The internet has caused an explosion of knowledge or the availability of knowledge. This has caused people to continually search for something new to help them. This is obvious with diets. Although there is already a large amount of information on dieting, people are always looking for that new improved diet to help them lose weight.
I have found the same thing happens with people managing a business. They are always after the latest product that will give their business the edge. I have experienced this a number of times over the past few months. I receive comments about how my presentation or e-book has nothing new in it.
Although there is nothing wrong with trying to continually improve your business, research shows that around 85% (just like the weight loss industry) of new business management products add no value to a business except to the person selling the product. However, we keep trying to find that silver bullet to our business the edge.
I am not saying these new management theories or products are bad or don’t work. Many will work in the right environment. However, many businesses haven’t mastered the basic principles needed. Those old pieces of wisdom that haven’t changed in years.
The formula for gravity hasn’t changed over the years. NASA has to get this formula right before trying any of its new technology when launching a space shuttle or the shuttle will come crashing back to earth. The same principle applies to business. If you don’t understand the critical numbers and how they affect your business then any gains from new management theories will be short lived.
Before trying to find the latest and greatest product to help your business make sure you have the old tried and tested basics in place.
Do you remember when computers started to become popular? All the talk about how people were to lose their jobs because of the increase of productivity with the introduction of the computer. There were even seminars to enable people to adjust to all the free time they would be having. Well that didn’t work out as planned. Computers can be a great asset however; it could be argued that computers are the biggest productivity stealer around.
The same can be said about accounting software in business. With the introduction of GST one of the benefits mentioned about changing from a manual accounting system to a computerised system was the fact business owners would know more about their business and would be able to manage their businesses better. Also, it was stated it would make it easier for their accountant. Generally, I have failed to see these benefits eventuate in many small businesses.
Knowing your fixed costs can help manage your business more effectively. Businesses with high fixed costs will have different strategies for managing their business than those with high variable costs.
Expenses are generally categorized as either fixed or variable. Fixed costs are the expenses that are incurred regardless of how much is sold or how much is produced. Some typical examples of fixed costs are lease payments, insurances and mobile phone cap. Variable costs are the expenses that vary depending on your sales or activity level. Variable costs include expenses such as electricity, phone call charges and subcontractors.
Businesses with high fixed costs need to consider some of the following points when managing their business:
Their breakeven point will start higher than a business with high variable costs. Therefore, pricing strategies may need to focus on volumes and not margins. A webinar, e-book or hosting a seminar are examples where this may apply.
Similarly, the business will need to make sure they sell enough to cover at least their fixed expenses. A business can achieve this by fixing its revenue stream. For example, the mobile phone industry signs customers to a 24 month plan or a consultant seeking a retainer.
Higher fixed costs may lead the business to be less flexible to changing conditions. In an economic downturn, the business may have increased risk or financial pressures if the business cannot reduce the fixed costs as quickly as the drop in revenue.
Conversely, in a growing market there is the opportunity to make higher profits. Once sales have exceeded the fixed costs then further sales will go straight to the bottom line. The business may seek a different market or pricing strategy to increase sales.
Entry barriers are usually higher for high fixed costs businesses. This may lead to higher profits due to less competition.
Managing your cash flow is one of the most important aspects to running a business. We have seen in the past few years a number of high profile companies that were supposedly profitable go bankrupt.
The cheapest and best source of cash for a business is the efficient management of the cash conversion cycle (or simply the cash cycle). The cash cycle is made up of three core components:
- Stock management (including work in progress)
- Payment of suppliers
- Collection of cash from customers
We need to keep a close eye on these components and the actual cash in the bank. If there are any leakages in these components then we may have additional costs hindering our financial performance. These costs may include extra interest charges for the overdraft, missed opportunities or loss of reputation when not paying creditors promptly.
The cash cycle is the length of time it takes from purchasing your stock till you receive payment from your customer. We can measure this cycle with the following performance indicators:
- Days Inventory – the average number of days your stock is held before being sold.
- Days Receivable – the average number of days to collect cash from your customers.
- Days Payable – the average number of days to pay your suppliers.
The Cash Cycle = Days Inventory + Days Receivable – Days Payable.
Generally, the shorter the number of days the better. However, it is not recommended that you hold off paying suppliers to reduce your cash cycle. The cash cycle needs to be compared to industry norms as well being reviewed for efficiency.
There is an excel spreadsheet available on the resources page of my website that calculates the cash cycle for you.
Welcome to my blog!
My blog is to provide small businesses information and tools to improve their business performance. By focusing on managing the activities and using different indicators to measure their performance we can get to work on improving your business.
Our first theme is the Working Capital Cycle and we will start more specifically with the Cash Conversion Cycle. The cheapest and best place to increase your cash flow is right here.