In times of economic uncertainty, businesses face three distinct paths: some innovative companies rise to the occasion, capitalising on opportunities amidst adversity; others, unfortunately, falter and face failure; while the most resilient enterprises emerge stronger than ever.
Effective financial planning is essential to this resiliency, helping to position it for sustainable growth. As we settle on the new financial year, it is the opportune moment to devise a strategy that ensures steady returns and the flexibility to adapt to an ever-changing business landscape.
In our recent webinar, Sue Hirst from CFO On Call and Laura Athena Walker, Senior Account Executive at ezyCollect, unveiled essential tactics for cost optimization, efficient stock and job management, and streamlined customer payments.
Let’s delve into the key takeaways from the session and learn how to empower your business to survive and thrive in the face of uncertainty.
Strategic Sales and Gross Profit Analysis
Conducting a strategic gross and profit analysis is essential for businesses to identify profitable and unprofitable areas within their operations.
By separating sales into different profit centres, businesses can evaluate the profitability of various products, services, customers, or divisions. This analysis helps pinpoint areas that contribute positively to the bottom line and might be causing losses. The process involves tracking sales and costs against these profit centres.
It is crucial to analyse opportunities carefully to ensure they will be profitable and not strain the company’s cash flow. Performing a SWOT analysis at least once a year can further aid in identifying strengths, weaknesses, opportunities, and threats, allowing businesses to prioritise improvements and make strategic decisions to enhance overall profitability.
Cost Optimisation for Improved Productivity
The first step is understanding the true cost of products or services, separating direct costs from overheads. By accurately determining the costs, businesses can set appropriate prices that cover expenses and overheads and ensure profitability.
Systemising processes is crucial for continuous improvement and increasing the value of the business. By documenting processes, the company can constantly refine and streamline operations.
Additionally, constantly researching alternatives and staying updated on market innovations can help minimise costs without compromising product quality or service delivery.
For service-based businesses, maximising labour hours and productivity is essential. Ensuring that billable hours are optimised and non-billable tasks are minimised can significantly impact sales and profits. Identifying opportunities to outsource or automate low-value tasks can free up skilled staff to focus on billable hours, leading to increased profitability.
Pricing Strategies for Profitability
Developing a successful pricing strategy for profitability involves:
- Understanding the actual cost of products or services.
- Analysing competitor pricing.
- Regularly adjusting prices to keep up with inflation and maintain profitability.
Businesses should communicate the value proposition to customers, making the invisible aspects of the product or service visible. This process could include highlighting superior quality, longer-lasting benefits, or time-saving features. Quantifying the value and showcasing success stories or testimonials from satisfied clients can help justify higher prices and differentiate from competitors.
Additionally, businesses must identify their break-even point and explore how small price increases or cost reductions can significantly impact the bottom line, making pricing adjustments an effective strategy for enhancing profitability.
Overhead Analysis for Enhanced Net Profit
Overhead analysis plays a critical role in enhancing net profit for businesses. Overheads include expenses such as marketing, office rent, and staff salaries that are incurred regardless of sales.
Businesses should create an organisational chart and clear job descriptions to ensure tasks are well-organised and understood to optimise overheads. As businesses grow, owners must assess when it becomes too much to handle multiple roles and decide when to hire additional staff or leverage software solutions.
Strategic business planning and budgeting are crucial to identifying growth opportunities and resource requirements. Proper planning should consider profit targets and cash flow management to ensure the availability of funds when needed. Regular analysis of overheads and cost efficiency will help businesses maximise net profit and overall financial health.
Streamlining Customer Payments
- Accurate Credit Risk Assessment: Evaluating and monitoring customers’ creditworthiness before extending credit terms is essential, especially in times of economic uncertainty. Accurate information about customers’ financial status can help businesses avoid risky clients and ensure timely payments.>> Get free credit scores with Credit Insights
- Proactive Communication: Promptly sending out invoices and pre-reminders before the due date can encourage customers to pay early. ezyCollect’s studies show that about 30 per cent of invoices can be paid before the due date if proactive communication is implemented. Engaging with customers before they become overdue is crucial, and addressing any potential issues to facilitate timely payments is vital.
