Client A Ltd runs a wholesale business. The previous financial year he had made a loss which had on-going effects in terms of his cash flow and therefore business viability.
Analysis showed that the previous year he had made several unusually large sales but that the selling price uplift on cost (margin) was too low to cover his full cost of running the business. Although the client was generally aware of the sales price compared to cost for individual orders, he had no month by month measurement of margin (profit) being attained on sales overall.
I created a report to measure profits by product and by customer on a monthly basis. This report identified:
- When products were being sold at too low a profit
- Where customers were demanding too heavy a discount
- The most profitable products and customers
The report provided information to ensure that the business as a whole was profitable. The report also enabled ‘target’ setting. Sales volumes actually decreased for the year but increased mark-up on products ensured overall profits increased substantially.
Client B ran a successful and expanding retail business with several other partners. Despite high profitability and an agreed overdraft cash flow was difficult because one large customer required a 60 day credit period.
I prepared a budget and cash flow template which helped evaluate monthly cash flows. The report indicated that there were several periods when the business would exceed its overdraft limit. Inspection of expenditure flows revealed that although the partners could afford the remuneration they were drawing when measured against profit the business did not have enough cash to operate with such high drawings. Exceeding agreed bank limits can result in even profitable business being forced to cease trading.
Partners agreed to a lower level of drawings over the ‘leaner’ cash periods. Bank credit limits were maintained.