MARGI CAMPBELL: Why profit is sanity and cash is king

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Opening a newspaper, or your internet browser, it might feel that all is doom and gloom in the world. We’re hearing regular bad news, and it can be tempting to stick your head in the sand and hope that all will be well.

But if you want to survive these difficult days, this is the time to take action to have the best chance of business success over the next few months.

It is vital that you get to know your finances. By this, I don’t mean the historic accounts – those are too old. You need to look at the performance of the business right now, and then identify where your weak spots are. Ask yourself these questions:

• When you make sales, what profit do you make on these units when you sell them?

• If you discount to clear stock, what profit do you make if you do that?

• What are fixed costs that you have to pay, and how many sales do they equate to?

• Where is your cash?

The profit per unit is really important to consider, as it can quickly go wrong while looking like all is well.

If you sell something at £100 and it costs you £80 to produce it, then you have a gross profit of £20 per unit. If you can sell double the number, that’s £40 profit.

However, if you can sell double the number but only at £90 each then you have increased your turnover to £180 from £100.

That sounds great, but if the two units still cost £80 to produce, you make £10 on each, so £20 in total, and have the same profit for double the work.

Turnover is vanity. You have made no more money, but you have made more work for yourself.

Use your time and resources wisely. Discounting is useful to clear stock and provide a cash injection, but you must be clear on what the end result is.

You also need to know what you need to sell to break even. If you make no sales, you must still pay your rent, your insurance, and other sums, which are your fixed costs. What are they, and how many sales would it take to make that amount? That is your break even point. Anything less than that and you are losing money.

If, using the same example as above, you need to make £200 a month for your overheads, then you need to sell 10 of your £100 units as they make £20 profit each.

If you discount to £90 then you need to sell 20 of them, and so it’s important to be careful with your price points. Can you actually sell 20 of them, even at a discount?

Instead, could you sell fewer, but price those at £105? Then you make £15 a time, and quickly you are covering your costs with less units to sell, as your 7th sale brings you into overall profit.

As prices go up across the board, it is important to keep an eye on the fixed costs and what you need to generate to keep paying the bills, as that figure will be moving around.

Profit is sanity. If you are not making sufficient profit to pass your break even point, it won’t be long before you run out of cash.

But the really crucial question in all of this is – where is the cash that was generated by the profit?

Has it hit your bank and been working for you, or is it still owed to you? If you have strong profits, but you still have to be paid for many of your sales, then that might look like everything is fine, but until those goods are paid for, those sales are irrelevant. Get in the habit of checking your debtors list really regularly, ideally daily.

We would always recommend an up-to-date cashflow, as the way the cash comes in and out of your business is critical. So, work out what you sell, and what the unit costs and your fixed costs are, and then also work out when you actually get paid and when you pay others.

If you buy the unit and pay for it straight away, then sell it and wait 30 days to be paid, you are £80 out of pocket for at least a month before the £100 comes in and the £20 profit is yours. What can you do to change that?

• Can you accelerate the payment from your purchaser?

• Can you delay the payment to your supplier without jeopardising the relationship?

• Can you spread your overheads?

And bluntly, can you survive the month?

Cash is king. If you are making a decent profit on paper, but not being paid for months, it is highly likely you will not survive. Pursue those debts quickly, and be sure you know where the low points of your cashflow are and plan for them. If you need bank assistance, that is much more likely to be approved if you have a good grasp of why and when you will need it.

With all that knowledge at your fingertips, you give your business every chance to survive the current storm and come out stronger at the other side.

If you would like to discuss any of the matters in this article please get in touch.

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