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DBLCalc

Get a Grip on the Num8ers that Count

Warning:
Your DBLCalc contains highly confidential and very sensitive
business information. Please shred all printed reports and
ensure neither the spreadsheet nor a hardcopy thereof falls into
unwanted hands.
We Want to Hear from You
As the user of DBLCalc, you are our most important critic and commentator.
We value your opinion and want to know what we are doing right, what we could do
better, and any other words of wisdom you are willing to pass our way.

My contact details are:


E-mail : info@dblonline.com.au
Phone : 61 3 9597-9791
Fax : 61 3 9597-9792
Skype : Jeff212
Mail : Jeff Lasnitzki
Dynamic Bottom Lines Pty Ltd
4 Coane Street
Ormond 3204
Australia

For more information on increasing profits and growing your business visit our
website at www.dblonline.com.au.

Thanks in advance for your input. Your opinion counts!

Sincerely,
Jeff Lasnitzki.

Paid Support
If you do not have the time or knowledge to use this valuable tool, please consider our
paid support solution.

Our immediate aim is to get you up and running as quickly as possible, so that you
may reap the benefits today rather then tomorrow.

Our longer-term goal is to provide you with the required expertise to become self-
sufficient. We will strive to become your life-long friend and trusted business
consultant.

Our rates are very affordable, task dependent and available on request.

Page: 2
Table of Contents
Overview 5

Getting the Most from Ratio Analysis 6


1. Accurate Records 6
2. Financial Ratio Adjustments 6
3. An analytical approach to Ratio Analysis 7
4. When and how often should you analyse your ratios 8

Installing & Running DBLCalc


1. Installing DBLCalc 9
2. Opening DBLCalc 9
3. DBLCalc Menu 10
1. Enter Data 10
2. Backup Data 10
3. Update Quarter from Year to Date Data 11
4. Update Year to Date from Quarterly Data 11
5. View Financial Ratios 11
6. Print Input Sheet & Financial Ratios 11
7. Year End Roll Over 11
8. Delete Oldest Year 11
9. User Guide 11

Input Sheet 12
Introduction 12
Your Company Name [Cell B1] 12
Financial Year [Cell E3] 12
Profit & Loss [Heading] 13
Operating Income [Line 1] 13
Cost of Sales [Line 2] 13
Gross Profit [Total] 13
Operating Expenses [Heading] 14
Employment Costs [Line 3] 14
Marketing & Selling Costs [Line 4] 14
Occupational Costs [Line 5] 14
Finance Costs [Line 6] 14
Depreciation [Line 7] 14
Other Costs [Line 8] 14
Operating Profit [Total] 14
Non-Operating Items [Line 9] 15
Taxation [Line 10] 15
Dividends / Drawings [Line 11] 15
Retained Profit [Total] 15
Balance Sheet [Heading] 15
Bank & Cash [Line 12] 15
Debtors [Line 13] 16

Page: 3
Stock [Line 14] 16
Other Current Assets [Line 15] 16
Total Current Assets [Total] 16
Fixed and Other Assets [Line 16] 16
Total Assets [Total] 16
Creditors [Line 17] 16
Other Current Liabilities [Line 18] 17
Total Current Liabilities [Total] 17
Long-term Liabilities [Line 19] 17
Share Capital [Line 20] 17
Retained Earnings [Line 21] 17
Retained Profit [Total] 17
Owners Equity [Total] 18
Out of Balance – Row 47 [Calculated] 18
Number of Employees [Line 22] 18

Financial Analysis 19
Profitability Ratios 19
1. Income Growth(%) 19
2. Gross Profit Margin(%) 20
3. Net Profit Margin(%) 22
4. Annual Return on Owners Equity(%) 23
Efficiency Ratios 24
5. Annual Asset Turnover 25
6. Debtor(Days) 26
7. Stock(Days) 27
8. Creditor(Days) 29
9. Annual Sales per Employee($) 30
Financial Risk Ratios 31
10. Current Ratio(x:1) 31
11. Quick Ratio(x:1) 32
12. Ownership Ratio(%) 32
13. Interest Cover (times) 33
Reports 33
14. $100 Sales Spread 33
15. Cash Flow Statement 34

Good Accounting Records 35


If you can’t measure it, you can’t manage it 35
The Importance of Good Accounting Records 35
Timely Records 36
Good Accounting Records - Check List 36

How to Grow Your Business 38

How to Improve Your Profits 39

Page: 4
Overview

DBLCalc and this User Guide will help you evaluate your company's financial
position and understand the risks you are taking.

Ratio Analysis is a widely practised method of analysing and interpreting financial


statements using Financial Ratios or Key Performance Indicators (KPI) as they are
sometimes referred to. Most ratios are calculated from the information found in the
company’s financial statements.

Ratio Analysis allows you to compare today’s numbers with historical figures to see
where you coming from and where you going to.

Ratio Analysis allows you to compare (benchmark) your performance against industry
standards, as well as successful businesses in other industries.

Although Ratio Analysis reports on past performance, it can predict and often
provides advanced warnings of potential problem areas.

As with any other form of analysis, Ratio Analysis is not definitive and the result
should not be viewed as gospel. Many off-the-balance-sheet factors play a role in the
success or failure of a company. But when used in concert with various other
business evaluation processes, Ratio Analysis is invaluable.

The DBLCalc is an Excel spreadsheet that calculates 13 Financial Ratios and 2


Reports. This User Guide discusses each ratio in detail, explaining how it is
calculated, how to use it and what corrective action can be taken to improve future
performance.

Page: 5
Getting the Most from Ratio Analysis

1. Accurate Records
Ratio Analysis is limited by the accuracy of the underlying accounting records.
It is essential to ensure that your records are as accurate as practically possible.
Refer to Appendix A: Good Accounting Records

2. Financial Ratio Adjustments


In most instances your accounting statements have been prepared for submission to
the tax office and / or the bank. They do not always reflect the true performance of
your business. For the purpose of calculating accurate financial ratios, we suggest you
make adjustments as required.

Typical adjustments include:


Note: [Line #] refers to the corresponding line numbers in the Input Sheet. Two
entries are required for each adjustment.

a) Fair Owners Remuneration


Employment Costs [Line3] should be adjusted to reflect a fair Owners Remuneration.
A corresponding entry must be made to Dividends / Drawings [Line11] to keep the
accounts in balance.

The adjustment value should be the difference between a fair and the actual
remuneration paid. A fair remuneration is the estimated cost of employing outsiders
to substitute for the hours worked and the skills provided by the owners. The actual
remuneration should include the cost of all benefits paid for by the business on behalf
of its owners.

b) Interest on Owner Loans


Interest on Owner Loans should be calculated at market related interest rates and any
difference to the actual interest paid, should be adjusted to Finance Costs [Line 6] and
Dividends/Drawings [Line 11].

c) Un-recorded Cash Sales


Increase Operating Income [Line1] and Dividends/Drawings [Line 11].

d) Depreciation
Calculate or estimate (use last years numbers) a provision for depreciation..
Add the adjusted value to Depreciation [Line7] and deduct from Fixed and Other
Assets [Line 16].

