Understanding your revenue drivers

Understanding your revenue drivers  

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.

Key numbers to focus on in your business now

Key numbers to focus on in your business now 

As a business owner, it’s always been helpful to have an understanding of accounting – but in the post-lockdown world, it’s never been more important to have a good grasp on your finances.

With the business world irreparably changed by the impact of coronavirus, your business is facing a ‘new normal’. Priorities have changed, customer behaviours have mutated and revenue streams have had to evolve and pivot in order to create a viable post-lockdown business model.

To track, monitor and drive your financial performance in this new business world, it’s increasingly important to have a handle on your key financial reports and metrics.

Getting to grips with your financial reports

Whereas in the past, extra cash in the business may have been seen as a surplus that needed to be spent on something, COVID-19 has shown us that having these reserves is vitally important for the survival and long-term health of businesses.

To truly be in control of this cash, it’s vital that you can dip into your accounts, financial reports and dashboards and ‘see the genuine story’ behind your financial position.

So, what are the key reports to focus on? Let’s take a look:

  • Budget – your budget is the financial plan that’s tied in with your strategic plan. In essence, the budget is your approximation of the money it will take to attain your key strategic goals, and the revenue (income) and profits you hope to make during this period. It’s a benchmark you can use to measure your actuals (historic numbers) against, allowing you to see the variances, gaps and missed targets over a given period.
  • Cashflow Statement – a cashflow statement shows the flow of money into and out of your business. Understanding these cash inflows and outflows in detail allows you to manage this ongoing process, allowing you to aim for a ‘positive cashflow position’ – where inflows outweigh outflows. In this ideal positive scenario, you have enough liquid cash in the business to cover your costs, fund your operations and generate a profit.
  • Cashflow Forecast – forecasting allows you to take your historic cash numbers and project them forward in time. As such, you can see where the cashflow holes may appear weeks, or even months, in advance – and that gives you time to take action, whether it’s increasing your income stream, reducing your underlying costs, chasing up unpaid invoices (aged debt) or going to lenders for additional funding.
  • Balance Sheet – the balance sheet shows you the company’s assets, liabilities and equity at a given point in time. In a nutshell, it’s a snapshot of what the business owns (your assets), what you owe to other people (your liabilities) and what money and profits you currently have invested in the company (your equity). The balance sheet is useful for seeing what stock and equipment the business owns, how much debt (liabilities) you’ve worked up and what the company is actually worth – all incredibly useful information to have at your fingertips when making big business decisions.
  • Profit & Loss – your profit and loss report (P&L) Your P&L gives you an overview of the company’s revenues, costs and expenses over a given historic period of time. Whereas the balance sheet is a snapshot, your P&L is more like a moving video. It shows you how your finances are progressing by demonstrating how revenue is coming in and costs/expenses are going out (rather than cash coming in and going out, as you see in your cashflow statement and cashflow forecasts).

Talk to us about accounting and financial reporting for your business

We’ll run you through the key reports in your accounting software, and can help you track performance, take action and prepare your company for surviving the new business normal.

How to create a cash flow forecast for your business

How to create a cash flow forecast for your business  

A cash flow forecast is an important tool for business planning. And right now, understanding the cash coming in and going out of your business is vital.

A cash flow forecast will show you how long your business can continue to survive on current sales levels, by showing you how much money you’ll have in the bank at the end of a period.

It will give you an understanding of what the revenue drivers are in your business, and give you visibility of your expenses and the things you can control. Having this information in a forecast will also allow you to plan for different scenarios, work out your priorities and understand the outcomes of different options such as diversification.

A cash flow plan can give you a proactive tool to deal with uncertainty. If you are seeking funding in the form of a loan, applying for business support or just establishing your long term survival, you’ll need a cash flow plan.

What information do you need?

We can help you to create a plan for your business. The plan is only as good as the data you have. So here’s what you’ll need to get started:

Understanding where your cash is coming from

Start with revenue from sales – break your sales figures up by product line and across channels. This will show you where the cash is coming from. For example:

  • Does 80% of your revenue come from only 20% of your products?
  • Do you sell to different markets and does one deliver more revenue than others?
  • Are some of your products high value but low volume or low value at high volume?

The data you collect will enable you to ask questions, such as can you reduce margin to lift sales, can you push volume up or are there other channels to sell through?

Make sure you include all other revenue streams, such as grants, tax refunds or investment in your cash inflows.

Understanding expenses – where is the cash going to?

This will include all the costs associated with your business, including rent, wages, supply materials, bank loan fees and charges, tax bills, and electricity.

If you have a bank loan, include the details such as the length of the term and the monthly payments.

Your cash flow plan should also include tax payments when they are due and any capital expenditures.

Some of your variable expenses will directly relate to revenue such as freight or materials. When your sales stop, these will drop too, so your cash flow plan should reflect this relationship in order for you to scenario plan.

