Management Accounting Tips for your Business

The Business Owner’s Accountant

E: admin@judsons.com.au | P: 07 3367 1994 | A: 20 Mayneview Street, Milton, Brisbane, Queensland 4064

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MANAGEMENT ACCOUNTING TIP

A ug ust 2013 w w w .jud sons.com .a u

Understanding Cash Flow 5I FSF B SF UZ Q FT PG DB TI Ă˝ PX UI B U OFFE UP CF VOE FSTUPPE JO PSE FS UP SVO B WJB CMF CVTJOFTT N B SH JOB M DB TI Ă˝ PX B OE OFU DB TI Ă˝ PX

MARGINAL CASH FLOW . B SH JOB M DB TI Ă˝ PX JT UI F B N PVOU PG DB TI B CVTJOFTT OFFE T UP H FOFSB UF JG JU TFMMT B OPUI FS PG Q SPE VDUT PS TFSWJDFT *G UI JT JT JOFGĂĽ DJFOU JU X JMM JN Q B DU UI F PQ FSB UJPO PG UI F CVTJOFTT OFH B UJWFMZ 5I JT JT X I FSF JU JT im p orta nt to und ersta nd th a t not every $ ofrevenue isth e sa m e.Ify oum a ke a sa le to a slow p a y ing custom er or m a ke a sa le w h ere y ouneed to obta in m ore stock th en it could w ork out th a t a n a d d itiona l$ ofsa le could be h urting y our business.

Case Study *G B #VTJOFTT TB MFT B SF B OE ( SPTT 1SPĂĽ U JT UI FO UI F ( SPTT . B SH JO DB O CF DB MDVMB UFE B T 31% or 31c for every d olla r ofsa les.

Total Dollars

For every $1 sale

Revenue

$4,200,000

$1

Direct Costs

$2,898,000

69c

Gross ProďŹ t

$1,302,000

31c

So for every $1 ofsa les,69 c isd ed ica ted tow a rd sm eeting y our d irect costs.Th isw illlea ve th e businessow ner 31c to th en cover th eir w orking ca p ita la nd overh ea d s.

N ow a ssum e th e sa m e businessa bove h a sth e follow ing ba la ncesin th eir ba la nce sh eet: Total Dollars

For every $1 sale

Debtors

$863,014

20.55c

Inventory

$1,429,151

34.03c

Creditors

($555,781)

(13.23c)

Total Working Capital

$1,736,384

41.35c

For every d olla r ofsa le,41.35c issp ent m a inta ining th e business’w orking ca p ita llevels.

5I F . B SH JOB M $ B TI ý PX GPS UI JT CVTJOFTT JT UI FSFGPSF B DSVFM OFH B UJWF D D – 41.35c)for every d olla r of sa le! For every a d d itiona lsa le th e businessm a kes,it ish urting th e businessby a n extra 10c for every d olla r w h ich w illneed to be fund ed eith er by th e ba nk or th e businessow ner.E.g .Ify oum a ke a $10,000 sa le,th e PX OFS OFFE T UP ü OE B O FYUSB UP N B JOUB JO X PSLJOH DB Q JUB M MFWFMT A key m etric th a t m ust be m onitored by every businessow ner isw h eth er th eir g rossm a rg in % exceed sth eir w orking ca p ita l% .

NET CASH FLOW / FU DB TI ý PX JT UI F N PWFN FOU JO CPSSPX JOH T UI B U B CVTJOFTT I B T GSPN POF Q FSJPE UP UI F OFYU 'PS UI F p urp osesofth e ca lcula tion,a ny ca sh in th e ba nk isoffset a g a inst a ny sh ort term borrow ing s.Th e g oa lfor a ny CVTJOFTT JT UP H FOFSB UF B Q PTJUJWF DB TI ý PX UI B U FOB CMFT PWFSI FB E T UP CF Q B JE B OE E FCU JG B OZ UP CF SFE VDFE w h ere p ossible.