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e)Taxation
If tax has not been entered or needs to be re-calculated because of the above
adjustments, it can be estimated as:
Taxation = (Operating Profit – Non-Operating Items) x Tax Rate
Add the adjusted tax to Taxation [Line10] and Other Current Assets [Line 16].

f) Revalue Fixed Assets


Where Fixed Assets are reflected at historical costs, and these are substantially
different from the current market value, adjustments for the differences should be
considered, in order to derive a "true return" on assets employed.
Add the revaluation adjustment to Fixed and Other Assets [Line16] and Retained
Earnings [Line 21].

How to Enter an Adjustment


The best way of entering an adjustment is to enter it as a formula using the “=”
For example if we wish to reduce the balance sheet value of $60,000 for fixed assets
by $1465 depreciation, simply enter =60000-1465 in the correct cell.
This way Excel will do the calculation for you and you can always see the constituent
numbers by clicking on the cell. You can add a comment to the cell explaining the
adjustment, by right clicking and selecting the Insert Comment option from the drop
down menu. Cells containing comments are indicated by a red triangle in the top right
hand corner. To view a comment, simply move the mouse cursor over the cell.

3. An analytical approach to Ratio Analysis


Each ratio should be approached with the following questions in mind:
a) Was the result anticipated or did it come as an unexpected shock / pleasant
surprise? If unexpected, we need to improve our surveillance frequency and methods.

b) Do we have explanations for the results? For example “Average Debtor days fell to
48 days due to an aggressive campaign to collect outstanding debts and tighter credit
control.”

c) Are there lessons to be learnt from improvements and/or deteriorations of Ratios?


For example “Radio Advertising drove a 4% increase in sales”

d) What action needs to be taken to correct the under performing ratios?

e) Set goals (expressed as ratios) to be achieved in the next period. Compare the
actual results achieved with the previously set target.

Page: 7
4. When and how often should you analyse your ratios.
Your ratios should be examined as soon as the accounting records for a given period
have been completed. This should be within one month of the actual period end date.

In an ideal world you should analysis your data once a month. In most small
businesses once a quarter is satisfactory. Anything longer could result in undetected
problems destroying your business.

Page: 8
Installing and Running DBLCalc

1. Installing DBLCalc
To install DBLCalc simply double click the Setup.exe file and follow the
instructions. On completion the shortcut shown below will appear on your
desktop.

Opening DBLCalc

DBCalc is a stock standard spreadsheet that has been protected to


prevent accidental entry in calculation fields.
You will therefore require Microsoft Excel to be installed in
order to open the spreadsheet.

Simply click on the desktop icon to open the spreadsheet.

DBLCalc uses a macro driven menu to help you navigate and enter data.
On opening the standard macro warning will be displayed as illustrated.

Click the Enable Macros button to enable the Menu buttons.


DBLCalc will still work with the Macros Disabled.
The Menu buttons will however be de-activated.

DBLCalc has three worksheets. To change the active worksheet simply click the
desired worksheet tab

Page: 9
3. DBLCalc Menu

1. Enter Data
This function opens the Input Sheet and activates the Operating Income YTD cell
(C5) for you to start entering data.

2. Backup Data
This option automatically backs up your data to the backup folder. The file name is
taken from the system date using a YYMMDDhhmm format, where YY= Year,
MM=Month, DD=Day, hh=Hour and mm=Minutes

Page: 10
3. Update Quarter from Year to Date Data
Enter Year to Date Values, then backup your data.
Select this function and enter the quarter to be updated.

The macro will automatically calculate and insert the values for the nominated
quarter, using the year to date and previous quarterly data.

4. Update Year to Date from Quarterly Data


Enter Quarterly Date Values, then backup your data.
Select this function to automatically calculate and insert the year to values using the
quarterly data.

5. View Financial Ratios


This option opens the Financial Ratio Worksheet, allowing you to view all the
calculated financial ratios.

6. Print Input Sheet & Financial Ratios


This option prints a hard copy of the Input Sheet and Financial Ratio Worksheets

7. Year End Roll Over


This option inserts a new year in both the Input Sheet and Financial Ratio
Worksheets.

8. Delete Oldest Year


This option deletes the oldest year from both the Input Sheet and Financial Ratio
Worksheets.

9. User Guide
This option opens the User Guide in MSWord, allowing the user to view and/or print
a comprehensive guide for DBLCalc.

Page: 11
Input Sheet
Introduction
Click the Input Sheet tab in the bottom left corner to open the Input Sheet.

The Input Sheet contains 22 data fields (highlighted in yellow) per financial period,
into which you enter your data. Its layout takes the form of a simplified set of
financial accounts, and is therefore split into a Profit and Loss and Balance
Sheet section.

You do not need to enter data into each and every field. The accounts must however
balance - Net Assets (row 40) must agree with Owners Equity (row 45). Any
out of balance period will be displayed in red in row 47.

Each column to the right of column B represents either a quarterly or annual


period. You may enter your data as Year to Date Result in column C, or
quarterly results in column D to G.

If you have entered Year to Date Results, you may automatically update the
Quarterly Results using the Update Quarter from Year to Date Data menu
option.
Alternatively if you have entered Quarterly Results, you may automatically
update the Year to Date Results using the Update Year to Date from
Quarterly Data menu option.

Very Important Note: To activate the Financial Ratios for any given period, the
Operating Income for that period must have a value other then zero.

All terms used are explained below, in the order that they appear in the Input Sheet.

Your Company Name [Cell B1]


Enter your Company Name in this Cell

Financial Year [Cell E3]


Change 2007 to your first Financial Year, if required.

Page: 12
Profit & Loss [Heading]
The Profit & Loss statement summarises the activities of a business over a period of
time. It reports the sales revenue, the expenses incurred in obtaining the revenue
including taxes and the portion of profits distributed as dividends (if any). Any
surplus (profit) or shortage (loss) is transferred to the Owners Equity section of the
Balance Sheet. The Profit & Loss statement is normally tailored to fit the needs of a
particular type of business and the detail break down of revenue and expense
accounts, largely depends on what the owners require to effectively manage the firm.

Operating Income [Line 1]


Operating income is the net sales (less credits) of goods and services,
commissions and other income associated with the normal operation of the
business. It excludes GST, VAT and Sales Tax.

Trade Discounts (given to encourage sales) should be included, whilst


Settlement Discounts (given to encourage early payment) should be excluded.

Non-operating income (e.g. interest earned on investments) should be excluded.

