There’s a massive difference between profit and cashflow. Profit increases when you create an invoice for work you’ve done or goods you’ve sold; cash increases when you bank the money.

Your lockup equals the cash that isn’t in your bank account because it’s either in work in progress (you’ve done some work but you haven’t yet billed for it) or you have billed your customer but are waiting to be paid.

There are two key processes that need to be improved to reduce the cash that’s stuck in your lockup. Within each of these two processes, there are countless strategies that can be put in place to put more cash in your bank account.

Billing

The earlier you invoice a customer, the faster you’ll get paid. How quickly after delivery of a product or service do you bill? Do you carry significant work in progress because your service spans several weeks or even months? If so, should you consider progress billing on a regular basis?

Collections

You’ve done the work, you’ve billed your customer, now it’s time to get paid.

Do your customers sign off clear Terms of Trade before they do business with you for the first time and are there clear expectations as to when an account is due for payment? Is that 14 days after invoice? 7 days? Shorten up that timeframe and your cash lockup will go down significantly.

How easy do you make it for customers to pay? Your invoices and statements should contain a link to pay immediately online or at least state your bank account details and due date.

Do you provide multiple payment methods to customers? For example, direct debit and credit, credit card, Eftpos, debtor finance (where appropriate). Do you offer a small discount for prompt payment? Customers love discounts.

These are just some of the process changes you can consider to reduce cash lockup. There are dozens more. Talk to us about our Cashflow & Profit Improvement Meeting. We’ll show you what’s possible – in cold hard cash of course!

Cash is the lifeblood of any business. Even profitable businesses can and do fail because of poor cashflow.

What’s important is that you understand your key cashflow drivers. Improving cashflow is often all about changing your processes. Processes such as how you order stock and pay for it, how you bill for your services, and how you make sure you get paid by your customers.

Treating the symptoms of poor cashflow without fixing the underlying causes is time-consuming and frustrating.

Inadequate cashflow is a symptom of management problems in a business, NOT the cause. In order to fix these underlying causes, you need to be willing to make the necessary changes. You’ll build a much better and valuable business, as well as improving your cashflow.

While there are many causes of poor cashflow, most of these relate to one or more of the following seven categories.

1. Your cash lockup.

By lockup, we mean the cash that isn’t in your bank account because it’s work in progress (work you have done but not yet billed for) or you’ve billed your customer but are waiting for payment.

2. Your accounts payable process.

If you don’t have spending budgets in place and aren’t taking advantage of the best possible supplier terms, your cashflow will be impacted.

3. Your stock turn.

If stock is moving too slowly, it will take longer to turn the stock you have already paid for into cash.

4. The wrong debt or capital structure.

For example, if your loans are being repaid over too short a term, this will place a big strain on cash reserves.

5. Gross profit margins are too low.

Your gross profit margin is what’s left from sales value after variable costs are deducted. If it’s too low, it won’t be enough to cover fixed expenses and your drawings from the business.

6. Overheads are too high.

Every business should do a thorough review of its overheads each year.

7. Sales levels are too low.

If sales levels don’t support cash demands on the business, then sadly, the business is not currently viable.

If you need help streamlining your processes and increasing your cashflow, we can help you identify the best areas to focus on during a Cashflow & Profit Improvement Meeting.

“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cashflow.” – Jack Welch

Turning a profit is at the heart of running any successful company. But should profits be the only financial focus if you’re looking to create a stable, long-term business?

Cashflow is the beating heart of your business. Without an even and predictable flow of cash into the company, you can’t cover your overheads, you can’t pay your employees and you can’t run your day-to-day operations – let alone think about expanding and growing the business.

So, what’s needed is a healthy cashflow position AND a good focus on driving profits.

Keeping on top of the financial management of your business can be hard work, especially if you’re new to accounting and the technical terms that are used to talk about money.

But if you’re going to be in control of your financial destiny, it’s important to get your head around the important process of cashflow management. This is especially true in the current business landscape, where sales revenue may be less buoyant, cash can be tight and the market is going through a challenging time.

