent to which you can cut costs, however, and so the best way to boost profitability is to increase your turnover as there is always room for sales growth.

Note: This article was originally published on Accelerate SME and it has been republished on Zawya with full copyright permission.

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

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