How to Make Changes Based Upon Numbers

This is an excerpt from SmallBusinessSchool Male: Your gross margins too low at 25% you know that. So there’s only two ways to improve it. Number one is to be more efficient at the manufacturing part. The second is to increase your prices. And where is the leverage for you? Which one of the two is the direction you need to go? Female: Well in our case, fortunately we don’t really have very much competition and so we have raised our prices. Male: If you only make a 25% gross margin you have to raise your prices. Female: Well we’ve created like what we call bid sheet and we put in the estimated cost of labor, estimated cost of the materials and we have a formula that we’ve created with our CPA for approximately you know how much more we need to add to that to cover overhead and taxes and things like that. Male: My guess would be that is you do those quotes that you generally plug in more than 25% profit. Female: Yeah. Male: But— Female: In the end Male: In the end it doesn’t there so something is wrong with the job causing right? Female: Yeah, what has been— Male: The gross marginal is 25% what should it be? Female: I don’t know. I mean all I know is that the bottom line sure needs to be a lot higher than this. Hattie: Cash is king for us business owners and it’s the cash flow projection part of our financial statement that forecast our cash needs. Male: We talk about profitability now we’re talking about cases. Someone went said that profits are what you pay taxes on, cash is what you take home. So cash obviously measures what’s in your bank account. What’s in your savings account or whatever and what is more important what you pay taxes on or what’s in your bank account. Hattie: What’s in your bank account? Male: So we need to track that. Hattie: Help us understand the factors that play into the cash flow statement information. Male: Okay well firstly there’s the profitability of your business is a generating profits which in turn hopefully well translate to cash. Is it—are you turning you accounts receivable? Are you turning you inventory? How much are you spending on equipment furniture and fixtures and what have you and how often do you pay your bills? Your accounts payable, are you paying them on time? A lot of the cash transactions are not on the PNL. For instance if you buy equipment that goes to the balance sheet but it doesn’t go to the PNL. Hattie: Okay right. Male: When you buy inventory it doesn’t go on the PNL it goes on the balance sheet. It all sucks up cash. So the cash flow statement measures what the PNL doesn’t which is the inflow and outflow of cash. Hattie: How did you project cash flow before and how are you doing it now? Male: It was a two part system and it did not—it was hard to work. Hattie: It was bulky and so your part maybe just didn’t bother to do it. Male: We did it but it just took a lot of extra time. We can take our employees time and materials and create an invoice directly in the software. This seems like it has made us more efficient and cut out a few steps on way we did it before. Now with our integrated system, our efficiency level has gone way up which is been a faded dark bottom line for sure. Male: When someone like me goes into a business will ask I’d like to see your accounts receivable aging. How quickly are you being paid by your customers and then lets go to your accounts payable aging. How quickly are you paying the folks that you depend on for their products? Hattie: Right. Male: Hopefully you generate an accounts receivable aging which will show you as the word denotes how many—what your receivables are from 1-30 days. What they are from 30 to 60, 60 to 90 you get that report and then you focus on keeping the percentage of receivables over you picked up a date but you generally most companies—it will be 60 days. Hattie: Right. Male: So one of the first thing you’ll always ask them when somebody has received his cash flow problem is how much your receivables over 60 days and if they say I don’t know, then you know what the problem is right now. They’re not generating the correct reports if they say I received over 60 days or 25% you know what the problem is. On the other hand if they say its over 1% that tells you something too. We got to go some place else.