Controlling expenses – what costs are fixed and what are the variable costs that you can control? You may not be able to stop fixed expenses like rent, power and internet, but you could reduce the cash going out on petrol and travel, cleaning, and even directors’ drawings.

Making informed decisions in your business

A good cash flow forecast will collate all the data from your business in one place. It will allow you to plan and work out how long your business can weather a storm. It will also help you make decisions around staffing, purchasing inventory, ordering supply materials or investing in growth.

It’s worth remembering that a cash flow plan is a different tool to a budget. Here’s one example: a budget will show sales but a cash flow plan will show the cash benefit of those sales. If you offer credit to customers, your sales may not result in immediate cash flow.

Want to get a handle on cash flow in your business?

If you’re not certain of how to get this information from your accounting software, talk to us about which reports to run. You may need a combination of accounting software reports and projected figures.

Use the information above to source the data you’ll need and get in touch. We can help you build a plan that gives you cash flow projections to assist your decision making.

The value of cashflow forecasting during a crisis

The value of cashflow forecasting during a crisis

During the ongoing coronavirus crisis, many sectors are seeing income either disappear completely or drop to dangerous levels. To be able to navigate the future path of your cashflow, you need to start forecasting – so you can map out your financial position over the coming months and can take the appropriate action to safeguard your cash position.

Forecasting your future cash pipeline

Projecting your cashflow pipeline forwards during a crisis is vital. Having access to detailed forecasts helps you to scenario-plan, search for cost-savings and look for strategies that will preserve your cashflow position.

Remaining in control of the cash coming into (and going out of) the business is the real focus, so you can accurately predict your financial position and can resolve any issues.

Key ways to get more from your forecasting

  • Run regular forecasts – The financial landscape is changing on a daily basis at present. A cashflow forecast is not a document that remains static. Variables and external drivers are literally changing each day, so it’s vital that you run frequent forecasts and react swiftly to any projected cash issues as they become apparent.
  • Use the latest cashflow forecasting apps – cashflow forecasting apps, like Fluidly, Float, or Futrli, integrate with your Xero accounts, giving a drilled-down view of how your cash inflows and outflows will pan out over the coming months – information that will inform and justify the decisions you make during these extremely challenging times.
  • Explore the right revenue streams – most sectors will have seen their face-to-face sales drop to absolute zero since quarantine restrictions came into place. To overcome this, there’s a real imperative to explore revenue streams and new opportunities for income. An example of this is coffee shops that now sell roasted beans online (this will depend on lockdown restrictions). The idea is to find ways to increase the money that’s coming in the door and balance out your unavoidable expenses.
  • Get proactive with cost-cutting – if you can reduce cash outflows to a minimum, that will have a real impact on the health of your future cashflow. Pare back your operations and aim to reduce things like unnecessary software subscriptions, or over-ordering of basic supplies. Negotiating cheaper rates with suppliers, if possible, will also help.
  • Review your staffing needs – now’s not the time to make anyone redundant, but you can look at ways to reduce the costs of staffing and resourcing. Reducing working hours or redeploying staff in different roles are all options that reduce payroll costs, while also looking after your staff’s welfare.
  • Run a variety of scenarios – changing the financial drivers in your forecast model allows you to scenario-plan different strategies and options. Many of these will be in a long-term plan when restrictions ease. Scenario-planning lets you answer questions and will give you some hard evidence on which to base your decision-making and strategic outlook over the coming months.
  • Look at various ways to access funding – if forecasts show a giant cashflow hole coming up, you’re going to need additional funding to get through this crisis. We can assist your business to investigate funding opportunities from grants, banks, loan providers, alternative lenders and crowd-sourcing funders.

Talk to us about setting up cashflow forecasting

Forceasting is an important step to give you the business intelligence to support your decision making.

Get in touch to improve your control over cashflow.

How healthy is your working capital?

How healthy is your working capital?  

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you’ll need to:

  • Proactively manage your cashflow – cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.
  • Monitor and forecast your financial position – running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.
  • Use additional finance when required – if working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Talk to us about optimising your working capital

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

Get in touch to start maximising your working capital.

Planning for seasonal dips in income

Planning for seasonal dips in income

Seasonal dips in income can be highly challenging when you’re a small business. But there are proactive ways to predict, plan for and overcome these dips in revenue.

The key to dealing with seasonal dips is to know when they’re most likely to occur, and to have measures in place to spread your income and revenue pipeline over the course of the year.

Understanding seasonality in your sector

If your business is seasonal such as pool supplies, or a ski gear specialist, you’ll be used to the peaks and troughs, but many ‘non-seasonal’ businesses experience times during the financial year where sales and revenue peak – and, on the flipside, where sales and revenue experience a pronounced dip.