Cost of Sales [Line 2]


The cost of the goods and services sold is the most important item in calculating your
profit and loss. Most accounting software packages will calculate this number for you
using the “average cost” and “perpetual stock” method. Do not assume that your
computer-generated cost of sales is accurate. Check it by agreeing your computerised
stock value, with a physical stock count and valuation.

The Cost of Sales can be calculated in a non-computerised environment, by adding


the value of stock purchased, to the value of last years stock count and subtracting the
value of this years stock count. You may need an accountant’s assistance to estimate
the Cost of Sales and Stock Value, at the end of a given quarter, if you are not using a
computerised system.

The costs of storing, packing and delivering goods are often included in the Cost of
Sales.

Service firms typically include wages and materials directly involved in providing the
service, in their Cost of Sales.

Because Manufacturing firms convert raw materials into finished goods, their
methods of accounting for Cost of Sales, usually includes direct wages and factory
overhead costs.

Gross Profit [Total]


Gross Profit is Operating Income less the Cost of Sales. The Gross Profit is very
significant as it represents the profit you were able to earn from the pure trading
activities of buying and selling.

Page: 13
Operating Expenses [Heading]
Operating Expenses include all business expenses other than those included as Cost of
Sales above. The allocation of an expense to a particular group is not that important,
as long as you are consistent from one period to the next.

We have broken Expenses into major sub-categories, for a better understanding and
control over this large group of accounts.

Employment Costs [Line 3]


Employment costs include all expenses relating to the employment of staff, including
Salaries and Wages, Superannuation, Payroll Tax, Staff Training and Staff Amenities.

Marketing & Selling Costs [Line 4]


Marketing & Selling costs include all expenses relating to the advertising and
promotion of the business. Typical accounts in this group are Advertising,
Commissions, Gifts, Samples and Seminars.

Occupational Costs [Line 5]


Occupational Costs include all expenses relating to the business premises.
They include Rent, Cleaning, Insurance, Repairs, Electricity, Gas and Water.

Finance Costs [Line 6]


Finance Costs include all expenses relating to the financing the business. Interest
Paid is the most common expense in this category. However, this group may include
HP and Leasing Costs as well as Settlement Discounts excluded from Operating
Income above.

Depreciation [Line 7]
Depreciation (also known as the amortisation) is the periodical amount written off
fixed assets, as an expense.

Other Costs [Line 8]


All other operating expenses not included in any of the above categories should be
included in this group. Examples include Telephone, Stationery, Postage, Accounting,
and Legal fees.

Operating Profit [Total]


Operating profit equals the Gross Profit less the total Operating Expenses explained
above.

Page: 14
Non-Operating Items [Line 9]
Non-Operating Items include all income and expenses that are not incurred in the
course of normal business operation (eg Income from Investments), or are extra-
ordinary, one-time income or expense (eg Fire Damage). This category has been
included to prevent the otherwise distortion of Operating Profits.
Note: Non-Operating Income must be entered as a negative amount

Taxation [Line 10]


This is the amount of income tax payable on your net profit.

Refer to Ratio Analysis Adjustments (Page 7) if tax has not been calculated on the
business profit.
.

Dividends / Drawings [Line 10]


This is the amount of dividends, other monies and benefits, taken out of the
business, by the owners.

Refer to Ratio Analysis Adjustments (Page 6), for examples.

Retained Profit [Total]


Retained Profits is the amount of profit retained in the business after tax, dividends
and drawings have been paid out. This balance is added to Owners Equity in the
Balance Sheet.

Balance Sheet [Heading]


The balance sheet is a snapshot at a moment in time (end of the quarter), showing the
total amount owing to (assets) and by (liabilities) the business.

The owners’ share (Owners Equity) is the net difference between the amounts owed to
and by the business. This is reflected in the basic accounting equation, which is: -

OWNERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES

Bank & Cash [Line 12]


Bank & Cash consists of funds immediately available for use without restrictions.
These funds are usually in the form of a bank cheque account, cash register money
and petty cash. If the business has an occasional Bank Overdraft, enter the overdraft
balance as a negative amount. If the business operates on a permanent overdraft enter
the overdraft balance as a Current Liability [Line18].

Page: 15
Debtors [Line 13]
Debtors are amounts owed to the business by its customers arising from credit sales.
They are one step removed from cash. The time it takes for debtors to be converted to
cash depends upon your credit policy and your customer’s payment habits. Non-Trade
Debtors (eg amount owing from the sale of land and buildings) should be entered as
Other Current Assets [Line 15]

Stock [Line 14]


Stock (also known as inventory) consists of raw materials, goods in the process of
manufacture and finished stock, held for resale. Trading stock is two steps removed
from cash. First, a sale must take place to shift the current asset from stock to a
debtor. Second, the debtor must be collected to turn it into cash.

Other Current Assets [Line 15]


Other Current Assets are securities, investments, loans, pre-payments and other assets
(excluding bank, debtors and stock) that are owned by the business, and would
normally be converted into cash within a year of the balance sheet date.

Total Current Assets [Total]


This is the total of Bank & Cash, Debtors, Stock and Other Current Assets.

Fixed and Other Assets [Line 16]


Fixed Assets are items owned and used by the business produce income. Examples of
Fixed Assets are Office Furniture, Vehicles, Land and Buildings, Building
Improvements, Plant, Equipment and Computers.

Fixed Assets (with the exception of land) are subject to depreciation. This is a process
whereby the cost of a Fixed Asset is written off as an expense, over the assets useful
life. Fixed Assets should be entered using their Net Book Value. For example a motor
vehicle purchased 2 years ago for $25,000 with a useful life 5 years, would be
reflected at its book value of $15,000 (Cost Price - $25000 less 2 years depreciation -
$10,000)

Other Assets are a miscellaneous third category of assets that do not fit neatly into
either Current Assets or Fixed Assets. These include intangible assets such as Patents,
Franchise Costs and Goodwill.

Total Assets [Total]


This is the total of Total Current Assets and Fixed and Other Assets.

Creditors [Line 17]


Creditors are the amounts you owe suppliers, from whom you have purchased goods
and services on account.

Page: 16
Other Current Liabilities [Line 18]
Other Current liabilities consist of those debts (other then Creditors) that will fall due
within one year from the balance sheet date. Examples of Other Current Liabilities
are:

Overdrafts are a line of credit with your bank, which allows you to write cheques for
amounts in excess of your account balance.

Provision for tax is the amount of income tax that has yet to be paid.

Accrued expenses are obligations, which the business has incurred but for which no
formal account has been rendered. An example of this is Accrued Leave Pay.
Although Leave Pay is only paid annually, it is being earned daily and constitutes a
valid claim against the business at any time between leave periods. An accurate
balance sheet will reflect these obligations.

Loan Repayment is the portion of the long-term liability, re-payable in the current
year.