Let’s look at some of the key things to understand about your finances:

• Profit is a by-product of a successful business – as the owner, you want to make profits, but profitability isn’t the only goal. A business can easily be profitable, but also be highly unstable in the longer term. What you want is stability and consistent revenues.
• Cashflow is the blood that keeps your business alive – good revenues (income) serve to bring cash into the business. Without cash to cover your operating expenses, you have no means to keep the lights on in the business. So cash really is king!
• Know your cost base and overheads – the flipside of your cashflow position is your costs. In an ideal world, you want more cash inflows than cash outflows, so it’s important to know your expenses and costs and to manage them carefully.
• Be proactive about spend management and easing expenditure – if you can take action that reduces your spending, that is hugely positive for your cashflow position. Choose cheaper suppliers, negotiate better deals and bring that cost base down.
• Drive more revenue, through increased sales and marketing activity – if you can increase your revenues, you also boost your cashflow. So it’s important to be proactive about running targeted sales and marketing campaigns to increase your sales.
• Keep the cash flowing and the profits take care of themselves – if you achieve the ideal cashflow position, the company sits on solid financial foundations, the cash is there for investment and the business can grow. It’s that simple.

Talk to us about improving your cashflow management

Whether you’re new to running a business, or a seasoned owner who needs some financial support, we can give you the cashflow advice you need.

We’ll review your finances, delve down into your cashflow and will come up with key ways for you to increase your cash income and reduce your cash expenses. It only takes a few small changes to achieve a far better cashflow position for your business – helping you maintain positive cashflow AND generate meaningful profits.

Get in touch to talk through your cashflow concerns.

Personal services income (PSI) is income received as payment for individual personal efforts and skills. It applies to many contractors who provide services as their means of earning an income. PSI rules can apply to individual sole traders and other types of business entities, but not employees. If PSI rules apply, the entity is called a personal services entity (PSE).

The PSI rules ensure the income is attributed to the individual who performed the services and not apportioned across other entities.

There are several tests to work out if your income is PSI or if you are instead conducting a personal services business (PSB), which means the PSI rules don’t apply. If a personal services entity qualifies as a PSB, the ordinary tax rules apply for that financial year.

At least one of these four tests must be satisfied for an entity to be classified as a PSB.

• Results test: the individual must be paid to produce a result, is required to supply their own equipment and tools to produce that result and is liable for the cost of rectifying defects in the work.
• Unrelated clients test: the sole trader or entity must be engaged by unrelated clients, and services must be advertised to the public.
• Employment test: in general, a sole trader or other entity must engage one or more entities to perform at least 20% of the sole trader’s principal work. Entities other than individuals must not be associated with the sole trader.
• Business premises test: the entity must maintain and use business premises to conduct personal services. The business premises must be exclusively used by the PSE and physically separate from private premises and customers.

If more than 80% of income in a financial year is derived from one customer, the PSE must satisfy the results test to be classified as a PSB.

If none of the four tests are met, the income is classified as personal services income, and the PSI taxation rules apply. PSI rules restrict the type of allowable tax deductions made in relation to personal services income-earning activities.

If you’d like to know more about PSI, talk to us to see if the services you provide meet the tests for conducting a personal services business. We’ll make sure you are claiming the maximum allowable deductions and being taxed correctly.

The last two years have been demanding and exhausting for many business owners. Are you one of them?

The challenges have been relentless, and we know many small business owners have had to navigate unprecedented demands because of the pandemic and related government regulations.

Burnout results from long-term stress and can manifest in emotional and physical exhaustion, which may affect your enthusiasm for running the business you once loved.

So, What Can You Do About it?

We understand that as a business owner, you have many responsibilities, and often you do everything on your own. So we know how hard it can sometimes be to keep on top of all your legal obligations.

The most important step is to acknowledge you feel burned out and need a break.

Take a break as soon as you can. Plan ahead for time away from the business. However, while getting some rest in the short-term will help, long-term stress will take commitment to recover from.

Strategies to Help Recover from Burnout

What can you do differently to avoid prolonging or retriggering the burnout?