When income is low at certain times of the year, it makes for challenging times.

So, what are the key ways to plan for this kind of seasonality?

  • Forecast your seasonality – it’s vital to know WHEN you’re most likely to experience any seasonal dips. Looking at benchmarking reports for your industry is one way to predict the seasonality in your niche or sector. But you can also use your own accounting data to great effect. Look back through your profit & loss reports and spot where the peaks and troughs have occurred over preceding years.
  • Charge a premium in peak time – one straightforward approach is to apply premium pricing for your products/services during the busy season. By increasing your pricing, you boost your overall revenue, giving you more working capital to see you through the leaner months when sales and income are at their lowest.
  • Offer additional peak-time services – offering added extras and other additional service lines during peak time is another way to maximise the season. In the months where customers are most engaged, look to upsell these premium services and offer more value. Satisfied clients will be more inclined to pay for added extras, giving you an increased revenue stream from the same number of customers.
  • Target other markets – exploring other related markets is another useful tactic. When you’re experiencing downtime, look for other ways to monetise your existing assets, products or services. For example, if you’re a hotel where sales peak in summertime, offer discounted conference space in the winter months to boost revenue.
  • Diversify your products/services – if one product/service has a known seasonal dip, look at adding an additional product or service to offset this downtime. For example, a a ski resort could promote bike-riding or hiking breaks during the warmer summer months to keep revenue constant. Likewise a pool maintenance firm could establish an outdoor fireplace business for the colder months.
  • Have a regional e-commerce strategy – If you’re dependent on a small local market, broadening your marketing and e-commerce strategies can help to attract a wider customer base – and bolster sales. Paid advertising through Facebook, LinkedIn or Twitter can easily target new geographical markets, bringing in new customers and giving your revenue a much-needed uplift during seasonal troughs.

Talk to us about planning for seasonality

If your business is struggling with seasonal dips, and the resulting impact on cashflow, come and talk to us. We’ll help you identify the timing of your seasonal downtime, and come up with a clear strategy for stabilising your income across the year.

Get in touch to start beating those seasonal dips.

How to plan for a holiday from your small business

Leading up to the holiday period, is your business cash flow in good health to carry you through? This time of year can be hard on small business. Make a plan early to ensure healthy cash flow over the holidays.   

Whether you are heading into a holiday period, or just planning to take a break (and congratulations, because a healthy business means work-life balance), it is important to keep your cash flow under control. This means pre-planning and being proactive.

When you are not in the office, there are still overheads and salaries that need to be sorted. If taking time off means that less cash will be coming in, it is essential to plan for this period to make sure that these costs can be comfortably covered. Make sure you have a clear picture of your payroll, and any other planned expenses that will need to be accounted for.

If there’s even a possibility that there could be a shortfall, it is essential to meet this head-on. Whether this means talking to your supplier or creditors to figure out an arrangement, or compromising on other business outgoings, you must make a plan to ensure that the business, or your staff, will not suffer.

Tips to minimise the stress of cash flow over the holiday period

Invoice early – Send any invoices that you can, and in advance if possible. Perhaps consider whether you have any regular clients or customers that you could offer a retainer or similar deal to if they book services or make a purchase from you in advance.

Chase payment – use this opportunity to chase up any outstanding payments. Strong communication and relationships matter – talk to clients and chase invoices.

Talk to suppliers – a little honesty can go a long way. Perhaps they can extend a line of credit for your payments to them. In most cases, a good supplier would rather offer a little flexibility to keep an ongoing business relationship.

Review your costs – it’s also a good idea to do a general review of expenses. Business costs can creep up, and it’s a great idea to make a time to check on your expenses regularly, no matter what your financial situation. Review all of your regular payments and subscriptions as well as upcoming costs. There may be travel, functions or purchases which you can decide on an alternative approach to.

Talk to the bank or Inland Revenue – if cash flow is tight, make sure you have conversations early so you have everything in place to see you through.

When you are planning for a break, book an appointment with us. We can help you navigate the holiday period and help you alleviate cash flow worries. So you get a well deserved break.

Make 2016 the Year for Business Growth

As an aspiring entrepreneur, or someone who already owns a business, at some point in time you would have created a business and financial plan.  When you created these plans, you had visions of how the business would work. Because we get so caught up working IN the business, we forget to make time to work ON certain parts of the business; and that includes your financial plan. It needs to be treated as a live document, not something you create and put aside never to be read again.

Why create or refresh your financial plan?

The answer is quite simple: cash flow forecasting and management makes or breaks a business. Statistics show that 8 out of 10 new business ventures fail within the first three years. This is largely due to poor business and financial planning. You can increase your chances of success through thorough, thought out planning. The better you plan, the better your chances are for success. Not only that, but most financing sources (should you require them) require a business and financial plan as part of the loan application process.