Total Current Liabilities [Total]


This is the total of Creditors and Other Current Liabilities.

Long-term Liabilities [Line 19]


Amounts owing that are not due within the current year are called long-term
liabilities. Any part of a Long-term Liability that falls due within one year from the
balance sheet date should be listed as Other Current Liabilities. Owner loans that are
re-payable in the foreseeable future should be included as Long-term Liabilities.

Share Capital [Line 20]


This is the initial and subsequent capital contributed by the owners to finance the
business. In many cases this is a nominal amount, with most financing provided by
way of a loan. Owner Loans that are not re-payable in the foreseeable future should be
included as Share Capital.

Retained Earnings [Line 21]


Retained Earnings are profits that have been retained (not paid out in tax, dividends or
drawings) in the business since the day it began.

Retained Profit [Total]


Retained Profits is the amount of this periods profit, retained in the business after tax,
dividends and drawings have been paid out. This balance is calculated in and
transferred from the Profit & Loss.

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Owner’s Equity [Total]
Owner’s Equity consists of the capital contributed by the owners, plus any earnings
that have been retained in the business since the day it began. Together, they represent
the value of the business (sum due to the owners), if the assets were sold for the
amounts appearing in the balance sheet, and the liabilities were paid off. Owner’s
equity is essentially a balancing figure in the sense that the owners get whatever is left
over after the liability claims have been satisfied.

Out of Balance – Row 47 [Calculated]


This cell reflects the difference between Net Assets (row 40) and Owners Equity (row
45). Any out of balance (not equal to zero) will be displayed in red.

Number of Employees [Line 22]


Calculate the average number of employees by dividing the total number of hours
worked, by the number of hours worked by a full time employee per quarter
For Example Total number of employee hours this quarter
= 1300 hours.

Hours worked by a full time employee per quarter


= 40 hours per week x 13 weeks
= 520 hours.

Number of Employees
= 1300 / 520
= 2.5 employees

Page: 18
Financial Analysis

Click the Financial Ratios tab in the bottom left corner to open the Financial Ratios
Sheet.

This worksheet contains 13 common Financial Ratios (sub-divided into Profitability,


Efficiency, Financial Risk ratios) and 2 reports.

Profitability Ratios
These ratios reflect how successful management has been in generating profits, as
well as changes in profit performance. These ratios are the most important indicators
of your business's financial success. Investors (including yourself, as the business
owner) will be interested in these ratios insofar as they demonstrate the performance
and growth potential of the business

1. Income Growth (%)

Formula :
(Operating Income –Previous Periods Operating Income)
Income Growth (%) = ------------------------------------------------------------------- x 100
Previous Periods Operating Income

Used to :
Determine the direction and extent of the businesses growth.
Best used by ascertaining trends over 4 and more consecutive periods.

Discussion:
Every business needs to grow or it will die. Hungry competitors are fighting for your
market share, each and every day. Loyal customers grow old and move on. And then
there is inflation. If your business growth does not keep pace with inflation (about
3% p.a.) you are going backwards.

Very successful businesses are able to maintain double-digit growth over many years.

Corrective Action:

a) Plan to grow your business


Set some goals and how you intend to achieve them in writing.
Translate the above goals and action plans into a financial budget, against which
actual results can be measured.

Page: 19
b) Increasing selling prices.
Did you know, a 1% Price Increase is equivalent to 2.5% Volume Increase, if you're
working on a 40% Gross Profit Margin. Don't believe it? Check the following
calculations.

Base 2.5% Volume Increase 1% Price Increase


Volume 1000 1,025 1,000
Unit Price $1.00 $1.00 $1.01
Unit Cost $0.60 $0.60 $0.60
Sales $1,000 $1,025 $1,010
Cost of Sales $600 $615 $600
Gross Profit $400 $410 $410

The lower your gross profit margin, the more a price increase and the less a volume
increase will impact on your bottom line. This is known as price sensitivity.

c) Make sure all sales are accounted for and that none are being lost through poor
procedures (forget to invoice sales) or fraud.

d) Increase and/or redirect your marketing efforts, in an attempt to sell more to


new and existing customers.

e) For more good ideas Refer to Appendix B: Grow Your Business - Check List

2. Gross Profit Margin(%)

Formula :
(Operating Income – Cost of Sales)
Growth Profit Margin(%) = ------------------------------------------ x 100
Operating Income

Used to :
Measure the results of your trading efforts with regards to purchasing, stocking and
selling activities.

Compare your current gross profit margin with previous periods to determine:
a) If you have been able to maintain an acceptable Gross Profit Margin?
b) If your efforts to improve on previous margins have been successful?
c) Why the margins are down against previous periods and what action should be
taken to correct the issue?

Discussion:
The Gross Profit Margins vary tremendously from one industry to another, so there is
no rule of thumb that can be applied. Try to obtain your industry averages to compare
your businesses performance relative to similar firms.

Page: 20
Maintaining an acceptable gross profit margin is difficult in the best of times. There is
constant competitor and customer pressure to lower your selling prices. Creeping
increases in supplier prices, often result in increased cost prices not being passed on to
your customers.

Gross Profit Margins are also eroded by stock losses (fraudulent or otherwise),
deterioration and obsolescence.

Abnormally high Gross Profit Margins are unusual (check for accounting errors) and
will most certainly attract fierce competition in the medium to long term.

Knowing your gross profit margin is one step from calculating a simplified Breakeven
Sales, as illustrated by the following example.

Assumptions: Gross Profit Margin = 40% Expenses= $50,000

Total Expenses x 100 $50,000 x 100


Break Even Sales = -------------------------- = -------------------
Gross Profit Margin 40

$5,000,000
= -------------- = $125,000
40

Proof
Sales $125,000
Cost of Sales (60%) $ 75,000
-----------
Gross Profit (40%) $ 50,000
Total Expenses $ 50,000
--------
Net Profit Nil
=====

Conclusion: You need to sell more then $125,000 in order to make a profit.

Corrective Action:
a) Increase selling prices
Refer to previous discussion on page 20.

b) Ensure products are being correctly priced.


A product’s selling price is often calculated by “Marking Up” its cost price.
For example a product costing $100 might be marked up by 50% and sold for $150.
Note however that a 50% mark up, only results in a 33% Gross Profit Margin.

The difference occurs because in the case of a Mark Up, the $50.00 profit is divided
by the cost price $100 (50/100=50%), whilst in the case of the Gross Profit Margin
the $50.00 profit is divided by the selling price $150 (50/150=33%).

Page: 21
The formula to convert Mark Up to Gross Profit Margin is:
Gross Profit Margin = (1 – (100 / (100 + Mark Up) ) ) x 100
= (1 – (100 / 150) x 100)
= (1 - .66 ) x 100
= 33.33%

The formula to calculate Selling Price using Gross Margin is:


Selling Price = Cost / (1 – Gross Margin %)
= 100 / (1 – .3333)
= 100 / .6667
= $150.00

c) Review sales promotion and discount policies.