- Remove Friction from Payment Process: Simplify and streamline the payment process for customers. Eliminate unnecessary steps and make it easy for customers to make payments. Providing convenient options such as digital payments, can lead to faster and more frequent payments, especially for small business customers with limited time to manage payments.
- Consistent Collections Approach: Implement a consistent and structured collections process to ensure all customers are treated equally and fairly. Avoid ad hoc chasing and ensure timely follow-ups for all accounts, regardless of their size. A systematic approach to collections enhances cash flow and reduces the risk of overdue payments.
- Improved Reconciliation: Maintain proper records and references for payments received. An automated accounts receivable system can help match payments with invoices, reducing confusion and enhancing clarity in the reconciliation process. Efficient reconciliation ensures accurate financial reporting and saves time investigating unidentified payments.
By implementing best practices and leveraging accounts receivable automation tools like EzyCollect, businesses can optimise cash flow, enhance efficiency, and ultimately boost their net profit.
Efficient Supplier Payments
- Avoid Cash on Delivery: Accounts Payable is the counterpart to Accounts Receivable, and paying cash on delivery can lead to a cash flow imbalance. Shorten the gap between customer payments and supplier payments to optimise cash flow.
- Smart Negotiation: Negotiate favourable payment terms with suppliers, aiming for the best possible terms without straining relationships. Avoid excessive delays that could harm supplier confidence and lead to demands for cash on delivery.
- Cash Flow Projection:Create a cash flow projection to understand the timing and nature of cash inflows and outflows. Plot out customer payments, sales, costs, overheads, taxes, and other expenses for the next 12 months.Regularly measure and adjust the cash flow projection to gain better control and preempt any potential cash flow issues.
- Buffer Amount: The ideal buffer amount may vary depending on the business’s nature and needs. A cash flow projection will help determine the appropriate buffer amount for temporary cash flow gaps.
- Proactive Approach: By managing accounts receivable and accounts payable efficiently, businesses can optimise their cash cycle and avoid needing external funding sources or cash injections from the business owner.
Effective Stock Management
Effective stock management is essential for businesses to minimise inefficiencies and optimise cash flow. Implementing a sophisticated stock movement system is crucial for tracking stock movements, identifying profitable items, and avoiding overstocking or understocking situations.
Viewing stock as tied-up capital reinforces the need to efficiently manage inventory levels, ensuring that money is not idle for too long. Obsolete stock can be a significant issue, but businesses can turn it back into cash through strategic measures like targeted promotions and sales. Using visual tools such as a stock pool can be another way to help you visualise your stock and manage it efficiently.
By adopting a proactive approach to stock management, businesses can unlock the potential of their inventory, improve cash flow, and make better-informed decisions about their stock needs.
Streamlined Job Management
For service-based businesses, efficient job management is crucial to eliminate problems and ensure profitability.
Implementing systems and job management software helps create templates for smooth service delivery, allowing teams to absorb learning and continuously improve processes. By tracking quotes, actual costs, labour, and materials for each job, businesses can assess profitability, identify areas for improvement, and make informed decisions.
Job management add-ons for accounting software like Xero offer affordable solutions that provide significant returns on investment in increased profitability, reduced headaches, and added value to the business. Embracing streamlined job management practices empowers service-based businesses to enhance efficiency, maintain profitability, and position themselves for long-term success.
In conclusion, the discussion highlighted the importance of effective cost optimisation for increased profitability. Understanding the true cost of your product or service, streamlining overheads, and implementing systems for job and stock management are crucial aspects to focus on.
By analysing your business’s financial health and making data-driven decisions, you can enhance cash flow, achieve better profit margins, and ensure the long-term success of your enterprise. Embracing these strategies will boost your bottom line and set the foundation for sustainable growth and prosperity.
Don’t leave your business’s financial health to chance – visit CFO on Call for more tips and strategies to drive business growth and success.
Interested to know more about streamlining your accounts receivables for a healthier cash flow? Speak with our AR experts to see how you can automate your process.