Transcript The how to on cutting costs & increasing profits

CUTTING COSTS AND
INCREASING PROFITS
INDABA 2014
Presented by: Hylton Long
Date: 9 May 2014
© 2009 Tourism Enterprise Partnership. All Rights Reserved
Introduction
• …”If the economy in general has a positive
attitude towards entrepreneurship, this can
generate cultural and social support, financial
and business assistance and networking
benefits that will encourage and facilitate
potential and existing entrepreneurs.”
2012 GEM Global Report
Introduction
The South African economy has escaped much of
the financial disasters experienced in the global
economy. This can be attributed to the financial
controls instituted by government e.g. FICA Act,
Consumer Protection Act.
However another big challenge facing small
business owners is their lack of financial
responsibility in their business and their lack of
understanding financial terminology especially wrt
budgets and controlling expenses.
Facts
• Primary objective of a small business is to “make
a profit”.
• This is achieved through:
- best utilisation of resources
- healthy cash flow position & effective cash
flow management
- effective budget system
- best loan conditions and interest rates
Facts
• Very few people in business maintain financial
records on a daily or monthly basis
• Very few businesses are aware of their cash
flow situation at given times
• Most businesses fail because of the lack of
management accounts (financial statements)
and cannot access additional finance (loans)
without these accounts
Facts
• The majority of businesses have their management
accounts (financial statements) done once at the end
of the financial year which in most instances is too
late to carry out a business rescue.
• The majority of businesses do not know or
understand the management accounts drawn up by
their Accountant and neither do they question them.
• The majority of businesses do not sit down with their
Accountant and discuss their financials in detail with
their Accountant.
Facts
• Very few business owners understand
accounting terminology. In some instances they
do not know what a debit or a credit is,
cashbook, general ledger, cashflow statement,
Cost of Sales.
• Very few business owners apply basic financial
ratios to assist them in analysing their business.
• Very few business owners draw up an annual
budget and measure performance against this
budget
Why Keep Financial Records
Enable’s owner to monitor financial position
Management of cash flow
Basis for decision making
Basis for projections for future income and
expenses
• Potential investors/ buyers should we want to
sell. Gives us proof of the following:
•
•
•
•
• - Proof of income
• - Proof of net assets
Why Keep Financial Records
• Suppliers of goods, services and finance
• - Evaluate credit risk
• - Evaluate ability to pay when applying for finance
• SARS
• - Legal right to examine records (Income Tax Act and
VAT Act)
Neglected Financial Activities in a Business
Some Financial activities in a small business that are
neglected or very little attention paid to include the
following:
• Budgets;
• Cash flow management;
• Record-keeping of all financial transactions and
their results (invoices and expenses);
• Controlling expenses;
• Internal controls;
• Analysis of financial statements (financial position
of the business);
Budgets
A complete budget that relates to the objectives of
a particular business enhances the decisionmaking process and has the following uses:
• It serves as a planning aid, and its compilation
virtually always leads to refinement of the short-term
plans.
• Budgets are an indispensable means of control and
assist in cutting costs.
Budgets
• It serves as a means of conveying policy to
subordinates
who
are
responsible
for
implementing policy-specific guidelines.
• It is an instruction to subordinates and delegates
the authority needed for them to act.
• Performance can be measured.
• Goal orientation
Budgets
Develop long-term strategies and broad short-term
goals/plans
Identify the objectives of the organisation and the short-term
goals
PLANNING
Develop detailed budgets to achieve short-term goals
Measure and evaluate performance against the detailed
budget
Reassess the objectives, goal strategies and budgets and
make changes where necessary
CONTROL
Steps In Drafting A Budget
Steps in drafting a budget
Analyse results from
previous period
Review assumptions about external
environment and own business
Set goals and
objectives
Adjust figures from
income and expense
accounts
Review results and adjust
where necessary
Cash Flow Management
Some Basic Internal Controls…
•
•
•
•
•
•
•
•
Trust nobody with cash!!
Bank all cash takings intact
Deposit takings every day
Physically secure inventory
Check bank statement yourself
Pay only on sight of original suppliers invoice
Check arithmetical accuracy of all documents
Open the post yourself
Managing cash flow
• Cash book that is regularly balanced – minimum monthly
• Reconcile with bank statement – outstanding cheques,
debit orders that will still come off the bank
• Know what you have sold and when you should receive
the cash
• Monitor creditor purchases and payments
• Plan in advance for month-end payments
• Never issue a cheque unless there is adequate funds to
cover
• Prioritise debt collection
Impact of poor cash management
• Inability to pay creditors on time [impacts on
relationship, interest charges, penalties]
• Overdraft facilities used [increased interest
payments]
• Employee dissatisfaction if salaries not paid on
time
• R/D cheques, unpaid debit orders [poor
relationship with bank]
Managing Debt
Some questions to ask about your clients debtors
management
• Do your customers buy on credit?
