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Does Your Business Suffer Cash Flow Problems?

Article By Brent Charlton | | Business Consulting
We recently advised a wholesale business that was experiencing large fluctuations in its sales, profits and cash flow. Like most wholesale businesses it is required to carry large stock holdings and significant credit accounts. The owners wanted advice on how to improve their profit, better manage their cash flow and prevent the loss of income from future unplanned events.

This case study highlights the importance of small business owners understanding the true costs of running their business and factors influencing their profit and cash flow. It also provides guidance on how to structure funding arrangements for unique business circumstances and how to use insurance as a means of protecting business income.

Client Issues identified:

1. Unsure of the business breakeven point
2. Not understanding the benefits of ratio analysis and budgeting
3. Not enough working capital
4. Inadequate business insurance

How Resolved

1. Breakeven Sales

We completed a breakeven sales analysis enabling them to pin point the minimum sales required to cover their business expenses on a monthly basis.

2. Improving Profit

To better manage their stock, we completed a series of key profit ratio calculations. This included Gross Margin Return on Inventory and Gross Profit Margin. It was agreed that we would upgrade their stock management system to improve their gross profit margin by reducing shrinkage and create certainty on the cost of each product line in stock.

3. Improving Cash Flow

To improve their cash flow, we completed a series of key cash flow ratio calculations. This included Account Receivable and Stock Turnover and a Flow of Funds Statement. It was agreed that we would prepare a financial budget and cash flow projection every year to determine their funding requirements.

Based on the cash flow budget projections and our discussions with the owner’s bankers, we were able to negotiate an extension on their overdraft limit to meet their working capital requirements.

4. Business Insurance

We also undertook a review of the businesses insurances and have increased the overall level of cover to include Business Interruption Insurance to protect their business from a loss of future income.

To support the owners through the implementation of the above initiatives, we have commenced quarterly Board of Advice meetings to ensure the owners implement the agreed actions and to provide a sounding board for the challenges experienced during implementation.