Maximizing profits and Cash Flow for Your Company

Bay Business Group				analysis each year and determine if additional
180 South Washington Street Suite 200				equipment or costs are necessary to provide the
Falls Church, VA 22046				products or services they sell. Before a fixed cost
Maximizing Profits And Cash-Flow For Your				is incurred, the method of repayment should be
Company				considered and evaluated for probability. It should
What every business owner, CEO, professional or				then be measured against actual results each
entrepreneur needs to know				month.

				13. Actual vs. Budget Review
Maximizing Profits and Cash-flow for Your				A budget should be prepared for every company.
Company				Once completed, the actual results should be
Spending just 10-15% of your time each month				compared to what was budgeted. When the
looking at the RIGHT financial indicators can add				budget is not met or is exceeded, the person
up to $30,000 - $300K to your bottom line.				responsible needs to account for the difference.
Why it’s important that the person who				This also helps the business to establish a specific
manages executive, sales, operations and				person being accountable for every financial
administration should also worry about something				transaction in the business. The sales team
the CFO or controller usually handles				explains any differences from budget for the
				amount of cash or payables, etc. Each difference
You’ll probably agree that most people				is either accepted (such as higher sales) or an
don’t go into business to be an expert at				action item is initiated to correct a problem.
accounting or even wish to know half as much as
their top financial person. But, as the man or				14. Inventory Turnover
woman who’s ‘steering the ship’				For businesses that have inventory, it is critical to
there are some key financial indicators that you				manage it correctly. If a business is efficient and
should look at each month to maximize profits				has high volume, the more turns it will have in
and manage the growth of your business.				inventory. This means the business will have less
This report will show you what areas to monitor				invested in inventory. If the turnover is not high,
or evaluate every month, described so it’s				then the business has to seriously look at
easy to understand and with minimal time				inventory and determine if it is carrying too much.
investment. In a recent survey of business
owners, it was found that nearly 7 out 10 said				15. Debt Of The Company
they spent 45 to 60% of their time on				The amount of debt a company carries must be
administrative tasks with a major portion focused				consistent with its needs. If a company is using
on accounting issues. That represents 3 to 6				debt just because it is easy or available, it may
times over the amount required by the most				be wasting money. If it is using debt because of
efficient companies.				opportunities that require funds that could
If you’re like most business people, you’d				increase sales then the company must measure
rather spend the majority of your time on getting				the results of the investment compared to the
the most sales and then efficiently fulfilling those				costs involved. Any pay downs or increases in
sales to turn Maximum Profit. But, in the noted				lines of credit must be scrutinized to see if they
survey less than 2 in 10 actually did what we all				conform to expectations, which can be
set out to do in our business. I think this fact				determined from an estimated cash flow
stems from two reasons. First, I’ll have to				statement as part of the budgeting process.
blame my own industry as part of the problem.
Two, it’s the lack of knowing what items are
important to the company and how to measure				Maximizing profits and preventing loss
the status of a company. (how to read the				A. Where is my time best spent on the
company’s temperature so to speak).				business?
				There are four areas business owners or
Accounting industry to blame?				managers need to be concerned with in running
The first order of business is to prepare a job				their company.
description of what you want your bookkeeper				1. 1) Executive decisions include strategic planning
to do. Yes, my industry may be partly to blame.				such as determining target markets, whether to
You know as well as the next businessperson				expand, whether to change concepts, etc.
that without accounting, there is No company. We
all know accounting is an integral part of every				2) Sales activities relate to generating revenue for
business. However, over the years our industry				your business including the marketing and
has acquired a reputation for the ones that focus				advertising.
on small details and past history. But, business				3) Operations relates to delivering what was sold,
owners consistently say they want financial				whether product or service.
information that helps them make good business				4)Administrative functions obviously includes the
decisions to help maximize profit and avoid				‘back office for all businesses’ –
problems.				paying bills, sending invoices, payroll, making those
				important bank deposits, generating reports for
Unfortunately, most accountants have been slow				government agencies, etc. Basically administrative
to utilize the most up-to-date software and				is important albeit a rather unproductive tax on
equipment to allow them to operate in the most				time.
