Let’s consider what might happen in your business in today’s tougher economic times.
Your customers may re-prioritise where they’re spending money, so you might notice your customer numbers drop
You might receive fewer enquiries or leads
It might be harder to convert leads into sales as prospective customers are likely to be more considered with their purchases and you haven’t built a relationship with them yet
Your customers may make fewer purchases and spend less each time they do
You may feel pressure to reduce your prices to match or undercut competitors to attract new and existing customers
Your suppliers might be feeling the impact of the downturn and put their prices up, so you’ll pay more for stock
Then you’re likely to be dealing with rising interest rates, cost of fuel, and increased wage costs - basically everything is getting more expensive, right?
It’s a scary thought but it’s important to anticipate how your business might be affected and have a solid plan to weather a potential storm.
We’ll use our calculators to put the potential impact into numbers so you can appreciate how small reductions in sales or increases in expenses can have a big impact on your profit and cashflow.
It’s not all doom and gloom though, we’ll then look at strategies you can implement to minimise the impact as much as possible.
This is the Business 101 Cycle, which shows how your business generates cash and what influences the amount of profit and cash you make, and therefore how much you can draw from the business.
As owners, you need to invest in the business to purchase assets.
*Click*
You might fund some of this with loan finance.
You use these assets to generate a profit.
*Click*
To increase profit, you need to grow your sales or your margin.
We’ll take a look at how you can do this soon.
*Click*
You also need to understand the drain on your profit, which is unchecked overhead expenses.
This profit is where our cash comes from, but I’m sure we’ve all made a decent profit and then wondered where the cash has gone.
*Click*
The key drains on your cash are the slow collection of debtors, increased stock or work in progress, loan repayments, tax payments, and faster payment of suppliers.
The tougher the economy is, the more of a drain these are likely to be.
*Click*
But there are ways we can increase our cash, for example, collecting debtors faster, reducing stock or work in progress, negotiating better payment terms with our suppliers, and ensuring our business is set up to pay the least amount of tax it can.
We’ll look at processes we can implement to maximise these gains.
*Click*
The amount of cash left over can be withdrawn by the owners, used for personal loan repayments, or re-invested in the business to generate income.
The more cash available to draw to fund your lifestyle, the more likely you are to achieve cashflow freedom.
Let’s look at a scenario of what could happen in an economic downturn and then we’ll go over strategies to increase sales outcomes and lower the cost of sales, so you have more cash available.
Notes:
This slide is animated
If you're comfortable with using the Value Gap Calculator and switching between PowerPoint and the Gap App, you may wish to perform the calculations within the calculator while sharing your screen rather than clicking through the animated slides.
The Value Gap Calculator is a tool we use during the Cashflow & Profit Improvement Meeting to teach you about your cash conversion cycle and identify strategies you can implement to improve your cashflow and profit.
Here is an example.
We start by inputting your numbers into the inputs tab.
*Click*
Note: This slide is animated.
You’ll see that these inputs automatically calculate the cash conversion cycle, and some other important metrics.
Your Cash Conversion Cycle is the number of days your cash is tied up in your debtors and inventory or work in progress.
The shorter your cycle, the more cash you have available.
Remember we just saw that the slow collection of debtors and increases in inventory or work in progress are key cash drains in a business.
*Click*
You’ll see, the tool has calculated the debtor days which is debtors divided by sales.
You can see here in this example that debtor days are 64.
This means that it takes customers 64 days to pay their invoice.
Think about the payment terms you offer.
If your terms are payment within 21 days, that’s a lot of overdue invoices and a lot of money tied up in your debtors.
*Click*
Next, we can see the Inventory or Work in Progress days which is your inventory or WIP divided by your cost of sales.
In this example it’s 101 days.
This means it takes 101 days to convert inventory or WIP into a sale.
So, you need sufficient cash to cover your expenses from when you purchase your inventory or start a job to when it’s completed, and your customer pays.
*Click*
Finally, we see Payable Days which is your accounts payable divided by cost of sales and shows how long it takes you to pay your suppliers.
If you’re taking 60 days to pay, your suppliers won’t be very happy with you if their terms are payment within 30 days.
The key is to free up cash by reducing debtor and inventory/WIP days so you can pay your suppliers on time.
And it’s very likely that we can help you not only free up enough cash for this, but to also have more cash in your bank after paying your suppliers!