Cut back on “Lost Leaders”, “Sales at reduced prices”.
Customers should have to earn their discounts by linking them to sales volumes.

d) Buy better.
Shop around for better prices.
Ask Suppliers for volume and early settlement discounts.
Buy directly from the manufacturer.
Buy fast moving stock lines.

e) Improve stock management


Eliminate slow moving stock items.
Avoid stock obsolescence and / or deterioration.

f) Identify and eliminate low margin products/services.

g) Identify and eliminate low margin customers.

3. Net Profit Margin(%)


Formula :
Operating Profit
Net Profit Margin = ----------------------- x 100
Operating Income

Used to :
Measure the average profitability of the business, per dollar sales.

Compare your current net profit margin with previous periods to determine:
a) If you have been able to maintain an acceptable Net Profit Margin?
b) If your efforts to improve on previous margins have been successful?
c) Why the margins are down against previous periods and what action should be
taken to correct the issue?

Value the business.

Page: 22
Discussion:
The Net Profit Margin can vary significantly from one type of business to another.
Try to obtain your industry averages to compare your businesses performance relative
to similar firms.

Net profit is the prime reason for the very existence of the businesses.

The life span of most businesses is very limited in the absence of good and continuos
net profits. A Business with continuos net losses will soon experience cash flow
problems, followed by bankruptcy.

Businesses with a poor profit history will find it difficult and very expensive to
borrow money.

Net profits need to be ploughed back into the business in order, for it to grow in the
future.

A business valuation (should you one day wish to sell) is often determined by the
volume and consistency of the net profits over the past few years.

Corrective Action:
a) Improve Gross Profit Margin
Refer to discussion on page 21.

b) Review major expenses with the view of cutting costs and /or improving
efficiency. Consider what activities actually cause the cost to be incurred (Cost
Drivers). Does the activity actually add value? For example, does it pay to insure
goods dispatched to customers? Is there an alternate way of doing business? For
example, charge customers for insurance on goods delivered.

c) Improve Your Profits - Check List


Refer to check list on page 38

4. Annual Return on Owner’s Equity(%)

Formula :
Operating Profit
Return on Owners Equity % = ----------------------- x 100 x periods per annum
Owners Equity
Used to :
Compare the earning capacity of the owner’s investment in the business, with the
returns that could be earned from alternative investments, adjusted for risk.

Value the business.

Page: 23
Discussion:
The owner would expect to earn between 5% and 20% more on his investment in the
business, than, if he had invested the equivalent money in say blue chip shares.

Most businesses employ some form of borrowing or trade credit, so that Return on
Owner’s Equity is influenced by the extent to which the firm borrows or leverages on
the owner’s equity. Leveraged businesses are more profitable when earnings are
positive, but they are also exposed to greater losses when earnings are negative.
For example, consider a business that has a net profit of $20,000 and an Owner’s
Equity of $100,000, rendering a Return on Owner’s Equity of 20% ($20,000 profit /
$10,000 Owners equity). Now if this business were to borrow $50,000 from the bank
at 10% interest and use this money to reduce the Owner’s Equity to $50,000, the
Return on Owner’s Equity would increase to 30% ($20,000 profit - $5,000 interest /
$50,000 Owners equity).

Corrective Action:

a) Increase Profitability
Refer to discussion on page 23.

b) Reduce Owners Equity


i) Obtain outside finance to grow the business
ii) Pay Owner dividends or repay Owner loans.

Efficiency Ratios
Efficiency ratios measures how effectively a business uses and controls its assets.
If all of your assets were used efficiently, then you would expect the return on your
assets to be maximised. One way of assessing how efficiently assets are being used is
to measure their frequency of turnover. This measure relates the investment in assets
to the level of activity, which they support.

5. Annual Asset Turnover

Formula :
Operating Income
Asset Turnover = ---------------------- x periods per annum
Total Assets

Used to :
Measure how hard the firm’s total asset base is working to generate sales.
The greater the Asset Turnover ratio, the more efficient the assets are in generating
sales.

Page: 24
The best way of judging the ratio is to look at the range of other successful companies
in the industry.

Discussion:
Companies with low profit margins tend to have high Asset Turnovers, whilst those
with high profit margins tend to have a low Asset Turnover. This is an indication of
pricing strategies – High volume low margin, versus Low volume high margin.

A high ratio may also be an indication that the business is working close to capacity.
It may prove difficult to generate more business without investing more in assets.
A high ratio may also indicate the business is more labour intensive and does not
require as much by way of plant and equipment.

A low ratio may indicate obsolete assets and/or under utilised (excess capacity) or
inefficient assets.

This ratio may be somewhat distorted by the balance sheet values of the underlying
assets. Assets valued at historical costs (under-valued in relation to market value) will
skew the results towards higher returns. Likewise new equipment early in it’s
depreciation life will skew the results towards lower returns.

Company A Company B
Sales 5,000,000 5,000,000
Rent 25,000
Net Profit 50,000 25,000

Land & Buildings 250,000


Other Assets 250,000 250,000
Total Assets 500,000 250,000

Asset Turnover 10 20

At first glance it may appear that Company B’s assets are more efficient in generating
turnover, but in reality the 2 companies are identical with Company A, having two
businesses incorporated in one as illustrated.

Operational Property
Sales 5,000,000 25,000
Rent 25,000
Net Profit 25,000 25,000

Land & Buildings 250,000


Other Assets 250,000
Total Assets 250,000 250,000

Asset Turnover 20 10

Page: 25
Corrective Action:

a) Grow your Operating Income – refer to page 19

b) Sell and replace under utilised and inefficient assets

c) Reduce Debtor Days – refer page 26

d) Reduce Stock Days – refer page 27

e) Increase Supplier Days – refer page 29

Debtor (Days)

Formula :
Debtors
Debtor (Days) = ----------------------- x number of days in period
Operating Income

Used to :
Measure how quickly the business collects its trade debtors. A high ratio indicates the
company is having problems getting paid.

Outstanding Debtor days should be in line with credit terms granted to account
customers.

Discussion:
Extended Debtor days is a drain on much needed cash flow and a possible threat to
profitability in the form of bad debts and / or settlement claims.

If the average collection period is getting longer, it is a signal that the investment in
trade debtors is becoming greater relative to sales. Perhaps the firm is becoming
dependent on too many slow payers, or it could be carrying some bad debts, which
should be written off.

If the average collection period is much shorter than the industry average, then the
firm might consider extending more credit in an effort to stimulate greater sales. The
average collection period varies significantly from one type of business to another.

This ratio is sometimes seasonally affected rising during the busy season and falling
in the off-season.

Corrective Action:
a) Identify and chase up overdue accounts – Start with the longest outstanding and
biggest outstanding balances.

