The Numbers You Need
The key to making the right financial decisions for your business is having the right information. Running a business without reliable financial information is like driving a car without a gas gauge. If you don’t have the numbers – and the skill to interpret them – your business will eventually run out of steam.
What types of numbers do you need to know?
You’ll need to know how much cash your business has on hand today, next week, next month, and perhaps next year. You’ll need to know your rate of growth, your profit margin, and the amount of money invested in your inventory. You’ll also need to know how much you are owed and what accounts are past due.
Need Help Managing?
If you’re looking for help managing your numbers, then you’ve come to the right place. YBKBS aims to help all small businesses get a grip on managing your cash flow and we can provide tips on how to prosper in the good times and survive the bad. If you already know basic accounting principles, this guide can help you sharpen your skills.
Think you’re already an expert on small business finance?
Test yourself by reviewing the following case study:
Jane Smith imports and sells carved wooden roses.
She pays the supplier 50p per rose and sells them for £1.00.
Almost all the sales of wooden roses are in anticipation of Valentine’s and Mother’s Day – for example, this year she sold 200,000 roses for Valentine’s Day and Mother’s Day.
Now, it’s July and her supplier makes her an offer that’s hard to refuse – she can order 400,000 wooden roses in July at 25p per rose instead of her usual rate of 50p a rose.
But she doesn’t have £100,000 in July to pay the vendor for the roses.
What should she do?
Review of case study:
If your response was that Ms. Smith should borrow the money to buy the roses, then you may want to review the questions and comments below.
What are the sales conditions?
The first issue is whether Ms. Smith can sell this volume of wooden roses. She may have sold 200,000 roses in one year, but has she examined whether sales conditions have changed? Is Ms. Smith sure that the product won’t be obsolete next year?”
What are the supplier terms?
If Ms. Smith is convinced she can sell the merchandise, she needs to see if she can find a solution with her supplier. Payment terms are a cost and the longer Ms. Smith can delay payment, the more of a cost reduction she will enjoy. Can she set up a plan to pay a portion of the payment now, and a portion after a portion of time has passed?
Is the inventory managed efficiently?
Managing stock – in this case, the storage and maintenance of the wooden roses – is also a cost. Ms. Smith should not have to sit with this inventory from August through January, so if possible, she needs to find out if her supplier will ship the roses over time, making sure the deliveries arrive for the required dates. With this approach, the supplier pays for inventory storage and related costs. And in terms of excess stock after the main sales season, will the supplier, after the season, accept credit for excess inventory? That way at least Ms. Smith can return unsold items and receive some value for his unsold inventory.
Does borrowing make sense?
The first litmus test of any business loan, is that you need to earn more money on the loan than it costs to borrow it. Depending on the interest rate, length of loan, and sales conditions for the roses, the loan may not make sense. For example, Ms. Smith borrows at a 10% interest rate over two years but during that time is only able to sell half the roses. Ms.Smith will be chasing debt while carrying a great deal of unsold merchandise. That’s going to seriously affect his cash flow.
As Ms. Smith’s rose-purchasing dilemma demonstrates, even a basic business decision – whether to buy inventory at a reduced rate – can trigger financial issues that later affect your cash flow.
Until next time…