*Click*
Overall, the cash conversion cycle is 105 days, which would be considered high in most industries, and should be a focus for the business to improve.
Note: This slide is animated.
Now let’s have a look at the sales drivers in the profit section of the tool.
The first section covers the five ways to grow sales.
Today we’re looking at the impact that reduced sales can have on profit, then we’ll look at steps you can take to minimise the impact.
Currently the customer retention rate is 78% - this is the number of customers that come back again.
But, in an economic downturn, customers will be more considered in their purchases which might mean they no longer purchase from you.
So, let’s see what happens if we reduce the retention rate to 70%.
*Click*
You can see that this results in a loss of 68 customers and a decrease of $44K in profit.
Note: This slide is animated.
And it’s likely we won’t get as many leads as people are tightening their budget and not responding as well to marketing as in the past.
Let’s look at what a 5% decrease in our number of leads might do.
*Click*
As you can see, our cash has dropped by almost $34,000 and profit over $47,000.
Note: This slide is animated.
It’s likely that even if leads respond to our marketing, the conversion rate will be lower.
Let’s drop that by 10%.
*Click*
Now our total customers has dropped from 768 to 678
Our cash is down by $40,000 and profit down by $58,000.
Note: This slide is animated.
Let’s keep the number of transactions per customer the same for now, but it’s likely that when those customers do buy from you, they’ll spend less by choosing cheaper options or maybe you’ve needed to discount products or services to encourage people to buy.
Let’s say they spend 10% less on average.
*Click*
So now our sales have gone from just over $1m to just under $900,000.
We’ve lost $72,000 of cash and our profit has dropped by $100,000.
And finally, let’s adjust overheads, as it’s likely these will be going up on top of that.
Let’s say $10,000.
These are quite small changes, but they’ve had quite a significant impact on the business’s cashflow and profit.
It can be scary to think about what might happen to our business in this scenario.
So, what can we do to protect our business and achieve cashflow freedom, despite the economic climate?
Your starting point should be your existing customers.
It’s easier and cheaper to sell to an existing customer, so it’s important to build a strong relationship and delight your customers to encourage them to come back.
Engage with your customers via their preferred channels and tailor your message to your target audience - both in person and online
Get to know your customers.
Building a relationship with your customers increases their loyalty and allows you to ask what they want so you can better serve them.
An online survey is a great way to do this for large numbers.
Always under promise and over deliver - be cautious and the customer will be pleasantly surprised when you deliver beyond expectation
Introduce a customer loyalty programme to reward customers for buying from you or recommending you to others
Perhaps you could offer guarantees or warranties on your products or services to minimise potential barriers to buying
Ensure when things go wrong, they’re fixed as soon as possible, with minimal hassle to the customer
Of course, it’s also important to target new customers.
Delivering layers of effective marketing is key to increasing leads.
First, you need a strong online presence so you can be found - use Google Business Profile, optimise your website with keywords for SEO, ensure your website is modern, demonstrates your value and has clear contact information, and utilise the social media platforms your target market uses
Implement and promote a referral programme to reward customers for referring new customers to you - leads are more likely to trust you and buy from you if they’re referred by an existing customer
Get networking to form relationships with other business owners who offer complementary products or services
Build a community presence by getting behind things that matter to you and your target customers, like sponsoring a local sports team or charity
There are so many tactics you can implement across these topics and more to attract new leads.
Dedicating time to working on a multi-faceted marketing plan will help you ensure a good return on your marketing efforts.
Now we’ve increased our leads, we want to make sure we’re converting more of those leads into customers.
A customer should receive the same awesome experience, no matter who they deal with.
Ensure you have a sales process in place and train the team on how to convey the value of each product or service
Make it easy for people to buy from you.
Consider the best payment methods and payment terms for your target customers.
For example, could you sign up for a buy now, pay later system like Afterpay?
Use testimonials and case studies from other customers to reinforce the value of your product or service
How easy is it for customers to access your business?
If it’s on-site, is it clearly signposted and easy to get to?
If you’re not selling online, should you be?
Would home delivery or free click-and-collect make it easier for your customers?
More and more customers want to book appointments online and don’t want to make a phone call to book.
Make sure you send text or email reminders the day before the appointment
The key here is to make it as easy as possible for someone to buy from you after they’ve shown interest in your offering.
Increasing transaction value sustainably means ensuring your customers spend as much money as possible but always get value from their purchase.