• Delegate – Look at the low-value tasks you spend time on and pay someone to do them for you. This will free up time and energy.
• Re-energise – If you’re struggling with a lack of enthusiasm or purpose, talk to colleagues or a business coach for support. If possible, connect with people in the same industry so you can share among others who may be facing similar challenges.
• Stand back – Take an objective look at how much you are working and how effective you are. For example, is it time to streamline your work activities and put boundaries around working hours?
• Reassess your goals – Do you have clear business goals for the short-term and long-term? Either set some realistic goals or revise them if they are too difficult right now.
• Commit to some regular self-care actions – Think about what you love doing outside your business that is nourishing. Regular exercise? Time in nature? Going on a retreat? Learning something for fun? Improving your diet? Get an app on your phone that reminds you to take mini breaks throughout each day. Whether that is movement, mindfulness or music, use technology to help.
• Celebrate milestones and achievements – When overwhelmed with stress or exhaustion, it’s easy to forget the positives. Remind yourself of just how much you have done in the last year!

Need Some Support?

You’ll be better able to face challenges, run your business well and assist others if you are looking after yourself well.

We’d love to help support you back to passionate engagement with your business. If you’re feeling burned out and need help in managing systems, technology, payroll or other financial and administrative management, talk to us today, and we’ll back your recovery.

Cash has always been king but it’s even more important during times of economic slowdown. The slower the economy, the less cash is available in businesses, and the more likely it will be for some customers to be unable to pay.

To protect your business and minimise the risk to your cashflow, follow these six steps to help ensure you get paid.

1. You must continue to enforce your Terms of Trade, however, your approach must change.
Do not adjust your expectation to receive what you are owed but tread carefully with your payment request, or you could risk irreparable damage to your brand and reputation.

2. Triage your debtors.
Consider each customer’s likely financial position; how impacted will their cashflow be in these times? Those who are most at risk need to be treated with empathy and flexibility.

3. A phone call is likely to be the most appropriate contact method.
An email may get missed or inadvertently deleted. Also, it’s hard to portray empathy in an email. A quick, polite phone call to your customer will be respected.

4. When you call customers with outstanding payments, first ask how they are.
Your initial assumptions may be wrong, and they may have been more impacted than you realise. Be respectful and kind in your positioning. If your customer is genuinely struggling, demanding payment within 48 hours may not be appropriate.

5. Offer severely impacted customers options to resolve their balance.
Be honest and tell the customer you are calling to discuss their overdue account and offer them some options, such as spreading payments across the next 6-12 months. Empathy, directness and professionalism are key.

6. Reach an agreement, record the details and set a reminder to check when due again.
If payment doesn’t come through on the agreed date/dates, follow up with the customer (again, with empathy, flexibility and options). Flexibility now will pay off in the future.

In reality, some customers may simply be unable to make payments. If this is the case, referring their account to a debt collection agency may be pointless. Consider the potential brand damage of appearing aggressive during difficult times.

Nobody is immune to the impact of an economic downturn, now or in the future.

Contact us for some scripts that will help you achieve better debtors’ outcomes when phoning clients to discuss overdue accounts. We can also provide you with a Credit Management Guide to support you to manage your accounts receivable and ensure your best shot at getting paid.

Employees of non-small business employers can now access 10 days of paid family and domestic violence leave in a 12-month period.

Employees of small businesses can access the leave from 1 August 2023.

Employees have had an entitlement to unpaid family and domestic violence leave (FDVL) for some time as part of the National Employment Standards (NES). But as of 1st February this is a paid leave entitlement for employees of larger employers and 1 August 2023 for employees of small employers (fewer than 15 employees).

The new law allows ten days of paid leave every 12 months, but the leave does not roll over and accumulate.

The full pay rate will apply as if the employee had worked as usual on the day of the leave.

The new FDVL means employees can take time off to deal with the impacts of domestic violence or abuse if they need to take care of things during working hours. This includes attending court, accessing police or support services, or making arrangements for the safety of oneself or close relatives.