5Z Q JDB MMZ B U UI F N PN FOU X I B U X F å OE JO N PTU CVTJOFTTFT JT UI B U UI F CVTJOFTT JT OPU H FOFSB UJOH TVGå DJFOU DB TI ý PX UP FOB CMF Q SJODJQ B M SFE VDUJPO UP CF N B E F PS FWFO X PSTF PWFSI FB E T UP CF Q B JE 5I JT X JMM VMUJN B UFMZ MFB E UP d ecisionsneed ing to be ta ken to cut costsa nd red uce w a g es.

MONITORING YOUR CASH FLOW " T Z PV DB O I PQ FGVMMZ UFMM GSPN UI F B CPWF N POJUPSJOH CPUI Z PVS N B SH JOB M DB TI ý PX B OE OFU DB TI ý PX iscritica l.A t Jud soOT X F I B WF FTUB CMJTI FE B Q B SUOFSTI JQ X JUI i. Z $ B TI ý PX 4UPSZ w 5I JT Q SPH SB N DB O OPX p rovid e th ese sortsofrep ortsto ena ble th e businessow ner to m onitor th ese key m etrics.A sa m p le rep ort is a tta ch ed for y our review .

4I PVME Z PV X JTI UP E JTDVTT X JUI VT UI F N POJUPSJOH PG Z PVS LFZ å OB ODJB M N FUSJDT VTJOH UI JT UPPM PS PUI FS å OB ODJB M UPPMT X F I B WF Q MFB TF E P OPU I FTJUB UF UP DPOUB DU VT

XYZ Furniture Prepared for XYZ Furniture 07 August 2013

Š Cash Flow Excellence Pty Ltd

Page 1/3

XYZ Furniture XYZ Furniture

Summary Story Your Profit Story

-

Revenue $4,200,000

COGS $2,898,000

=

Gross Margin $1,302,000

-

Overheads $840,115

=

EBIT $461,885

Current Year

Change

$4,200,000

+20.00%

Gross Margin %

31.00

+1.00%

EBIT %

11.00

+0.29%

4.96

+0.24%

Revenue

Net Profit %

Your Balance Sheet Story

+

Net Debt $1,727,981

Funding

Debtors Days Stock Days Creditors Days Working Capital Days

Š Cash Flow Excellence Pty Ltd

Equity $1,958,402

=

Working Capital $1,736,384

+

Other Capital $1,949,999

Net Operating Assets

Current Year

Change

75.00

5.00 days

180.00

26.00 days

70.00

9.98 days

185.00

21.02 days

Page 2/3

XYZ Furniture XYZ Furniture

Your Cash Flow Story

1,727,981 727,981

1,295,986 501,974

Bank loans current Bank loans non current

863,991 431,996

900,000

1,000,000

Total Debt 30-06-2012

Total Debt 30-06-2013

0

Marginal Cash Flow Operating Cash Flow Net Cash Flow

Š Cash Flow Excellence Pty Ltd

Powered by TCPDF (www.tcpdf.org)

Current Year

Change

-10.34

-3.14%

27,575.00

+100.00%

-326,007.00

+100.00%

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MANAGEMENT ACCOUNTING TIP

June 2013 www.judsons.com.au

REPORTING RHYTHMS The right data at the right time

A question we often get asked is what financial data should the business owner be reviewing and when. It is our suggestion for business owners to set up for themselves a financial reporting rhythm that ensures that they look at their data on a regular basis but not overload them too much so their focus is lost.

Our suggestion of a financial reporting rhythm is as follows: • • •

Daily reports: Cash balance Weekly reports: Cash flow forecast & sales and productivity report Monthly reports: Profit and loss, balance sheet and Cash flow report

Let’s look at these reports in a little more detail:

1. Daily Reports You’d be surprised as to how many business owners have no clue about how much cash they have in their business at any given day. This report is a simple report that shows which customers paid yesterday and overnight. If you have more than 20 customers paying daily, a listing of who paid is not always practical. However you should report the total deposits for the day and the cash balance.

The report should be easy to email and read on a PDA or smart phone without needing to open an attachment.