The most obvious way is to increase your prices.
It’s a reality that prices are increasing due to inflation.
Ensure you articulate these changes clearly to your customers
Discounting can be a good way to get customers through the doors, however, leads to a lower transaction value.
Where possible, try to limit discounts and only discount end-of-line products or those becoming obsolete .
We’ll look at the dangers of discounting shortly
Bundling products or services that complement each other is a great way to increase transaction value
Offering payment options can allow customers to spend more money.
If they can buy now and pay it off over the next 6-8 weeks, they may be likely to buy more
Upselling encourages customers to add on an additional product or service.
A classic example is “…would you like fries with that?”.
What classic upsells can your team offer?
Remember to sell the features and benefits of the product or service and relate it back to how it will solve a problem for the customer.
It’s not just about getting more cash in our bank account; it’s also about reducing the amount flowing out.
One way to do this is to lower the cost of sales.
Ensure you’re taking full advantage of any early payment discounts offered by your suppliers
If you buy in bulk from a supplier, ask about a volume discount
If you’ve been their customer for a long time, discuss a loyalty discount
Minimise freight costs by making bigger orders less frequently, but try to buy only what you need to ensure your stock doesn’t become obsolete
Review your suppliers against others in the industry and see if you can get a better price for the same quality elsewhere, or use this as a negotiating tool
One of the easiest ways to lift your margin is to reduce re-work and wastage.
Perhaps your team would benefit from training or developing processes to reduce re-work and wastage
This slide is animated.
It can be tempting to offer discounts to increase sales when they’ve been dropping.
However, often you can be more profitable by holding your price and accepting the reduction in sales volume than you would be by discounting a product.
For example, let’s say you’ve been selling 10,000 units at $100 each, with a cost of $60, so your gross profit is $400,000.
*Click*
If you were to discount your price by 10% and still sell 10,000 units, but now at $90, your sales revenue will be $900,000.
With a cost of $60 per unit, your gross profit would drop to $300,000.
*Click*
Alternatively, if you accept the drop in sales, selling 9,000 at $100, your sales revenue is still $900,000.
However, you only have to pay for those 9,000 units, so your gross profit will be $360,000.
Still lower than before, but better than it would be if you discounted the product by 10%.
Make sure you perform a cost-benefit analysis before deciding to discount products or services so you truly understand the implications and the best option for you.
We’ve seen some strategies for increasing sales and reducing costs, but there are ways we can better manage our cashflow to really help us achieve cashflow freedom.
Small changes can result in a significant increase in your cashflow over time.
Cashflow issues can’t be fixed overnight, but there are lots of different strategies you can implement to improve your cashflow.
This is an area we love to help our clients with, and we can help you identify which strategies and tactics will have the biggest impact on your cashflow.
Here are a few ideas:
Have a robust process for debtor collection and enforce your payment terms.
Outsourcing your debt collection to a third party might be a good option.
Get credit references or personal guarantees before offering credit.
Make sure you set credit limits and consider adding a provision for late payment fees and interest charges to your Terms of Trade.
Regularly monitor stock levels and sales trends.
You should be utilising technology for inventory management.
Review supplier contracts and negotiate better terms for payment or delivery of goods.
Create budgets and forecasts and review actual results against these regularly.
Create a personal budget and stick to the monthly drawings amount.
Note: This slide is animated.
Now let's see the impact these strategies and tactics might have on the overall numbers.
*Click*
In this scenario, debtor days are up by 3 and inventory days by 5.
If we really focused on our debtor processes and perhaps utilised an external debt collector, maybe we could bring our debtor days right down to 59.
This is still well outside our payment terms, but it’s a relatively small change which should be achievable.
That’s already freed up $17k
Also, maybe we could focus on our stock management and adjust our restocking levels and bring those inventory days down by 5.
That’s another $9,500 cash freed up.
Now, let’s move to the profit tab.
Note: This slide is animated.
In the profit tab, let’s look at our retention rate and consider what might happen if we use some of the tactics we’ve looked at to increase our sales.
For example, if we provided more support for our existing customers, could we encourage them to keep coming back?
What problems do you solve that your customers still need you to keep solving even if they have less disposable cash?
Let’s say we can increase our retention rate by 5%.
*Click*
Also, if we keep those customers happy and coming back, they’re likely to tell their friends about us.
Note: This slide is animated.