FDV Leave Eligibility and Proof

• Applies to all employees, permanent and casual.
• Close relatives include a spouse, partner, former partner, child, grandchild, parent, grandparent or sibling; or the child, parent, grandparent, grandchild or sibling of a current or former spouse or partner. Torres Strait Islander and Aboriginal kinship relatives are also included.
• The leave is available as soon as an employee starts with an employer.
• Employees must inform the employer as soon as possible about the need for FDVL and the expected length of leave.
• The employer can ask for evidence such as police, court, or support service documents, or a statutory declaration, even if the leave period is less than a day.

Plan for Increased Payroll Costs

Because the new leave provision applies from day one of employment for all employees, employers should plan for the potential cost of the leave. While it’s unlikely that all employees will take this leave, preparing for the possible cost means you won’t get caught out if you do have to pay FDV leave, particularly for casual workers.

If you have any questions about how the FDV could affect your business, please contact our office on 08 6118 6111 or email hello@prescottsolutions.com.au

More information

• Fair Work Ombudsman
  • Employer guide to family and domestic violence (fairwork.gov.au)
  • New paid family and domestic violence leave – Fair Work Ombudsman
• How to process FDV Leave
  • Xero Help Guide – Process family and domestic violence leave – Xero Central
  • KeyPay/ Your Payroll Help Guide Paid family and domestic violence leave guide – Payroll Support (AU) (yourpayroll.com.au)

Understanding your business breakeven point is essential to know how much money you need to make to stay in business. It can therefore help you make well-informed financial decisions and practical business plans.

The breakeven point is the income or sales needed to cover all costs. Any earnings above this point generate profit. So your breakeven point tells you the minimum sales required to continue operating a viable business.

Understanding the breakeven point in conjunction with financial reports can give you valuable data to analyse fixed and variable costs and set sales targets for the business or individual staff members.

Fixed and Variable Costs

• Fixed costs – remain the same regardless of how many sales you make. Expenses like rent, equipment lease repayments or full-time staff have to be paid whether you sell any goods or services or not. Fixed costs are often called overheads.
• Variable expenses – (sometimes called production costs) fluctuate based on sales. For example, cost of goods sold, production labour, and commissions paid to salespeople will vary according to the number of goods or services sold.

It’s helpful to work out an amount or percentage of variable costs compared to the sale price of your products or service. This may not be exact initially, but even if you get a rough figure to work with, this will help calculate your breakeven point. Over time as you analyse your financial reports, you’ll be able to refine the calculation and adjust your selling price accordingly.

How to Calculate Breakeven

You’ll need to know your fixed costs (overheads), selling price and production costs.

One common method of calculating breakeven is as follows:

• Overheads / (selling price – production cost)

For example, let’s say overheads per month (rent, vehicle lease, administration staff) are $20,000, and you sell a coaching program for $3,000 with variable costs (coach fees, handout materials for participants, advertising) of $1,500 per program.

• $20,000 / ($3,000 – $1,500) = 13.33

You would need to sell over 13 programs per month to break even, which equates to $40,000 worth of sales.

If the same program had variable costs of $1,800, you would need to sell 17 programs per month to generate $50,000 worth of monthly sales just to cover costs. Variable costs of $1,000 per program would mean you only need to sell 10 per month to break even.

With these examples, you can see how important it is to understand your fixed and variable costs. Then you’ll know exactly how much you need to make to remain in business and the resulting impact on your financial position. Once you have a reasonably accurate breakeven figure, you can quickly calculate your profit before tax for sales above the breakeven point. In the example where variable costs are $1,500 per program, let’s say you sell 20 programs each month. This would result in an extra $10,000 in profit (before tax) after paying for overheads and variable costs.

Can breakeven help with your pricing?

Understanding your breakeven point can give you some deep insights into your selling prices, helping you understand if they’re realistic.

For example, if your variable costs are high, how much more income will you need to reach breakeven. Is there a fair price for consumers that covers your expenses in a reasonable time frame? Do you need to raise prices to account for fixed and variable costs accurately?

Talk to us about calculating your breakeven point

There are different ways of calculating your breakeven point to confirm the viability of your business, and the ideal pricing point for driving both sales and profitability.

We’d love to help you understand your business financials in more depth, so you can plan for long-term sustainability, enjoyment and profitability.

