As your business grows you need to make a lot of decisions, most of which involve spending some money. You may need to employ more staff, you may need to move to larger premises, you might want to move to a better location, your staff might want you to invest in a new beaut coffee making machine or the local newspaper sales rep has told you you need to place an ad in the paper every week.

When making all these decisions, and more, you need to work out whether the extra expense will help you generate more sales or help you make more money out of each sale, either directly or indirectly.

One quick tool that can help you is breakeven analysis. Have you used breakeven analysis before? In what circumstances? What was the result?

If you’re new to this one, breakeven analysis tells you how much revenue you need to generate to break even, that is make neither a profit nor a loss but just cover all your costs.

Breakeven analysis can also tell you how much revenue you need to generate to make a desired level of profit. Let’s look at this in its most basic form.

Say you have fixed costs of $80,000 each year and your variable costs (things that move with the level of activity you do e.g cost of sales) make up 50% of your sales. In order to cover that $80,000 of fixed costs you need to generate $160,000 in sales. Of that $160,000, 50% will disappear in variable costs leaving $80,000 to cover the fixed costs.

So if you want to make $50,000 profit you will need to generate sales of $260,000 and so on.

The formula is quite straightforward: -

 (fixed costs + desired profit) divided by “contribution margin”.

Your contribution margin is the percentage of sales dollars that are left once all variable costs are taken out ie it’s what’s left to “contribute” to the fixed costs.

You can use this formula when looking at the impact of additional fixed costs. If an advertising sales rep calls you and convinces you to spend $10,000 on extra advertising in the paper, in the above example you will need to generate an additional $20,000 in sales just to recoup that cost. This sort of analysis can be extremely useful to put extra spending into perspective and to help you in your decision as to whether to incur the cost or not. Even if you have no choice about incurring the cost, you can use this formula to identify how much extra sales are needed to recoup it. You can then look at strategies to get that sales growth.

While the formula is straight forward, working out which costs are variable and which are fixed is not so straight forward. Many people just use cost of sales as the variable costs and gross profit margin as the contribution margin. That may work for some businesses but many businesses will have variable costs in their overheads and some costs might have elements that are fixed and elements that are variable. You may need some help working out just how your costs behave – you could ask your accountant.

If you’ve been following our blogs over the last couple of months and have been building your own business plan as you go you will probably have quite a lot of information accumulated for your objectives and the strategies you are going to implement to achieve them.

But what does all this mean for the bottom line or for the top line for that matter?

This is where your forecasts or budgets come in. This is the “show me the money” part.

Every good business plan has a financial section where you outline your profit and cash flow projections for the coming financial year (and sometimes beyond that) and all the assumptions that are behind them.  This is also the bit the banks are most interested in.

A profit forecast sets out, for a 12 month period, the monthly revenue and expenses you expect to generate and incur. A cash flow budget is something quite different – why?

Cash is not the same thing as profit. Think about this – when you raise an invoice to a customer in July you are generating income in July but it might take your customer 60 days to pay you so the cash flow from that sale will not hit your bank account until September. Also think about this – you might need to put a $10,000 deposit on a piece of machinery in November. That piece of machinery will be an asset, something of lasting value, and so won’t be an “expense” of the business. This cash outflow will not appear in your profit forecast but it will certainly affect your cash flow forecast as will the loan repayments for the balance owing on the piece of equipment.

There are many other reasons why cash differs to profit but that’s a whole separate blog topic.

Suffice to say that your business plan should cover both profit and cash forecasts. Why?

Well as noted above, the bank will want to see it if you apply for finance or if they review your loans. Secondly it allows you to see in which months cash will be tight so that you can plan in advance. Thirdly it enables you to see what sort of impact your strategies can achieve and/or what your strategies need to achieve in order to achieve your profit and sales objectives. Fourthly it gives you  a benchmark against which you can measure your success as the year progresses.

Not having a forecast or budget against which to measure yourself is like not having any objectives – you may drift along quite nicely without them but you certainly won’t reach your full potential.

Forecasting is not easy and you will probably need the help of your accountant to put it together but hey, that’s what we’re here for.

How are you going with your business plan so far?

Over the previous weeks we have discussed the core of a good business plan, something to give you direction, something to engage your team.

Now you need to get down and get dirty. Make sure you look at particular facets of your business, look at them objectively, look at then positively and evaluate them. It is difficult to do, isn’t it?

You need to dissect the areas within your business that make it what it is today, common areas that are targeted are Marketing, Production, Technology and People.

What we have found that works when assessing various segments is to do a SWOT analysis on the segments so the theme can be carried through your business plan. The SWOT analysis allows you to quickly identify the multiple facets of the segment. Make sure you do it in bullet format, it makes it easier to review and digest on a regular basis. If the documentation is too bulky and wordy it is less likely to be reviewed.