So, let’s say we increase leads by 3%.
*Click*
Note: This slide is animated.
And we can use testimonials from our happy customers to help boost our lead conversion.
Let’s just bring this back to -5%
*Click*
So it’s still lower than it was originally as it’s still harder to convince new customers to spend.
Note: This slide is animated.
We might offer incentives for customers to come back more often or make sure they’re sent reminders when due for their next service or product update.
So let’s increase the number of transactions by 5%...
*Click*
Which is actually only an average of 0.1 transactions per client.
Note: This slide is animated.
Our customers might still spend a bit less each time…
But let’s change this from 10% less to 5% less…
*Click*
because of the tactics we’ve introduced to show them the value of our offering.
*Click*
Those small changes now mean that our sales, profit, and cashflow have all increased from where we were at previously.
We didn’t look at our gross margin earlier, but if we could increase that by just 1% by reducing our cost of sales, that’s another boost to our cashflow and profit.
It’s hard to implement all these strategies without support and accountability though, so maybe your accounting fees have increased because you’re undertaking advisory services to improve your business processes and increase profit and cashflow.
Let’s add an extra $5,000 onto the overheads.
It’s hard to implement all these strategies without support and accountability though, so maybe your accounting fees have increased because you’re undertaking advisory services to improve your business processes and increase profit and cashflow.
Let’s add an extra $5,000 onto the overheads.
Note: This slide is animated.
Even though this reduces cash by about $10,500 and profit by $15,000,
*Click*
you can see that overall our cashflow has increased by $40K and our profit by nearly $20K.
Hopefully this has shown you that you can take steps to increase your cashflow and profit despite economic downturns.
Managing your cashflow is essential and the sooner you implement these tactics, the sooner you’ll be able to achieve cashflow freedom.
Once you know which strategies you’ll implement to increase sales, reduce costs, and boost cashflow, you must start measuring and monitoring their impact using Key Performance Indicators, or KPIs.
Different businesses will have different KPIs.
For example, a motel should monitor room occupancy, a cinema should monitor average ticket sale value, and a concrete supplier should monitor cubic metres sold.
We recommend having up to five KPIs you’re actively monitoring and aiming to improve.
Work out what drives the profit in your business and create a system to measure these drivers and regularly report on them.
We can use our tools to help you determine which drivers will have the biggest impact on your business.
Set targets for your KPIs and communicate these to your team.
Measure your results, at least monthly, to ensure you’re on track to achieve your targets.
Consider how taking corrective action sooner will impact your results.
The goals and actions in your Business Plan should reflect improving these KPIs.
By monitoring your KPIs, you’ll be able to quickly identify any downturns and respond appropriately.
This means that you can take steps to minimise the impact downturns will have on your cashflow and profit.
Now that you know some strategies you need to implement in your business to achieve cashflow freedom, it’s essential that you set aside time to work on your business.
Consider which sales and cashflow drivers are key to the success of your business and put systems in place to measure and monitor these KPIs
Determine which ‘what if’ scenarios you should analyse so you can prepare and safeguard your business
Set sales and cashflow goals and review your progress regularly to ensure you achieve them
Business Planning or Management Reporting.
Wherever possible, include the price for each service so your clients have certainty as to what’s involved and ideally offer a low cost and a free option.
Briefly explain what is involved in each of the options and the benefits to the client if you support them in this way.
If you’re keen to run your numbers through our tool, we can start with a one-off cashflow and profit improvement meeting to establish initial strategies you can implement which will have a tangible impact on your business.
This will also help to clarify other opportunities that exist in your business.
We can also prepare a Cashflow Forecast for you.
Or, if you really want to improve the cashflow in your business, we offer Cashflow Management Coaching to help you implement processes for managing your cash and hold you accountable to achieving your cashflow goals.
We can also send you a complimentary Cashflow Health Check for you to identify where you could improve your cashflow.
And we’ll send all our attendees our Guide to Achieving Cashflow Freedom.
Ask attendees if they have any questions.
These can be submitted via the chat panel and the moderator can ask them on behalf of attendees.
We recommend having ‘dummy’ questions on hand for your moderator to ask in case people are slow to submit their questions.
When no more questions are forthcoming, click through to the next slide.
Before we go I thought I’d share this quote with you… (read quote).
Write them down, give each of them an owner and a completion date.
Remember, if you need our support, we are here for you.