Daily Cash Report 12 June 2013 Customer payments: Bob’s auto repair

$2,000

XYZ Engineering

$1,500

Fred Smith

$750

Total Deposits

$4,250

Cash Balance

$23,462.71

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MANAGEMENT ACCOUNTING TIP

June 2013 www.judsons.com.au

2. Weekly Reports Create a rhythm by sticking to whatever day of the week works for you to review your weekly reports. You should look at two reports every week: cash flow forecast and sales and production.

The purpose of the cash flow forecast is to make sure you have money in the bank when your bills are due. It shows a two-week projection of your expected sources of inflows and outflows. Break your payables up into 5 key categories: • • • • •

General Bills Wages and Salaries Superannuation (and payroll tax if applicable) Rent and Utilities Payment of debt

As for the sales and Production report, the key is to identify trends in your sales and cost of goods sold figures on a rolling basis. If your billing cycles are monthly then this report would need to be done on a monthly basis rather than weekly.

3. Monthly Reports Pick a day of the month to review your monthly reports. A profit and loss report shows if your business made or lost money during the reporting period. You have to keep in mind that sometimes a month is an extremely inaccurate period of time for some businesses. You may need to look at a minimum of six months data to see what the ups and downs were.

We would suggest simplifying the print out of your profit and loss statement. Too many times we have seen business owners get distracted on areas of overhead that may constitute .5% of the business e.g. printing & stationery yet it is the only thing that they can concentrate on. One way to do this is to choose a Level 1 or 2 report in MYOB or a similar report from other accounting systems where the overheads are grouped.

The balance sheet should be reviewed to ensure that the profit and loss makes sense. Remember, in the end the profit and loss statement merely shows the movement in the balance sheet position of a business from one period to the next.

Attached to the profit and loss and balance sheet is a cash flow report that shows where the cash has gone in the business. Very few accounting systems can produce this report at the push of a button. We have designed a report (next page) that shows you the typical makeup of this sort of report.

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MANAGEMENT ACCOUNTING TIP

A p ril2013 w w w .jud sons.com .a u

G iven th e na ture of our business, w e a re in continua lcom m unica tion w ith business ow ners a s to th e sta te of th eir businessesa nd th e econom y in g enera l. It w ould be ofno surp rise to m ost ofy outo h ea r th a t th e B OTX FS UP UI F R VFTUJPO i8 I B U JT Z PVS OVN CFS POF CVTJOFTT JTTVF B U Q SFTFOU w JT i#B E DB TI ý PX w 8 I JMF * DB O FN Q B UI JTF X JUI UI F PX OFST UP B E FH SFF X JUI UI B U B OTX FS R VJUF DPN N POMZ CB E DB TI ý PX JT SFB MMZ B O PVUDPN F PG MPX Q SPå UB CJMJUZ

-FU N F FYQ MB JO GVSUI FS . B LJOH B Q SPÃ¥ U JO CVTJOFTT JT DSVDJB M GPS TVSWJWB M 1SPÃ¥ U Q B Z T Z PVS PWFSI FB E T 1SPÃ¥ U FOB CMFT UI F Q SJODJQ B M DPN Q POFOU PG B OZ E FCU UP CF SFQ B JE 1SPÃ¥ U B MTP Q SPWJE FT UI F CVTJOFTT X JUI N POFZ UP Q B Z d istributionsa nd a return to th e ow ners.Th isisd ifferent to a w a g e a n ow ner p a y sth em selvesout ofth e business. Ia m stillof th e strong view th a t ow ners sh ould p a y th em selves a m a rket ba sed sa la ry a s m uch a s Q PTTJCMF 0UI FSX JTF UI FJS Q SPÃ¥ U B OE MPTT TUB UFN FOU JT MZ JOH UP UI FN " SFB TPOB CMF Q SPÃ¥ U H PB M GPS B CVTJOFTT JT PG UVSOPWFS PODF B N B SLFU CB TFE TB MB SZ GPS UI F PX OFST JT UB LFO into a ccount.A t p resent w e h a ve a num ber of businesses strug g ling to m a ke even th is sort of return.Ioften h ea r ofour contra cting clientsta king on w orka t low m a rg insjust to reta in th eir key sta ffa nd keep th eir p eop le busy .Inva ria bly som e ofth ese contra ctorsh a ve sh ed som e ofth eir subcontra ctorsp erm a nently just to survive in th e current environm ent.