efficient manner. As a result, there is too much of
a fire fighting mentality, rather than being in a				The problem is that most business owners and
progressive, financial advisor role. Once the				managers tend to spend too much time on
accounting department gets bogged down and				administrative tasks. This is probably because
into the mode of merely getting information				these tasks are easily identified and can be
recorded, the most valuable tasks they could				completed by the owner since he or she had
perform tend to get put onto the back burner.				probably done them from the business starting
The end result is that the business executive				up. Instead, the focus should be Sales and
does not get the right financial information to				Operations. You should let others whose
make key business decisions that may influence				compensation is more in line with these
the growth or decline of the company.				administrative duties complete them. Note the
Today, accountants need to have a system and				table below showing how time is spent by typical
use the tools (software & hardware) that				owners or managers vs. where time is spent by
make the job of accounting extremely efficient, if				the most efficient best run companies.
utilized properly. A little preplanning allows the
accounting department to not only record the				Business Activity
required information, but also to produce the				Time Spent By Typical Owners
valuable decision making information for the				Time Spent Optimally
business owner. Also, every accountant should				Executive
provide the business owner or executive with a				0-2%
report that highlights critical information.				5%
We’ve identified ten critical pieces of				Sales
information every business owner should focus				20-25%
on. We’ve name these ‘Ten Most Critical				40%
Indicators’. It’s a concise snapshot of a				Operations
business automated each month and gives the				20-25%
business owner the right data for targeted and				40%
strategic decisions that need to be made. This				Administrative
valuable information can be the difference				50% (or more)
between extreme success and disastrous failure.				15% (or less)
Remarkable, if done properly, the accounting
function in this new environment can cost 30 to				B. How Do I Increase My Profits?
50% less and produce more and better				There are only a few ways to increase profits
information than the old school method that may				and the business owner or manager must
frustrate a business owner and produce				determine which ones he or she has control over
inaccurate and untimely information.				and then concentrate on those areas. Increased
				profits can come from 1) Increased sales, 2)
What you need to know				decreased expenses 3) increased efficiencies or
But where should we start this education?				4) increased margins on existing and future sales.
Well, it would seem that the best place to start				Usually the business owner or manager has
would be to accumulate some of the financial data				already done what he can relative to item #2.
that is discussed in the next section. You may				However, with increased efficiencies using current
find much of this education to be pretty				technology, many companies that have been
elementary. But the next person may not be				around for a while may be doing things
clear about many of the sections we’ll				inefficiently and can focus on #3 to cut costs
discuss. So we ask that you skip over those				here. Never forget to be innovative in your
items you already know.				business operations. This can be a fun and
Financial indicators to review monthly				profitable exercise. We recommend a gathering of
1. Cash Balance and Reserves				key members of your team for a meeting
Ultimately you’re in business to convert all				outside the workplace to roundtable ways to be
other assets to cash. Even businesses with large				more efficient in the delivery of your products or
profits have actually gone bankrupt, simply by not				services. Do it every quarter and relish the
being able to convert other assets (such as				reward at year’s end.
inventory and accounts receivable) quickly enough				The best opportunities for increased profits are
into cash. If there is not enough cash, then the				usually with item #1 or #4. Most businesses
business cannot pay its employees, order new				always concentrate on increased sales. This is
product, or pay vendors. In addition to reviewing				usually a wise move since they try to leverage
the cash balance and reserves each month, the				what they have already proven they can do.
owner needs to focus on cash needs for the				Item #4, increasing margins, is rarely reviewed or
coming month.				proactively chased. Here’s some FREE advice
				about testing price points… Do it and do it
2. Liquidity Analysis				regularly! It can result in permanently increasing
What is the proportion of your current assets to				profitability.
current liabilities? Do you measure that monthly?
What does that tell you? It indicates your ability				C. Where Can I Cut Costs?
to payyour bills as they come due. Just as a good				An analysis can be done to make sure your
doctor will take your pulse and blood pressure, a				spending money according to norms for similar
good accountant will (amongst many other things)				businesses. While cost cutting is a goal that is
take the pulse of your business by measuring				sought by many small and medium sized
liquidity. Two ratios used to measure liquidity are				businesses, it is difficult to help a business cut
the Current Ratio and the Quick Ratio. If they are				costs, since the owner or manager is usually
too low, it will be a warning sign a pending cash				already focused on reducing costs. In fact,
crunch. By monitoring these key rations regularly,				generally, the recommendation is for the owner
corrective action can then be taken before a				to spend more money to generate more
crisis occurs.				revenue.
