Case Study – How to Beat the Cash Flow Crunch

Background

We recently consulted to a wholesale and retail business that was experiencing large fluctuations in its sales, profits and cash flow. The business supplies goods to mining and rural businesses and is required to carry large stock holdings and significant credit accounts. Heavy rains also caused damage to the business’s stock and premises and it was unable to supply refrigerated goods for a period of 2 months.

The owners, William and Laura, 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, as well as 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

• Unsure of breakeven sales level.
• A lack of understanding the benefits of ratio analysis and budgeting.
• Funding shortfall.
• Inadequate business insurance.

Resolutions

 1. Breakeven Sales

William and Laura, with support from their accountant, completed a breakeven sales analysis. This enabled William and Laura to pinpoint the minimum sales required to cover their business expenses.

Total fixed business expenses $350,000
Average gross profit margin 55%
Minimum weekly sales required $12,250

2. Improving Profit

To better manage their stock, William and Laura, with support from their accountant, completed a series of key profit ratio calculations. This included Gross Margin Return on Inventory, and Gross Profit Margin. It was agreed that William and Laura would upgrade their stock management system to improve their gross profit margin.

3. Improving Cash Flow

To improve their cash flow, William and Laura were provided with the necessary assistance to complete a series of key cash flow ratio calculations. This included Debtors and Stock Turnover and a Flow of Funds Statement. It was agreed William and Laura would prepare a cash flow budget every year to determine their funding requirements.

4. Finance and Business Disruption Insurance

William and Laura’s Financial Adviser was able to negotiate an extension on the their overdraft limit to meet their working capital requirements. William and Laura also worked with an in-house Financial Planner to purchase new Business Disruption Insurance to protect their business from a loss of future income.
Client Process

William and Laura completed a Business Life Plan to determine their business growth and succession objectives.
  
If you would be interested in completing a Business Life Plan like William and Laura, or for more information on any of the above Business Performance Indicators, please contact us on 07 3209 2300 or via our website.