Unfortuna tely , m a ny ow ners feelth e solution lies w ith th e ba nkin p rovid ing m ore d ebt to g et th roug h th is Q FSJPE #B TFE PO PVS SFDFOU JOUFSB DUJPOT X JUI UI F CB OL UI JT PQ UJPO JT CFDPN JOH N PSF E JGå DVMU E VF UP Q SPQ FSUZ WB MVB UJPOT DPN JOH JO MPX FS UI B O FYQ FDUFE B OE UI F å H VSFT GPS UI F CVTJOFTT CFJOH MPX FS UI B O JO Q SJPS Z FB ST 5I F GPDVT * CFMJFWF GPS B MM CVTJOFTT PX OFST JT UP GPSN VMB UF B Q SPå U Q MB O GPS UI FJS CVTJOFTT 5I JT N VTU incorp ora te a sa lesa nd m a rketing p la n th a t focusesth e businessow ner on d ifferent op tions.Th ism a y involve ch a ng ing y our p rod uct m ix of g ood s or services or a ttend ing to d ifferent m a rkets or d itch ing custom ers th a t B SF OPU Q SPå UB CMF " MM PG UI JT SFR VJSFT B OB MZ TJT B OE * FODPVSB H F B MM PX OFST UP I B WF B TUSPOH SFWJFX PG UI FJS TB MFT CVE H FUT B OE UI F FMFN FOUT PG UI B U å H VSF GPS UI F VQ DPN JOH Z FB S 5I F GPDVT * CFMJFWF GPS B MM CVTJOFTT PX OFST JT UP GPSN VMB UF B Q SPå U Q MB O GPS UI FJS CVTJOFTT 5I JT N VTU incorp ora te a sa lesa nd m a rketing p la n th a t focusesth e businessow ner on d ifferent op tions.Th ism a y involve ch a ng ing y our p rod uct m ix of g ood s or services or a ttend ing to d ifferent m a rkets or d itch ing custom ers th a t B SF OPU Q SPå UB CMF " MM PG UI JT SFR VJSFT B OB MZ TJT B OE * FODPVSB H F B MM PX OFST UP I B WF B TUSPOH SFWJFX PG UI FJS TB MFT CVE H FUT B OE UI F FMFN FOUT PG UI B U å H VSF GPS UI F VQ DPN JOH Z FB S 6OE FS UZ Q JDB M B DDPVOUJOH SVMFT TB MFT B SF B H H SFH B UFE JOUP POF MJOF PG Z PVS Q SPå U B OE MPTT 5I JT JT CFDB VTF GPS ta x p urp osesincom e ista xed exa ctly th e sa m e reg a rd lessofsource.H ow ever for m a na g em ent a ccounting p urp oses, not every d olla r of revenue is eq ua l 0X OFST N VTU H FU UP UI F I FB SU PG UI FJS TB MFT å H VSFT B OE X PSL out w h ere th ey a re m a king m oney a nd w h ere th ey a re not.Only a rm ed w ith th isinform a tion, ca n th e ow ners truly m a ke better d ecisionsin d ea ling w ith th e current environm ent.

4I PVME Z PV SFR VJSF PVS B TTJTUB ODF JO E FMWJOH JOUP Z PVS TB MFT å H VSFT UP X PSL PVU X I FSF Z PV B SF N B LJOH N POFZ feelfree to conta ct us to org a nise a consulta tion to d iscuss y our situa tion a nd h elp y ou w ith y our sa les a nd Q SPå U Q MB OT GPS -14.

Judsons Financial Management Services Pty Ltd. ABN 49 135 685 148

E: admin@judsons.com.au | P: 07 3367 1994 | A: 20 Mayneview Street, Milton, Brisbane, Queensland 4064

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