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Business Finance Consulting

Financial Ratios – Profitability Ratios

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A recent article in the Australian Financial Review explained that the three main reasons for business failures were: Poor Financial Management (28% of failures), poor Accounting (16%) and lack of Management experience (15%).

So Poor Financial Management is the main culprit in business failures. The Directors and the owners of a company need to monitor the financial performance of the business. Revenue, Gross Profit, Operating Profit are important elements, but they have limitations: Firstly, they vary considerably with the ups and downs of Revenue (seasonality), and secondly, an increase in Operating Profit does not always reflect good performance (if Operating Profit increases by 5% for example, while Revenue increases by 20%, it is a poor result).

Ratios do not have these limitations and that is why they are widely used to measure financial performance.

Let’s look at the first set of financial ratios: The Profitability Ratios.

Profitability ratios measure the business’ ability to generate profit as compared to its costs and expenses, over a period of time.

They are: The Gross Profit Ratio, the Operating Profit Ratio and the Profit Before Tax Ratio. Read more →

Business Finance Consultants

Waste in the Finance Function? Surely Not!?

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In a previous blog, we discussed applying the first principle of Lean (‘adding value’) to the Finance function. Today, let’s consider the second Lean principle: ‘Reducing waste’.

Yes, there can indeed be waste and missed opportunities in any Finance Department.

Here are a few common examples:

  • inefficient collection processes
  • the same data being manually entered several times in different systems
  • reports being generated for people that do not understand them and/or do not use them (in which case they are obviously not helping to guide the business)
  • complex report generation that requires the collection/analysis of data from multiple systems
  • cost allocation that does not add value to the decision making process, and
  • inappropriate budgeting processes that do not deliver outcomes aligned with the strategy of the business.

Read more →

Business Finance Consulting

Can Finance be LEAN?

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Most of our readers will be familiar with ‘Lean’ methodology and principles, which have been around for a number of years. But, like most people, some readers might primarily associate ‘Lean’ with manufacturing and everything that is linked with production.

In actual fact however, ‘Lean’ can be applied to every function in a business, including Sales, Marketing, Human Resources and Finance.

The Finance function is the same as all other functions in a company: It has processes (accounting, controlling, collection and reporting to name a few), which can be optimised through the application of Lean principles.

The three key Lean principles are Adding Value, Reducing Waste and the Continuous Improvement. Read more →

Financial Assistance for Exporters

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Are you an exporter or aspiring exporter? Is your turnover below $50 million?

If the answer is yes to both questions, you may be eligible to benefit from the Export Market Development Grants (EMDG).

The EMDG scheme is a key Australian Government financial assistance program for aspiring and current exporters. Administered by Austrade, the scheme supports a wide range of industry sectors and products, including inbound tourism and the export of intellectual property and know-how.

If you are currently benefiting from the EMDG, you already know of the 30th November 2016 deadline to lodge your application for the Financial Year ending 30th June 2016.

If you are not benefiting from the EMDG, keep reading… Read more →

Business Finance Consulting

It’s Payback Time! …or is it?

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Everyone facing a business investment decision, such as launching a new product, purchasing equipment, installing a new production line, building a factory or acquiring a business needs to ask themselves the following questions:

How long before I get my money back?
Which of these investments is better?

The Payback Analysis provides us with a means to answer these questions by clarifying the length of time (weeks, months or years) required for an investment to reach breakeven, before it begins returning a profit. This length of time is called the Payback Period.

The calculation takes into account Incomes, Expenses (*) and Taxes. The shorter the payback period, the better. The longer the payback period, the longer funds are locked up and the riskier the project.

Read more →

Business Finance Consultants

Working Capital Explained

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‘Working capital’ is a notion that many business owners are not familiar with. It seems difficult, complicated, so many prefer to just ignore it.

But it is important and it does not have to be complicated: It can be put in simple words.

I agree that the definition in Wikipedia is not easy to follow: “Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.” Even some finance experts need to read this definition three times to comprehend the wording…

To put it simply, working capital measures the short-term financial health of a business, ‘short-term’ being less than 12 months. Read more →

Stocktake

Doing A Stocktake Is In Your Interest!

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The end of Financial Year approaches and most businesses would typically be planning and organising their annual stocktake. Other companies may do one or several interim stocktakes during the year in order to better monitor their inventory and/or minimise the disruption of a full stocktake.

A stocktake is the verification of the items physically held in inventory (also called stock). Both the quantity and the condition of each item are checked. The purpose of a stocktake is to confirm that the real physical inventory of a company reconciles with the theoretical inventory held in the accounts.

The objectives of a stocktake are multiple:

  • To remove the items that are broken, damaged or that have become obsolete;
  • To learn of items that are no longer there;
  • To provide valuable information on slow moving items;
  • Last but not least, to reduce your taxable profit via inventory write-offs.

You would not want to pay taxes on a profit you did not make, would you?

Inevitably, a stocktake will end up with a list of discrepancies: Items unaccounted for, missing or that reduced in volume, density, quality, etc. Even the best companies with well implemented inventory procedures will have discrepancies: It is human nature or should I say it is “business nature”. Read more →

Business Finance Consulting

You Need a Cash Flow Forecast!

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Cash is the lifeblood of any business, large or small.

When cash runs out, the business goes bust: Ansett, Babcock & Brown, Centro, HIH and OneTel are some of the famous names that went belly up. Thousands of businesses do the same every year, for the same reason.

All bankruptcies are not avoidable: Sometimes the business model is flawed, the market conditions change, or a fierce competitor comes in and ravages everything.

I recall an article in the Australian Financial Review stating that 28% of the business failures were caused by poor financial management!

Those bankruptcies could have been avoided if the business had better planned the cash movements: The periods of famine would have been foreseen and the business would have taken measures to sail through the storm.

The key to this problem is called: Cash flow forecast. Cash flow forecast is not a miracle recipe. It is a tool that all business owners should work on and work with. Read more →