What does cash flow forecasting and management really mean?

Cash flow is the primary indicator of a business’s financial health. It helps measure your ability to pay your overheads this includes: rent, insurance, wages, and supplier invoices. Successful cash flow management really comes down to the management of the money coming in vs going out. If you never have money in the bank to pay bills and expenses, then you may want to modify your financial plan ASAP.

What can you do to help get your cash flow forecast and plan working for you?

  • Compare your original plan to the current expenses you have now. Was your original forecast correct? Are you meeting your targets? If not, you need to modify your plan for it to match your current situation and desired outcome.
  • Look at your current accounting software to see if it can help you. Some systems have budget sections in place to help you forecast over the next year.
  • Seek advice from someone who does this as a job! An expert Accountant or Bookkeeper can sit down and work out a budget with you. Alternatively, if numbers just aren’t your thing you can always ask them to help prepare the budget on your behalf.
  • Look at areas of your business where you can cut down on spending. If you can cut down on costs, then you should. For example, are you posting invoices and/or correspondence? Postage is now up to $1 for a normal letter. Email is widely used these days, so take advantage of this free service.

Now is the perfect time to re-visit your financial goals and plans, as we are at the beginning of the new Financial Year. Make the time to figure out where you want your business to be this time next year. Your business will thank you for it.

Want to get a clearer picture of your next financial year but time poor or not sure where to start? Then get in touch with the team at GoFi8ure. We are experts in assisting businesses with cash flow forecasting and management – enquiries@gofi8ure.co.nz – get in touch to discuss your needs further.

Are you financially ready for the holiday season?

The holiday season is a hard time financially for businesses, so what can you to avoid being financial stress?

Get your Bookkeeper to calculate your GST as early as possible. Don’t risk a late payment (and penalties!) or stress of having to find the money just because you are unprepared.

Make sure you have a budget and cash flow forecast in place. This will help you cover costs and expenses over the holiday period and into the New Year without the worry of running out of money.

Make sure you are claiming right.  An important thing to remember is some expenses are 100% deductible while others are only 50% deductible.

Cash Bonuses for Staff – These must be included in the employee’s wages for the week and PAYE paid on them.

Gifts of Food and Wine to Associates or Clients – The cost of gifting food and wine to associates or clients will normally be 50% deductible for tax purposes.

Gifts to Staff – Each quarter there is a fringe benefit tax (FBT) exemption of $300 per employee – as long as your gifts are under $300 the costs will be 100% deductible. If they are over the $300 then FBT will be payable to Inland Revenue, however, the costs can still be claimed.

Other Gifts to Associates or Clients – The cost of gifts (other than food and beverages) to associates or clients will normally be 100% tax deductible for tax purposes.

If you would like to know where you could be financially on the 31st March 2016, GoFi8ure can help you with easy to understand cash flow forecasting and budgeting reports from one of our top reporting packages Spotlight Reporting. Find out more by emailing enquiries@gofi8ure.co.nz or call us on 0800 463 488.

Verve Magazine December issue – Cashflow, don’t let yours get down to a trickle

The third in a series of Small Business Basics by Lisa Martin, Executive Director of professional bookkeeping and accounting firm, GoFi8ure.

Cashflow – don’t let yours get down to a trickle

Christmas is coming and ‘oh my goodness’ it’s also nearly the summer holidays. You’re probably going to close your business for a couple of weeks while everyone has a jolly good break.
That’s wonderful. We all need to recharge our batteries. But, unless you are in retail and plan to only close for a day or two, this basically means no income while you’re shut – and no income can have catastrophic effects on your cash flow.

If your accounts are organised and your bookkeeping is all up to date, this shouldn’t be a problem. You’ll likely have prepared your cash flow projections some time ago for this period and will have chased up your debtors to ensure all monies owing will come flooding through before you have to pay out holiday wages for your staff.

The trouble is that only a small percentage of small businesses are in this situation. Many meander along day to day without even thinking about what’s around the corner and others tear through their business hours like a raging torrent with no time to stop and look at what’s going on. Come the end of the year, these business find that their cash flow has run dry and they have to borrow.

It’s a fact of life that small business owners are time short. However, there are a few time-efficient strategies that you can put in place to ensure you don’t get caught out:
· Control your costs – you should live and breathe this one.
· State payment terms on your invoices – so everyone knows when payment is due and you can instantly spot overdue payments.
· Send out payment reminders – send these out close to the payment date and as soon as a payment has been missed. Generate reminders via your online accounting system and you can keep track of when you’ve chased and when it’s time for a firm phone call.
· Use financial forecasts – analyse your accounts, create projections to limit financial surprises.
· Know your finance options before you need it – know how and what you can borrow. Don’t wait until you’re on the brink before you visit the bank.

And if you don’t where to start, ask your Accountant or your Bookkeeper – easy!