				Typically we see that most small and medium
3. Accounts Receivable Aging				sized companies spend too little (some not at all)
The longer it takes to collect your receivables the				on marketing and advertising. We’re certainly
more pressure is brought to bear on your ability				not suggesting you buy a bunch of TV and Radio
to pay your bills as they come due. This in turn				ads. But good marketing is a key to success for
will lead to increased bank borrowings or capital				any sized business.
injections from the owners. Furthermore, the				Take us for example, we have always provided
older your accounts become the more difficult it				this advice and knowledge contained in this report
will be to collect them. The old adage is: “A				to our clients. To them, we are like no other
sale is not a sale until the money is in the till”.				accounting firm they’ve ever heard of or
Perhaps the sales department is selling to poor				dealt with. We get many referrals but we had no
credit risks. Maybe better collection systems need				other ability to let a prospect know what we did
to be implemented.				and how we did it. (unless they wanted to sit
				across from us in a consultation).
4. Gross Profit Margin				It was our marketing company that told us we
This rate should stay constant. If it moves, it is a				had to put this knowledge into this report
sure sign of potential trouble. If the change was				(marketing) and offer it on our website
expected, that is fine – but you need to				(advertising) to prospective clients. The website
measure and analyze your margin to be sure it				would let them know that this report existed.
changed the way everyone expected. If it was				Whether or not they were satisfied with their
not expected, immediate analysis is required to				current accounting situation, they might want to
correct the situation. An example of an expected				get a copy. It didn’t matter if they were
change in gross margin is Taco Bell. When they				going to do business with us or not, we just
went to the low priced menu several years				needed to publish our knowledge and expertise.
back, their food costs were approximately 30%.				So our advice to owners and managers…
They reduced their prices such that food cost				“Don’t be afraid to spend money on good
was 40%. They counted on dramatically increased				marketing.”
volume to make up the shortage and more. What
they got was a windfall. Their sales increased				D. Stop Loss: Know Ways Employees Can Steal
significantly and profits increased as a result and
the customers were happy.				The following is a list of the most popular ways
				employees can steal from your business.
5. Sales Per Salesperson				We’ve seen many scenarios where
This measures the effectiveness of each sales				employees from service managers and clerks to
person. It also provides a barometer for when				bookkeepers and CFO’s have stolen from
new sales people should be added (as sales				their employers. In some cases it has resulted in
increase). It also spots potential downtrends in				the companies having to close their doors. Note
customer buying which will allow the company to				the ways that may affect your company and
pursue other options or new marketing,				install security, checks and balances to minimize
advertising, product or service lines.				your risk.

6. Sales Per Employee
This measures the effectiveness of the entire
company. When sales increase per employee, this				1. Steal Inventory – For personal use or
is not always a good sign. Service may be				resale.
suffering, so the company must make sure that
if there is an increase that it was due to				1. Phony Vendor - Send in phony invoices and
productivity gains. If merely because of sales				the company pays them, the employee takes the
gains, then hiring should begin or operational				payments from the company issued to the phony
efficiencies put in play to avoid service or quality				vendor
problems.
				1. False Employee - Set up a false employee and
7. Sales In The Pipeline				issue a regular payment. The real employee
This is sometimes hard to measure, but critical to				collects his regular payment and the payment for
proper planning. The semi-conductor industry has				the false employee.
long used the “book to bill” ration. It
measures orders for products vs. amounts				1. Take The Cash From Cash Sales –
actually invoiced upon shipment. If the number is				Don’t ring up the cash sale in a register and
positive, growth is occurring, if negative, sales will				pocket the cash.
be slowing down in the future. The same type of
analysis can be done for any business as long as				1. Void a Sale – After an invoice is mailed out,
the measurement is consistent and real.				void the sale and reduce the customer accounts
				receivable. When the customer pays, take cash
1. Sales Conversion Ratio				from a cash drawer equal to the amount the
Since sales in the pipeline are usually not as well				customer has paid. Include the customer payment
defined for most businesses (such as the				as part of the daily deposit so that the total
“book to bill” ration), the conversion ratio				deposit for that day agrees to the sales records
is a good measure. This is a very key ratio for				for the day and the cash is not missed.
most businesses, and yet often overlooked. It
can be calculated at each stage of the sales cycle,				1. Signature Stamp Abuse – Obtain blank bank
and then used to predict and plan future sales. For				stock and signature stamp the stock, and then
example, if you do telephone cold calling, you can				buy personal items using it.
count the number of calls made each week and
the number of appointments that result from				1. Company Credit Card - Use this for personal
those calls.If your company made 100 calls this				purchases.