Whether you want to grow your business or take more time for yourself, these goal-setting tips can help you achieve your long-term plans.

1. Think big! – What do you want from your life – and how can your business help you achieve that? Think about next year and beyond; what does your business look like in five or 10 years? When you know what end point you’re aiming for, it’s easier to set goals that move you in the right direction.
2. Pick something you can measure – Vague goals aren’t as helpful as those you can measure and monitor. Think about what you already measure in your business and how you’d like to see those metrics change. For example:
   • A 3% increase in net profit year-on-year
   • A 2% reduction in expenses
   • 1 new customer per month
   • Reduce average payment time to under 50 days
   • 4 weeks of holiday during which you don’t go into the office at all
3. Make a plan to achieve each goal – Once you’ve picked a few goals, come up with ways to achieve them. It could just be back-of-the-envelope thinking, or have a brainstorming session with your team or your advisers (give us a call!). When you have a plan in place, do your best to follow through and make it happen.
4. Keep monitoring your progress – Check in each month to see how you’re tracking with your goals. Set yourself reminders on your calendar or make it part of your invoicing cycle. If you’re not quite on track, you can make tweaks or come up with some fresh ideas to help you reach your targets.
5. Plan a celebration! – Give yourself a good reason to keep striving for your goals. It might be a long lunch, a trip to the movies, a manicure, or a beer advent calendar next December. Something you’ll enjoy that’s not going to blow the budget.

We can help

Not sure what your goals should be or how to monitor them? We can show you where to find the information you need, how to check on it, or keep an eye on it for you.

Our team also has some fantastic ideas for how to reach your goals and build your business – get in touch!

For your business to make money, you need to generate revenue.

You produce revenue through your usual business activity, by making sales, getting your invoices paid, or taking cash from paying customers. So, the better you are at selling your products/services and bringing money into the business, the higher your revenue levels will be.

But what actually drives these revenue levels? And how do you get in control of these drivers?

Knowing where your cash is coming from is more crucial than ever

As a trading company, you face the multiple challenges of a global recession, an increase in online consumer buying and a ‘new normal’ when it comes to trading, markets and buying expectations. The better you can understand the nature of your revenue and its drivers, the more you can flex, manage and control your ability to generate this income.

This helps your medium to long-term strategic thinking, and your decision-making, allowing you to be confident that you’re focusing on the business areas that deliver maximum revenue.

Import areas to consider will include:

• Revenue channels – where does your revenue actually come from? Do you create income from online sales and ecommerce, through retail sales in bricks and mortar stores, or through wholesales to other businesses? You may focus on just one of these channels, or it could be that you use a mixture of two, three or more.
• Revenue streams – your total revenue will be made up of a number of different ‘streams’ So, you might be a coffee shop, whose revenue streams include coffee sales, cake and pastry sales and lunch sales. Knowing which revenue streams you rely on, which are most productive and what return they are delivering allows you to make decisions. If 80% of your income comes from 20% of your products, perhaps you need to tighten up your product range and ditch some of the poor sellers. If you’re selling more services to one particular industry, perhaps you should focus more marketing in this specific niche, or downscale your sales activity in less profitable niches.
• Product/service split – Do you know which products/services are the most profitable in the business? Which products/services have been resilient to market changes (giving you some revenue stability) and which have adapted well to change? The more you can dive into your metrics and find the most productive and adaptable products and services, the greater your ability is to provide constant and evolving revenue for the business.
• Value vs volume – Is your revenue based on selling a high volume of products/services at low margin, or low volume at a high margin? Based on this, can you move your margin down to create a more attractive price point (and more value for customers)? Or are their ways to push volume up, shifting more units and boosting total revenue? By diversifying into new channels, new streams or new products/services you can aim to balance value and volume to create brand new sales – and higher revenue levels.

Talk to us about exploring your revenue drivers

If you want to boost revenue and increase your overall profitability, come and talk to us. We’ll review the numbers in your business, help you to understand your revenue drivers and will give you proactive advice on enhancing your total revenue as a company.

Get in touch to kickstart your revenue generation.