“My business has made a profit and yet I’m not seeing it… Where does all the money go?”
This is one of the most common questions that business owners ask and it’s often a symptom of deeper cashflow or operational concerns.
If you’re not sure where the money in your business is going, you are most likely missing out on opportunities to reinvest in your business, build your personal wealth or pay off debt.
So where is your money going?
There can be many areas that drain your cashflow or affect your business performance, but you need to know where to look. Here we have highlighted the FIVE most common pain points for business owners.
#1: Stock on hand
Inventory is often the largest asset for your business and it can significantly affect your cashflow. How you source and manage stock can have an impact on your profitability.
While bulk purchasing may save you money, too much stock on hand can increase labour and warehousing costs. It can also prevent you from using your money elsewhere in the business, such as paying off debt, which may be more advantageous in the long run. Too little stock on hand can be equally damaging, creating delays in your order processing and in turn, delays in invoicing or loss of customers.
We can help you get the balance right so you can achieve operational efficiencies and improve your cashflow by using stock management to your advantage.
#2: Debtors
Cash tied up with debtors is hidden from view and a commonly misunderstood area of cash flow management which can negatively affect business performance and profitability. Late payments could be costing your business tens of thousands of dollars each year.
We can help you to better understand your debtors by modelling your Debtor Days to demonstrate how payment delays are impacting your cashflow and ultimately affecting your ability to service debts or increase the profitability of your business. Strategies such as setting appropriate payment terms and using incentives, through to simple solutions such as automatic invoice generation, tracking and reminder systems can improve your cashflow position dramatically.
#3: WIP
Whether your business is product or service based, understanding your Work in Progress (WIP) can help you identify where efficiencies can be made to increase your overall business profitability.
Your WIP consumes manpower, storage and general overhead costs. Bottlenecks with WIP can delay payment for your products and services and generally impact available working capital.
We can help you to measure your WIP Lock-up days (the number of days that work in progress is undertaken before clients are invoiced), to help identify cash tied up in inventory and appropriate stock ratios for your business. Implementing strategies to achieve greater efficiencies or introducing progress payments can also improve your overall cashflow position.
#4: Drawings or Salary
Taking a salary or receiving drawings from the business will have a different impact on your business finances and tax outcomes.
An owner’s salary is regarded as a business expense, and drawing a regular salary may help to better plan cashflow, however you will also need to consider other mandatory requirements such as PAYG and Superannuation Guarantee requirements. Drawings will not incur PAYG payments, but they are treated as a loan, including the requirement for a loan agreement and interest payments. Drawings reduce assets and decrease owner’s equity on your business balance sheet.
Depending on your situation, we can help you plan the most appropriate approach for your circumstances, incorporating your business cash flow needs and requirements for managing your tax liability.
#5: Assets on your balance sheet
What’s on your balance sheet can provide clues about potential problems, such as being able to manage current debt levels or your ability to access cash to support the running of your business.
Your Balance Sheet outlines your financial position including assets, liabilities and shareholder’s equity. It helps you understand the value of what you own (accounts receivable, cash and other assets), as well as outlining what you owe (debts, accounts payable) as well as nominating a value for Shareholder’s equity (that is, what’s left if you sold all assets and paid all debts/liabilities).
By working with you to understand your balance sheet, we can help identify any underlying warning signals and implement strategies to address the long term performance and profitability of your business.
Is it time to get a second opinion?
Challenges such as cashflow or operational concerns, if left unchecked, can significantly affect the performance of your business. Using your financial reports, we can help you rectify your pain points… and in our experience it’s often small and easy to implement actions which can make a big difference to business outcomes.
As business owners as well as accountants and business advisors, we have more than 40 years combined experience in specialised tax issues, accounting and business advice. Perhaps more importantly, we also have an expansive repertoire of insights derived from working hands-on with hundreds of businesses across a diverse spectrum of size and industry. If you want to feel confident that your business is relevant and equipped for the future, it might be time to get a second opinion.
If you would like to discuss your business in further detail, or would like a second opinion, we encourage you to make an appointment. Contact us today on 03 9708 8801 or email info@rvpartners.com.au
General Advice Disclaimer: The information contained within this document is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Robinson Voss Partners (RV Partners) strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.