Have you got a big “glossy” business plan that just sits in the top drawer because it is too hard to review? Simplify it!

When considering areas such as marketing, people and technology use specialists in the areas to help you with your SWOT analysis and then provide solutions or plans that will allow your business to have the best possible outcome.

We have found using outside resources allows for a different perspective and a professional solution. What have you done? Do you find it is too costly to use professionals to help you with your analysis and solutions?

The analysis of these sectors will allow you to identify additional capital requirements, efficiency gains, ensuring you have the right team and refocusing your efforts to the right market. If you do not have clear visions for each of these segments you will invariably be wasting time, money and effort in focusing on the wrong items.

Make sure you get the biggest bang for your buck. What was your biggest bang or easy win?

Over the past few weeks we have been looking at various aspects of business planning. By this stage you’ll have your objectives, vision and mission down pat. So now you have a good picture of where you are heading but how are you going to get there?

You need strategies and actions that will lead to the achievement of your objectives and goals. One of the best ways to trigger the identification of specific strategies is to do a SWOT analysis.

That is, take a good look at the Strengths and Weaknesses of the business, the Opportunities the business faces and the Threats that the business could potentially confront.

This is often best done as a brainstorming session and you may want to do this with the whole team. Get everyone in a room with a whiteboard or a flip chart and just throw ideas up.

Strengths – what is it we do well? what advantages do we have compared to others in the marketplace? What makes us special?

Weaknesses – what is it we don’t do so well? what are the areas of the business that frustrate us? What is it that puts us behind our competitors?

Opportunities – this may be new technology that could give you an edge, areas in which you believe the market is underservicing customers that you could get into, potential takeover targets, the economy itself may provide opportunities, strategic alliances or partnerships with other businesses, new government regulations may provide opportunities etc.

Threats – economic, industry specific e.g new regulations and requirements, competition, if you are a farmer then the weather may be a threat. Here you are looking at anything, usually beyond your control, that may impact your business adversely. It doesn’t need to be happening right now, but it might happen in the future.

Tip: Strengths and weaknesses are internal, they are about your business. Opportunities and threats are external to your business.

Once you have exhausted the team’s thoughts, run through the lists and just confirm that you are happy with what’s there and select some as priority or key items.

Now your strategies can be developed by thinking about what you can do to:

a)      capitalise on your strengths (including making your customers aware of them);

b)      mitigate or address your weaknesses;

c)      take advantage of opportunities; and

d)     prepare for and combat the threats.Have you done a SWOT analysis for your business before?

What were the results?

Did it raise things that led you to actions and strategies you hadn’t thought of before?

By being able to articulate your vision, mission and values will allow you to communicate with your clients and team on a new level. You will engage them, excite them and satisfy them. This has an immediate impact on relationships and over time will have a critical impact on business performance.

Have you been able to tell your clients what your mission is? Are your team engaged because they know the vision and they see the path ahead?

When you are creating your business plan it is imperative that you get this right at the front end because it will set the tone when addressing all of the other segments in the plan. It will identify the team members you want to attract and retain, it will give you clarity on the type of client you want to attract and most importantly it will identify the values that you want your business, your team and your clients to model.

Your Mission Statement  will be a constant reminder to your team of why the company exists and why the business owners have risked their money and creditability to establish, develop and grow the business that is now on display.

There are numerous examples of creative and catchy mission statements from all types of companies on the internet but it is important that you develop your own, something that means something to you and what you set out to achieve.

Your Vision Statement is your inspiration and framework for  all of your strategic planning. It really answers the question “Where do we want to go?” This is a statement that is not for the public domain, it is for you, your senior management and your team to give guidance and clarity on the decisions that are made. This clarity comes when you ensure that the decisions you make are in line with your future goals.

The values of an organisation will reflect the personal and corporate values of the leadership team, the owners and ultimately the team of people that continually display these values to your customers every day.

If you outline your personal values and then assess the values that you want your business to display, they will generally be in line. If they are not in line then it will be difficult to continually enforce values that you do not believe in.

Can you always rely on your team to act within the values you want them to? Do they know what your values are?

Together these three items within a business plan create a foundation that will allow you to develop the remainder of the plan with consistency and clarity.

 Give it a go, you will be amazed with the results.

Business planning is a term that has been thrown about for years now but what does it actually mean? Many people talk of the business plan itself and refer to an actual document but is that all it is?

We don’t think so. At Flavel Tierney we believe business planning is a process, an ongoing process, during which you step back from working in your business and spend some time working on your business.