• Do you know how long they usually take to pay?
• Do you know how much money is currently owed to your
business?
• Do you keep a record of debtors
• Have you been owed money for more than a year
• Do you keep a record of overdue accounts
• What is your level of bad debts?
Credit policy – Key questions
Can the business answer the following
• Will we sell on credit
• What percentage of total sales should be on credit
• Will there be a selling price differential – cash discount
• How will clients qualify for credit
• Who will assess the applications
• What will the conditions be
• How will the debtors accounts be managed
Controlling Expenses
During these challenging economic times,
managing expenses has increasingly become a
priority for many small-business owners. When
reviewing your expenses, consider the following:
• Watch expenses from day one.
• Don’t confuse business and personal expenses.
• Keep detailed and accurate purchasing records.
• Run reports early and often
• Continue financial responsibility.
• Look at cutting down on expenses
Responsible Lending
We all know that small business lending is down.
Still, despite the lending challenges facing small
business owners, there are still loans being
approved and, although it’s never easy nowadays,
qualified small business owners are getting
approved for many different forms of financing to
start, build and grow their businesses.
Responsible Lending
Some of the aspects a business owner must be
aware of when borrowing money for the business:
• Remember you will have to supply collateral
- Can you borrow the money you need without
pledging any collateral to the bank?
- What is a reasonable collateral request based on the
loan you’re requesting? .
Responsible Lending
• Not Being Committed to Maintaining (or
improving) your Personal Credit
Although bank financing is challenging to get,
it’s always going to be the cheapest form of
funding your business. There are “alternative”
financing options galore but it should always be
your goal to get your business to be “bankable.”
In other words, you want to be able to obtain
your loans and lines of credit from a registered
financial institution e.g. SEFA, IDC, Banks who
Are their to assist small businesses.
Responsible Lending
• Not Knowing the Impact of Your Loan on Your
Budget and Cash Flow
- What impact does the loan have on your
Budget? There are two important factors here:
Use the funding you obtain for RGA (revenuegenerating activities).
Keep in mind that cash flow is usually more
important than interest rates i.e. if you can
extend a loan period in exchange for a little
higher interest rate, consider what lower
payments mean to cash flow.
Responsible Lending
• Choosing the Wrong Loan for Your Purpose
Do you need a loan or a line of credit? Based on
your credit, business, industry, collateral,
revenue, profit, etc., do you know what your
borrowing options are? If you understand what
your options are, you can choose the loan
solution that’s best for you.
Responsible Lending
So the questions each business owner must ask
themselves when taking on debt is:
• Explore your reasons for borrowing
• Plan effectively
• Examine short-term vs. long-term debt
• Base new debt on current needs
By applying these simple questions you will ensure
that when you lend money you have taken all
aspects into consideration and will be able to meet
your monthly commitments.
Financial Ratios Analysis
• Management Accounts is not just about
preparing financial statements it also entails
being able to interpret these financial
statements.
• How do we do this? By applying various financial
ratios. These ratios will highlight any serious
problems relating to your business from a cash
flow perspective.
• Speak to your Accountant and let him explain
these ratios to you as they can help you in
cutting costs and increasing profits.
Types of Financial Ratios
• Liquidity Ratios
- Used to determine the company's ability to pay off
its short term debt. Some examples
• Profitability Ratios
- Used to determine average mark-up %, average
Gross Profit % and Net Profit Margin %
• Efficiency Ratios
- Used to calculate average debtors collection period
and average creditors payment period. Also used to
determine average stock
Financial Resolutions
Just like individuals draw up a list of New Year’s
resolutions to steer their life in a desired direction,
the small business owner should jot down
resolutions that’ll make for a successful financial
year. But where to start? With the basics of
course. Here are 4 financial resolutions to start
with:
• I will draw up a realistic budget
• I will manage the cash flow better
• I will assess all expenses
• I will reduce my personal spending
Closure
In closing being financially responsible is crucial as
you advance your business. When you address
these financial responsibilities, discussed briefly
today, for small businesses, you will be rewarded
with financial flexibility as you grow the company.
You need to be in control of your income and
expenses and apply all possible methods to
ensure you control your costs thereby increasing
profits
Thank you
© 2009 Tourism Enterprise Partnership. All Rights Reserved