Page: 26
b) Write off bad debts

c) Follow up and settle disputes as soon as they arise.


i) Maintain an open item system, allocating payments against the invoices being
paid.
ii) Query why earlier outstanding invoices have not been paid, each time you
receive a payment.
iii) Query payment allocations that are not apparent.

d) Tighten up your credit control procedures.


i) Assign credit terms to each and every customer. Communicate these terms and
their strict adherence, to your customers in writing.
ii) Phone customers as soon as they exceed their credit terms.
iii) Place customers exceeding their credit terms on hold.
iv) Arrange for salespersons to collect overdue amounts when making sales calls.
v) Display outstanding balances (aged) on Customer Invoices
vi) Send out monthly statements.

e) Restrict Credit to credit worthy customers


i) First sale should be for cash – test the customers ability and willingness to pay.
ii) Customers requiring credit need to complete credit application form.
iii) Follow up on trade references given in the credit application form.

f) Request post dated cheques from customers who are unable to meet their
credit term obligations.

7. Stock (Days)

Formula :
Stock
Stock (Days) = ------------------- x number of days in period
Cost of Sales

Used to :
Measure on average, how many days it takes to convert your stock to sales. The
higher the ratio, the slower the stock is being turned over.

It is a good idea to monitor the ratio over consecutive financial periods to determine if
a trend is developing.

Discussion:
A low ratio may indicate positive factors such as good stock demand and
management.

Lower than Industry average ratios, could however indicate stock levels are too low to
service sales levels. This may very well result in lost sales, due to a lack of variety to

Page: 27
satisfy customers needs and “out of stock” situations. These imbalances may alienate
customers and incur avoidable costs of shipping back-orders.

A high ratio may indicate that either stock is naturally slow moving or problems such
as the presence of obsolete stock, bad buying or simply carrying too much stock.

A high ratio can also be indicative of potential stock over valuation issues.

Corrective Action:
a) Computerise your stock – It is impossible to track and control stock without the
aid of a computerised system.

b) Ensure your computerised stock records are accurate – Often actual physical
quantities and theoretical computer quantities bear no relationship to each other. You
will need to physically count your stock and re-adjust your computerised stock levels
until you attain a high degree of accuracy. Investigate the reason for these
discrepancies and prevent them re-occurring in the future.

c) Determine Stock (Days) for each stock item – Use this information to set
minimum stock levels and to calculate economic order quantities. Enter these values
in your computerised stock system so that you can generate Stock Re-Order reports in
the future.

d) Set your computerised stock system to reserve stock that has been allocated to
a customer on a sales order and to disallow negative stock quantities. Sales
invoicing should only permit for available stock, at all times.

e) Calculate and compare the return on investment of each stock item.


Item Gross Profit for the period divided by Items Stock Value. Use this report to help
determine the ideal product mix in your stock holding.

f) Measure customer back orders as a percentage of total sales.


Take corrective action until an acceptable ratio is attained and then ensure it is
maintained.

g) Incorporate supplier purchase orders into your computerised stock system.


You should have a complete view (Stock on hand + Stock on Purchase Order – Stock
Reserved for Sales Orders) at all times. Ensure that actual goods received, are as per
order with regard to price, quantity and description.

h) Monitor supplier back orders closely. Drop suppliers who are unable to deliver
consistently on time.

i) Negotiate favourable delivery schedules, minimum order quantities and lead


times with reliable suppliers. Aim for “Just in Time” stock levels.

j) Arrange for drop orders. Your supplier delivers directly to your customer.

Page: 28
k) Make your production processes lean and mean – eliminate wastage and reduce
production times.

l) Enter into a partnership arrangement with your customer whereby they agree
to purchase a fixed quantity of product, to be delivered according to a pre-determined
delivery schedule.

m) Stock Items (code & description) and location (bin numbers) should be
clearly and correctly labelled, ensuring that stock items can be easily and correctly
picked. For example do not pick and supply a box of 12, when 1 item has been
ordered and invoiced.

n) Stock Items should be correctly stored (eg refrigerated) to ensure they remain
in a saleable condition. Items that have a use by date should be picked on “a first in
first out” basis, to ensure the longest possible shelf life.

8. Creditor (Days)

Formula :

Creditors
Creditor (Days) = ------------------- x number of days in period
Cost of Sales

Used to :
Measure on average, how many days it takes to pay your creditors. The higher the
ratio, the more use is being made of creditors to finance your business.

Discussion:
Creditors are a useful form of financing working capital. Average Creditor days
should be compared to average Debtor days with the view of bringing them in line by
reducing debtors and increasing creditors.

On the other hand a mountain of outstanding creditor obligations, indicates serious


health problems and might require re-financing.

If creditors offer a settlement discount, there is a great benefit in prompt payment. For
example a 2.5% settlement discount for payments in 30 days instead of 60 days yields
a return of 18% per annum (2.5 * 360/30).

Page: 29
9. Annual Sales per Employee ($)

Formula :

Operating Income
Sales per Employee = ----------------------------
Number of Employees

Used to :
Measure employee efficiency in generating income.

May be used as a basis for calculating employee incentive schemes.

Used to determine the level of sales that a business needs to generate when increasing
staffing levels and/or the capacity to increase sales before more people need to be
employed.

Discussion:
Companies with higher sales-per-employee figures are generally considered more
efficient than those with lower figures. A higher sales-per-employee ratio indicates
that the company can operate on low overhead costs, and therefore do more with
fewer employees, which often translates into healthy profits.

Companies that concentrate on selling and distributing products will typically enjoy
much higher sales-per-employee figures than firms that manufacture goods.
Manufacturing is typically very labour intensive, while sales and marketing activities
rely on fewer people to generate the same sales numbers. In manufacturing, each
employee can usually assemble only a certain number of products. Increasing
production requires more employees. By contrast, marketing and sales activities can
increase without necessarily adding staff.

Early-stage businesses typically have low sales-per-employee numbers. Companies


involved in developing new technology, for example, often have meagre sales-per-
employee figures in their early years.

Trends are important. Be sure to watch sales-per-employee ratios over several years to
get a reliable idea of performance. Don't jump to conclusions without examining
trends over time. A jump in sales-per-employee efficiencies can be just a blip. For
instance, big job cuts often translate into a temporary ratio boost as remaining
employees work harder and take on extra tasks. But research shows such a boost can
quickly reverse as workers burn out and work less efficiently.

Also, a company that consistently generates rising sales with a stable or shrinking
work force can usually boost profits more rapidly than one that can't make additional
sales without adding more workers. An improving sales-per-employee ratio frequently
precedes growth in profit margins. A climbing sales-per-employee number could

Page: 30
mean that the company is growing but has not hired more employees to handle the
added workload.

