Financial Issues


I don’t want to do business with those who don’t make a profit, because they can’t give the best service. Lee Bristol, US pioneer of renewable energy systemsmanaging-cash-flow

Profitability

Having an understanding of the profitability of not only the business as a whole, but also each product/service offered and the breakeven point is critical to the success of a business. The breakeven point should be monitored regularly and strategies implemented to lower it as far as possible in order in improve business profitability and sustainability.  These strategies should include increasing gross margin and/or reducing expenses.

Calculating breakeven may be complicated by having varying gross profit margins on various products/services.  Unless you have a specific “Loss Leader” (which should be closely monitored to ensure the sale of this item is leading to further sales of more profitable items), pricing should be adjusted so that all products/service have similar and suitable gross margins.

Discounting prices should be avoided as it depresses margins significantly, does not contribute to customer loyalty and although it may attract new customers, these customers will generally be short term, price sensitive and will move on just as quickly.

Raising Capital

Bank Funding. Funding may be required to grow a business by accommodating increased working capital requirements, to upgrade plant and equipment, move to a new workshop etc.  Bank loans have been more difficult to obtain since the GFC unless the loan is secured by “bricks and mortar” and/or a charge over the business assets/property.  A bank will usually require a Business Plan including financial projections (P&L and Cash Flow forecast).  These projections should ideally be based on historical figures with assumptions on future activity and how the debt can be initially serviced and then paid off.

Equity Funding. Raising funds via independent investors may need to be conducted in accordance with Section 708 of the Corporations act which has specific exemptions on the raising of capital and disclosure documentation requirements provided shares are not sold to more than 20 investors in a 12 month period (20/12 month rule) and no more than $2 million is to be raised.  This legislation is subject to change and should be reviewed with a suitably qualified advisor.

Cash Flow

See our report on Cash Flow for small/medium business.