Recessions, whether single or double dip signal a time for business owners to take a hard look at their business practices, and check what they need to do in order to still be in business this time next year.
The first question that needs to be approached honestly, is:
“Is your business making money or costing it?”
The best way to do this is to look at your breakeven point. Which is the minimum amount you can sell your products/services for, to cover the actual cost of purchasing/providing those services.
May sound simple, but costs should include everything it costs you to operate your business, such as insurance, electricity etc. That is why the breakeven point will take into account annual expenditure in addition to raw materials etc.
Once the breakeven point is known, small business owners will at least be aware if any areas of the business, are losing money and adjustments can then be made. This may include adjusting prices, lowering costs or dropping unprofitable activities.
It may also be of reassurance, as low volume sales are not necessarily an indication of an unprofitable business, as long as they are above the breakeven point.
The 2nd area business owners need to know about is cash flow.
Where is the money into the business coming from, and what is draining money out of the business?
A cash flow analysis will provide this valuable information. It can be used to determine the most profitable areas of the business, (so efforts and resources can be deployed more effectively) and the most costly.
This can help owners to plan to reduce their debts and structure purchases of business equipment.
We can provide a cash flow analysis to clients and go through it with them upon request.
Recovery, good news or is it ?
When trade starts to pick up this can cause additional problems for small businesses. All of a sudden, orders are pouring in, which need additional purchase of raw materials or extra staff to meet demand. This leaves a dangerous gap of expense before payment. Owners need to manage this carefully, to ensure orders will be paid quickly and additional funding secured. This is where working capital comes in.
The working capital is the cost of getting the goods or services the business needs in order to trade.
If you know this, you can then calculate what you need to meet your day to day running costs, and what extra you would need to cover additional orders. This information will help owners decide what finance to raise, or if the order is a worthwhile risk to your business.
If you would like assistance in any of the above areas, please get in touch via telephone or email.
01225 751361 or email@example.com