Corrective Action:
a) Streamline the organisation – Structure a flatter organisation with less
middle management and supervisory roles.

b) Improve efficiency. For example computerise stock control

c) Outsource manufacturing division.

d) Improve employee assessment procedures and training

e) Implement an employee bonus scheme

f) Implement / Re-assess marketing and advertising campaigns

g) Implement Customer Self Help programs. For example Internet Sales &
Support

Financial Risk Ratios


Liquidity ratios reflect the ability of the business to meet its short-term financial
obligations and are of particular interest to those extending credit to the business. The
inability to satisfy the legitimate demands of creditors, is sufficient reason for a
business to be wound up - irrespective of how profitable it may be! While these ratios
help you and your creditors to monitor the liquidity of your business, they are not a
substitute for cash flow budgeting.

10. Current Ratio (x :1)

Formula :
Current assets
Current Ratio = ------------------
Current liabilities

Discussion:
The current ratio is a common test of liquidity. It looks at the level of current assets
available to meet current liabilities. Short-term creditors prefer a high current ratio
since it reduces their risk. On the other hand, Owners prefer a lower current ratio, so
that more of the firm’s assets are working to grow the business. As a rule of thumb,
the current ratio should be in the region of two or better.

Page: 31
11. Quick Ratio (x:1)

Formula :
Current assets - Stock
Current ratio = --------------------------
Current liabilities

Discussion:
Creditors often question the liquidity of a firm’s trading stock. They reason that since
trading stock is two steps away from cash it should not be considered available to pay
bills, which are immediately due. They may prefer, therefore, to use the quick ratio in
which trading stock is subtracted from the current assets.

The rule of thumb for the liquid ratio is 1. While it needs to be interpreted with the
same care as the current ratio, significant deviations below 1 are usually viewed with
concern.

12. Ownership Ratio (%)

Formula :
Owners Equity
Ownership Ratio = -------------------
Total Assets

Discussion:
Most successful small businesses make judicious use of outside finance. This not only
makes it possible to leverage the owner’s equity, but also enables the business to take
advantage of opportunities, which would otherwise have to be forgone.

The ownership ratio helps us to determine to what extent the owners are financing the
business, balance being financed by outside stakeholders.

An important and difficult question in financial management is how much debt a firm
can afford to take on. The acceptable proportion of debt varies between different types
of businesses. Debt finance will enable a firm to grow and to improve its profitability,
but too much debt exposes the firm to the risk of financial loss and bankruptcy. When
the ownership ratio is below 50 per cent, outside stakeholders have a greater financial
stake in the business than the owners.

It is prudent for a company not to pay out all its earnings by way of dividends and
owners remuneration. Some profits should be held back to finance future growth and
inflationary increase in working capital. By holding back a portion of earnings the
retained income is increased. This acts as a reserve for a rainy day and can be used to
smooth out year on year fluctuations.

Page: 32
13. Interest Cover

Formula :
Operating Profit + Finance Costs
Interest Cover = ------------------------------------------
Finance Costs

Use:
To determine how easy a company can pay the interest on its outstanding debt.
The lower the ratio the greater the debt burden on the company.

Discussion:
An interest cover of 2 and greater is considered good.

An interest cover of 1.5 to 2 is average.

An interest cover of 1 to 1.5 indicates some weakness and requires attention.

An interest cover below 1 is insufficient to cover ongoing finance expenses and would
be of grave concern to lenders.

14. $100 Sales Spread

Expense
Formula : Expense = ------------------------ x 100
Operating Income

Use:
To determine how every $100 Sales has been spent.

This is a very useful method of comparing companies and/or periods, where the
volume of activity (operating income) differs substantially.

Discussion:
The aim is to minimise the amount spent in each expense category, with the view of
maximising the owner’s share.

If you are no longer able to trim the “spend” in any expense category, then the only
way to increase total profit is to increase Operating Income.

The report highlights the size of expense categories relative to each other, allowing
you to focus on the areas where savings are most likely to be made.

Certain cost categories (eg Cost of Sales) are variable, in that they will increase /
decrease in proportion to turnover. All things being equal the $100 spent on these
categories should not change with turnover.

Page: 33
Certain cost categories (eg Occupational Costs) may be relatively fixed and do not
change with changes in turnover. All things being equal the $100 spent on these
categories should fall with an increase in turnover. There will however be a point
where additional expenses (eg a larger warehouse) will need to be incurred in order to
reach the next level of turnover. At this point the $100 spent on this category may
increase dramatically.

15. Cash Flow Statement

Use:
To understand where the company’s cash is coming from, and how it is being spent.

Discussion:
One needs to appreciate that a cash inflow is not the same as profit. A company can
quite easily make a profit and have a negative cash inflow at the same time. In the
medium to long term however, a company needs to make both a profit and have a
positive cash flow to survive.

Ideally the company should have a large cash inflow from its operations.
Operational outflows can occur if the company incurs a loss (very bad), or it grows
faster then the internally generated cash - all right in the short term, provided the
company is making a profit and is easily able to service it’s loans.

The Investment outflows may be required from time to time, to purchase the asset
infrastructure to ensure the continued growth and profitability of the business.

Financing inflows may be required from time to time to finance Investment and
Operational outflows. Financing outflows reflect loan repayments and/or cash
surpluses paid to Owners by way of dividends.

Page: 34
Good Accounting Records

If you can’t measure it, you can’t manage it.


The most basic requirement for a successful small business is good accounting
records. This is well illustrated by an Australian survey that showed a business’s very
survival depended on accurate and timely records.

Unfortunately many “time poor” business owners tend to ignore this seemingly non-
essential area of their business, until it is too late.

The Importance of Good Accounting Records


1) The most important reason for Good Accounting Records is, that they can provide
you with vital management information needed to increase profits and grow your
business.

2) By law the Tax Office requires you to keep and maintain business records for 5
years. Failure to do so may result in high penalties.

Page: 35
3) You will need Good Accounting Records to demonstrate your financial position to
banks, other lenders and prospective buyers some time in the future. These parties will
want to track your historical performance for the past three to five years.

Timely Records
Most small businesses prepare a set of financial accounts for income tax purposes
once a year. It may take a further three to nine months after the year-end before these
accounts have been finalised.

By contrast companies quoted on the stock exchange are required to publish half and
yearly financial statements within three months of the period end. In addition to the
statutory accounts, most quoted companies produce detailed monthly accounts and
reports to aid and support critical management decisions.

We recommend that small business track critical information (eg Sales Volumes and
Bank Balances) daily, and less important information (eg Outstanding Debtors, Stock
Levels and Expenses) monthly. A full set of management accounts should be created
and reviewed at least once a quarter.

Good Accounting Records - Check List


Score 0 for all “Yes” and non-applicable answers. Non-applicable only applies if for
example you are a service business without stock. It does not apply if for example you
do not understand the question or do not consider it relevant to your business. Score
the value in [ ] for all “No” answers. Add up your total score and see how well you
rate.