 A couple of weeks ago our blog talked about setting goals for the coming year. This is part of the business planning process and is a good starting point. Without goals the rest of the business planning process will be at best vague and without direction and, at worst, completely redundant.

Business planning encompasses the following:

a)      articulating your goals and your vision for the business,

b)      critically analysing the business’ strengths, weaknesses, opportunities and threats,

c)      developing strategies across all areas of the business to achieve your goals,

d)     identifying actions needed to implement the strategies and allocating responsibilities and timeframes;

e)      documenting the plan and communicating it to your team (this is the business plan document referred to earlier); and

f)       implementation – following progress and keeping things on track.

Put in point form like this it appears to be a simple task but it is actually harder than it looks. Many business owners have lots of ideas in their heads but are not necessarily good at putting those ideas in some form of order, articulating them for others to understand them and ensuring they actually get translated to action.

Also, many employees have great ideas but we often feel that we, as the owner, have to take full responsibility for running the business and we don’t stop to ask for ideas and help. The business planning process is a good way to do this.

At Flavel Tierney we’ve found that a great way to get started is to hold a strategic planning day, or half day, either with the whole team or just the owners/managers and have someone independent, like us, facilitating the day and guiding you through the process – getting all those ideas out. We can then document the outcomes for you ie the business plan itself, and then help you with the implementation process. Here comes that word again from our previous blog – accountability. We can help hold you accountable for achieving what you set out to do.

Over the next few weeks our blog will work through some aspects of the business planning process in more detail – why not use it to give yourself a kick along and don’t forget that we are only a phone call away if you need any help.

In the meantime we’d like to hear from you. Do you have a business plan? How did you go about pulling it together? Who in your organisation did you involve in the process? Did you get any external help? Are you happy with the outcome and are you satisfied that it’s being implemented?

The Global Financial Crisis (GFC) has made us all too well aware that cash is king. The Reserve Bank (by lifting interest rates), the government and many others are telling us that the GFC is now over and the economy is going well. Is it? What’s your experience?

As we all know there are various things that affect our business and cash flow is usually high on the list. We speak with a lot of business’s in a lot of different sectors and the majority are telling us that cash flow is worse than it ever has been before. This in many circumstances is coming from business people that have been operating  a small business for 25 to 30 years.

When an economic event such as the GFC takes place different segments of the economy feel the effects at different times. When the GFC first hit the stock market plummeted followed by the collapse of a number of large organisations and the regular poor reporting data of large corporations. This was followed by the real estate sector coming off. Is it now small business’s turn to feel the real effects of the GFC?

The bank’s lending criteria have definitely tightened up. They want better interest cover ratios, they want to see complete and up to date data and generally have strict reporting covenants and security positions when approvals come through. More often than not they now wanted to see cash flows, they want to know where you are heading and how you are going to get there. Have you recently refinanced? Was it a detailed process?

In order to try and keep the cash flowing through your bank account it is a great time to review your terms of trade, how you enforce these and the collection process if you experience a “bad” payer. You can change your terms of trade to request a bigger percentage of the invoice up front, shorten trading terms or put systems in place to ensure you get paid on the day you are meant to be paid.

Some of you may be saying this does not affect me because I operate on cash only. If this is the case you are right, debtors don’t affect you but it is still a great time to evaluate how you increase your revenue, new markets, new services or a combination of both.

If you do offer terms of trade to your customers, have you reviewed your terms recently? Do you follow your debtors up on a regular and structured basis? Can you change the terms of trade to greatly benefit your cash flow and ultimately your business?

The effect of reducing debtor days has a profound impact on your cash flow and ultimately the reliance on your bank to supply working capital. If you would like us to show you how changing debtors days impacts your business then contact our office and we will schedule an appointment.

Following our commitment to communities, Flavel Tierney are pleased to be hosting an event as part of the Cancer Council's Australia's Biggest Morning Tea.  Australia’s Biggest Morning Tea is one of Cancer Council’s leading fundraising events and the largest, most successful event of its kind in Australia.  With 1 in 2 Australians affected by cancer we are proud to be supporting this fantastic event. 

This year, Flavel Tierney are inviting all clients of our firm and the tenants of 295 Rokeby Road to come together for 'Morning Tea at 295' on 27th May from 10.00am.  Each person is being asked to kindly bring a plate of morning tea, together with a $5 donation to enjoy morning tea with a cup of tea or coffee donated by Domain Catering. All funds received will be donated to The Cancer Council.

We are welcoming all our clients to support this fantastic event and invite you to join us for 'Morning Tea at 295'.  Should you wish to attend, would like more information or would like to donate towards this cause, please contact Cathy Fulwood on cathy@flaveltierney.com.au or 9380 3555.

We look forward to enjoying a coffee and morning tea with you on the 27th.