Business Finance Consulting

Financial Ratios – Profitability Ratios

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 Consulting

It’s Payback Time! …or is it?

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

Lean Business – Myth or Reality?

LEAN Misconceptions – Part 1

The Lean Philosophy has been around for many years, but unfortunately it is not always understood, predominantly because Lean is thought to be:

  1. A cost reduction exercise
  2. A process to reduce the number of employees
  3. Only applicable to ‘manufacturing’ organisations
  4. An ‘operational’ issue that can be solved by the ‘operations people’
  5. Only for ‘big’ organisations.

Nothing could be further from the truth!

In this series of articles, I will discuss each of these misconceptions and demonstrate that Lean is about business; any and every business. A Lean business strives to understand what the customer really values, and then maximises customer value. Lean is not a short-term fad, but a long-term commitment towards continual improvement that involves every system, every process, every department and every employee within the organisation, irrespective of it’s size. Read more

Engaged Employees = 27% Higher Profit!

Engaged employees = 27% higher profit, 50% higher sales and 50% higher customer loyalty. (Gallup Study)

Is Your Business Set to Achieve Success Through People? Our FREE diagnostic tool will help you find out!

Consider for a moment the total value of your investment in the employees within your business -basic wage and salary costs, leave provisions, workers’ compensation and other insurances, training costs, incidental costs, accommodation and technology costs, recruitment and induction costs, the cost of casual staff to relieve employees on leave etc…. Think also about the time involved in recruiting employees and having them perform at their best, the time you might need to invest in addressing poor performance, conflict, customer complaints etc….

If yours is like most businesses, you’ll find that the total investment in your employees is significant, and in many cases it’s the single-most significant cost of doing business. With this in mind, it simply makes sense to ensure that your business is managing employees in a manner which generates the maximum possible return on investment. Read more

The Real Impact of Giving Discounts

As a consumer, we all love to receive discounts when we purchase. The same goes when buying goods or services for our company.

But discounts have a strong impact on the business and its Gross Profit (also called ‘Gross Margin’):

  • Discounts received trigger:
    • Increase in Gross Profit
    • Increase in Profit before Tax
  • Discounts given can trigger:
    • Loss or Revenue
    • Loss of Gross Profit
    • Decrease of Profit before Tax

So if you intend to give a discount to your customers, the question becomes: How much increase in Revenue do I need, in order to maintain the Gross Profit in $ value?

The answer is in the following formula:

= [(Gross Profit ratio / (Gross Profit ratio – % Discount given)) – 1] x 100

If it sounds complicated, here is a table with all calculations already done: Read more

Business Finance Consulting

You Need a Cash Flow Forecast!

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