1) Do you reconcile your Bank and Credit Card Accounts with Bank and Credit Card
Statements monthly or more frequently? [5]

2) Does your Debtors (Customer) Control Account, balance with your Debtors
(Customer) Age Analysis Report? [3]

3) Are all amounts reflected in your Debtors Aged Analysis Report either collectable
or covered by a Provision for Bad Debts? [2]

4) Do you allocate Debtor payments against the invoices being paid (open item)? [2]

5) Does your Creditors (Suppliers) Control Account balance with your Creditors
(Suppliers) Age Analysis Report? [3]

6) Does your Stock Control Account agree with your Stock Valuation Report? [3]

7) Are all values reflected in the Stock Valuation Report realisable or covered by a
Provision for Obsolete Stock? [2]

8) Do you physically count and adjust stock values at least once a year? [2]

Page: 36
9) Does your accounting system allow negative stock balances? This often distorts the
average costs of stock. [1]

10) Do you have an explanation for all clearing and suspense account balances? [2]

11) Do you provide for depreciation and / or hire purchase interest on a monthly
basis? [1]

12) Does your Salary & Wage Account agree with your Payroll Gross Payment
Summary? [2]

13) Do you account for leave liability? [1]

14) Do you prepare and analyse Management Reports at least once a quarter? [2]

15) Do you compare actual financial results against budget? [1]

16) Do you revise your budget (if required) during the year? [1]

Score Results

0 to 5 This is a good score - if you have been honest. You can rely on the accuracy
of your accounting records with confidence.

6 to 10 This is an acceptable score, with some room for improvement.

11 to 15 This is a poor score with lots of room for improvement.

15 and more Your accounting records are a disaster and require urgent attention.

Page: 37
Grow Your Business – Check List

1. Grow Your Customer Base

a) Increasing your lead or inquiry generation


• Referral systems.
• Acquire customers by "Break-even Up Front" and "Profit on the Back-End".
• Guarantee purchases through risk reversal.
• Host/beneficiary relationships.
• Advertise.
• Use direct mail.
• Use telemarketing.
• Run special events or information nights.
• Acquire qualified lists.
• Develop a unique selling proposition.
• Increase the perceived value of your product/service through better customer
education.
• Use public relations.

b) Increasing your customer retention rate


• Deliver higher -than -expected Levels of Service.
• Communicate frequently with your customers to “ nurture” them.

c) Increasing your conversion from inquiry to sale


• Increase sales skill levels of your staff.
• Qualify leads up front.
• Make irresistible offers.
• Educate your customers by giving “reasons why”.

2. Increase the Average Transaction Value


• Improve your team’s selling techniques to "Up-Sell" and "Cross-Sell".
• Use Point-Of-Sale Promotions.
• Package Complementary Products and Services together.
• Increase your Pricing and hence your Margins.
• Change the Profile of your products or services to be more “Up Market”.
• Offer Greater/Larger Units of Purchase

3. Increase the Transaction Frequency


• Develop "Back-End Products" that you can go back to your customers with.
• Communicate personally with your customers (by telephone, letter, etc.) to
maintain a positive relationship.
• Endorse other people’s products to your list.
• Run special events such as “Closed Door Sales”, limited pre-releases, etc.
• Implement Price Inducements for frequency.

Page: 38
Improve Your Profits – Check List

1, Increase Revenue
Increase Selling Prices
Increase Selling Prices
Change Special Deals.
Lower Discounts Allowed.
Revamp entire Price Structure.
Prune Product/Service profile.

Improve Product Mix


Weed out loss-making products/departments.
Concentrate efforts on high margin products/services.

Invoicing
Ensure all deliveries are invoiced.
Check invoicing accuracy.

2. Reduce Variable Costs


Improve Productivity
Better Controls.
Enhanced Incentives.
Improve Training & Morale.

Improve Yield
Eliminate Waste.
Introduce Quality Control.
Improve Formulae & Mixes.
Use Computer Controlled Devices.

Reduce Direct Costs


Substitute with Cheaper Materials.
Improve Price Negotiating Performance.
Use Volume Bargaining.
Pool Purchases with associates.
Challenge Price Increases.
Spend to Save.
Update & Change Methods.
Ensure Greater Care & Clearer Instructions.
Avoid Throwing Away Money.
Employ Better Quality Staff.
Subcontract if Cheaper.

Page: 39
3. Increasing Volumes
Increase Sales Volumes
Increase Marketing Activity.
Advertise
Make Special Offers.
Identify & Follow up Lost Sales.
Offer Sales Commissions.
Appoint Sales Agents.
Clear Arrears Back Orders.
Cold Canvass.
Show at Exhibitions.
Improve Feedback regarding services.
Hold Stock on Consignment.

4. New Business
Enter New Markets
Sell in New Areas.
Export.
Widen Export Activity.
Create New Markets.

Introduce New Products


New Products in Current Markets.
New Products in New Markets.

5. Reducing Fixed Costs


Occupation Costs
Find Smaller Premises.
Sublet.
Change Locations.
Clear obsolete stock, plant and equipment.

Staff Costs
Improve efficiency.
Remuneration based on Performance.
Reduce Labour.
Use Specialists where Cheaper.
Employ Casual / Part time / Contract Labour.

Advertising
Measure Performance of Advertising Effort.
Eliminate or Redirect under-performing Advertising.

Repairs & Maintenance


Practise Preventative Maintenance.

Page: 40
Sundry Costs
Improve General Efficiency.
Systematic Review of all Overheads.
Eliminate Unnecessary Costs.
Improve Negotiating Performance.
Raise Buying Performance.

6. Improve Fixed Asset Performance


Existing Fixed Assets
Rectify or modernise them.
Prune out inefficient Plant.

Investment In Fixed Assets


Select Projects with high projected returns.

Control Investment Costs


Enforce proper pre-investment appraisal disciplines.
Insist on submission of alternatives.
Deny pet projects that are not sound.
Insist on alternative quotes.
Control Actual Expenditure as the project progresses.

7. Improve Debtor Performance


Offer Cash Discounts
Trade for Cash Only
Improve Credit Control Procedures
Review Ageing of Current Debtors regularly
Settle Disputes Quickly.
Factor Debtors profitably

8. Improve Stock Performance


Write off and sell obsolete and damaged stock
Employ minimum/maximum stock targets to control and order replenishments
Ensure stock levels remain balanced in relation to sales.
Use sound production and scheduling methods
Avoid stockholding responsibilities - buy on consignment
Hold part manufactured stocks pending receipt of orders

9. Improve Creditor Efficiency


Ensure that you are buying at the best price / quality available
Negotiate higher discounts and extended payment terms.
Favour reliable and short lead-time suppliers.

Page: 41

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