week and 10 appointments were set up, you
would have a 10% conversion ratio from phoning				1. Personal Supplies – Order personal supplies
to appointments. Then if the sales reps closed 3				from established vendors and take these items
sales for each 10 appointments, you would have a				for personal use. This can include anything from
30% conversion ratio from appointment to				pens and paper to computers, software, and
customer. By tracking the conversion ratio at				furniture.
each point in the cycle, you can see where
effectiveness is lagging and make changes, more				1. Duplicate Payments to Vendors –
importantly; you can predict sales volumes by				Employees can easily make duplicate payments to
adding additional appointments setters and reps				vendors in error. Employees may be reluctant to
and applying your average conversion ratios to				admit this when they discover making a duplicate
project sales volumes.				payment for fear of looking bad.
				7
9. Job Costing				10. Record Phony Bank Charges – The
For certain industries, this is critical. For others, it is				employee can record phony bank charges and
merely essential. It is imperative to know the				then take the equivalent amount of cash from a
costs of a job to make sure adequate profit is				cash drawer.
made on the job (or worse – to make sure
there is not a loss). If the business does not track				11. Phony Receipts – Sometimes, phony
services or products sales by job, then there are				receipts can be simply submitting the same
still ways to measure the costs associated with				receipts twice. Many times, the objective is to
groups of products or services. These costs must				turn in items so small they will not be noticed.
be tracked and evaluated for consistency and to
evaluate if products and services are being sold at				12. Auto-Pay a Phony Contract – A regular
the highest price that customers will pay.				payment is made out of the bank account to a
				phony contract vendor controlled by the
10. Net Profit Percentage				employee by pre-authorized payments instead of
This is profit expressed as a percentage of sales.				the usual payment method that is scrutinized each
This number cannot be calculated correctly unless				time a payment is made. Usually, only the
the entire accounting system is working properly				bookkeeper handles the bank account, so no one
and correct information is available. The				else would see this expenditure.
percentage is generally consistent, but may
change for various expected reasons. However,				1. Phony Refunds – An employee issues a
any changes should be evaluated and any				refund to a supposed legitimate customer. The
remedial action required must be implemented				employee does not mail the refund to the
immediately upon determining the corrective				customer, but rather negotiates it himself.
action.
				Time = Money
11. Return On Equity				(Or why it pays to outsource your bookkeeping
Based on your risk, and effort to run your				need to a professional firm, like Bay Business
business, are you getting an adequate return on				Group.)
equity, or have you just “bought yourself a				So now you have a pretty good idea of what
job”. The business should always be focused				information and reports you need to focus on to
on making sure that staying in business makes				manage your business more effectively. But do
sense. Good Return On Equity (ROE) happens				you have the data needed to do it? Or an
when the company makes more money doing				in-house accounting department to generate the
what it does rather than investing elsewhere.				information? At Bay Business Group, that’s
Return on equity tells the owner if this is				all we do. We take the raw data and provide
happening. If a business owner has $1,000,000				accurate, timely and insightful monthly financial
invested in the business and the business nets him				reports to all of our clients helping them make
$10,000 in profit, he may be better off quitting				good business decisions that maximize profits and
the business, investing the 1,000,000 in the bank				avoid problems.
and earn 3%. A target return should be				All of our clients have both a full-charge
established as to what the business owner				bookkeeper and a CPA assigned to their
expects to earn on invested equity and make				account. We offer our clients a level of
sure that it’s happening. This can then be				professionalism and expertise that they just
measured regularly against the target ROE rate.				can’t find anywhere else. We only hire the
				best and brightest. And we stand behind our staff
12. Fixed Costs				and processes.
Fixed costs continue each month regardless of				And, we charge our clients a fixed monthly fee
the level of sales activity. Fixed costs include rent,				– no surprise bills.outsourced accounting
lease payments on business space, equipment,				So if you’ve come to the point in your
and property taxes (if owned), etc. Each fixed				organization that you need to hire someone to
cost should be carefully reviewed before being				help with your businesses’ day to day, or
committed. Airlines have high fixed costs,				even monthly finances,outsourced accounting call
regardless of the number of flyers. They have to				me today at 703-533-0888 or email me at
make certain assumptions about occupancy and				I’m happy to talk with you about what you
traveler miles to determine the number of planes				should know about maximizing profits and
they need. Each business should make the same				cash-flow for your company.

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Maximizing profits and Cash Flow for Your Company

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