When we look at our clients’ accounts, they often ask – how can I improve my profits or how can I increase my cash flow? We help our clients to do this, of course, but here’s some free advice about improving your profitability.
Firstly, things that improve your profitability will likely improve your cash flow but there are other things that only improve cash flow.
The are only 4 ways to increase your profits and cash flow.
- Increase sales volume.
- Increase sales price.
- Improve your gross profit percentage.
- Reduce your overheads.
There are only 3 ways to improve your cash flow.
- Reduce your debtors’ days.
- Reduce your stock holding days.
- Increase your creditor payment days.
The 1% rules – how much of a difference would it make if you improved the above by just 1% in a year – what would be the impact on profits and cashflow?
Let’s consider the following business.
| £ | ||
| Turnover | 5,000,000 | |
| Cost of Sales | 3,500,000 | |
| Gross Profit | 1,500,000 | |
| Overheads | 1,000,000 | |
| Net Profit | 500,000 | |
| Trade Debtors | 500,000 | |
| Stock | 1,000,000 | |
| Trade Creditors | 300,000 |
The improvement to profitability and cashflow in year would be
| £ | ||
| Increased Sales Volume | 1% | 15,000 |
| Increased Sales Price | 1% | 50,000 |
| Increased Gross Profit | 1% | 50,000 |
| Reduced Overheads | 1% | 10,000 |
| Total | 125,000 |
The improvement to cashflow would be
| £ | ||
| Reduced Trade Debtors | 1% | 5,000 |
| Reduced Stock | 1% | 10,000 |
| Increased Trade Creditors | 1% | 3,000 |
| Total | 18,000 |
So just by improving each of the 7 items by a very small percentage your profits would improve by £125,000, which is 25% and you would have additional cash in the bank of £143,000.
Imagine what you could do if you increased each by 2% or concentrated on the items with the biggest impact.
So now we know what to concentrate on in future post we will look in details how we can improve these 7 key items
