How To Beat The Cashflow Crunch

Background

We recently advised 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 and 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

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

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How Resolved     1. Breakeven Sales 
                           William and Laura, with support from their accountant, completed a breakeven sales analysis.
                           This enabled William and Laura to pin point 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 William and Laura would upgrade their stock management
                           system to improve their gross profit margin and to reduce shrinkage

                           3. Improving Cash Flow
                           To improve their cash flow, William and Laura, with support from their accountant, completed
                           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 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's Financial Adviser also
                           purchased new Business Disruption Insurance to protect their business from a loss of future
                           income

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Client Process   William and Laura completed a Business Life Plan to determine their business growth and
                          succession objectives

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© Bstar Pty Ltd 2008

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