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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 →

Thinking Outside the Box to Win Sales

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In both our personal and business lives, the decisions we make today are largely the result of past experiences, relationships and the values that were ingrained in us as we developed.

Good or bad, our past will have an impact on our future and all too often restrict the decisions we make and limit our growth. This is natural and many of us are aware of this and actively work to address the issue.

From a business perspective, such thinking can limit our careers and our personal and business potential. As markets change so to must the way we approach business. A lot has been said and written about disruptive innovation, and what has happened to those businesses that got stuck in the past (think Sony Walkman, Kodak, Swiss watches), but ultimately it may just be a case of changing the way we think about the obvious.

I came across this story on a friend’s Face book page today which I think demonstrates this idea perfectly. Now I think the story has been around for a while and I am unsure whether this is a true story or not, but it does highlight just how we can be constrained by not thinking outside the box.

Consider this:

You are driving down the road in your car on a wild, stormy night, when you pass by a bus stop and you see three people waiting for the bus:

1. An old lady who looks as if she is about to die.

2. An old friend who once saved your life.

3. The perfect partner you have been dreaming about.

Which one would you choose to offer a ride to, knowing that there could only be one passenger in your car? 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 →

Lean Business – Myth or Reality?

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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 →

The Real Impact of Giving Discounts

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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 →