§A Fellow Member of The Institute of Charted Accountant of Nigeria (ICAN)
§Over 14 years of experience in different area of Accounting and Finance:
(Financial Data Analytics, Public Finance, Internal Audit, Internal Control, Supply Chain/FMCG, Tax management, Financial Modelling, Budgeting & Forecasting and Capacity Building)
§Currently providing services to three CFOs as Strategic Finance Partner
Profit vs Stability
The mere fact that your company is profitable does not imply stability.
Stability is the capacity to survive a short-term problem, such as a drop in sales, a shortage of funding, or losing a crucial employee or customer.
You can establish whether or not your organization is financially stable by examining your cash flow and a number of contrary scenarios.
The ultimate objective of every business
The ultimate objective of every business is to maximize profit.
Profit stability means that profit is in stable form.
Profit stability come only when there are enough sales.
Profit stability is a good sign for business entity.
Cost structure
Whichcost structureis better ?
Is it highvariable costsand lowfixed costs, or highfixed costsand lowvariable costs?
There is no single answer to this question. It depends on the nature of your business and certain circ*mstances, any structure is best.
Case Study 1
Let’s a take a look at this case study below for a more in-depth analysis of cost structure and profitability.
X Amount ($) %
Sales 100,000.00 100%
Less Variable Exps 65,000.00 65%
Contribution Margin 35,000.00 35%
Less Fixed Expenses 25,000.00
Net Operating Income 10,000.00
Y
Amount ($) % Sales 100,000.00 100%
Less Variable Exps 35,000.00 35%
Contribution Margin 65,000.00 65%
Less Fixed Expenses 55,000.00
Net Operatng Income 10,000.00
Companies X and Yundertake agricultural activities.
Company X is heavily depending on workers, whereas company Y is highly mechanized.
Company X has highvariable costsand company Y has highfixed costs.
The question that which company has the best cost structure depends on many factors:
including the
- long run trend in sales,
- year to year fluctuations in the level of sales
- and the attitude of the owners toward risk
If the sales are expected to be above $100,000 in future, then company Y probably has the better cost structure
The reason is that itscontribution margin (CM) ratiois higher, and its profit will increase more rapidly as sales increase.
10% increase in total sales
X Amount ($) %
Sales 110,000.00 100%
Less Variable Exps 71,500.00 65%
Contribution Margin 38,500.00 35%
Less Fixed Expenses 25,000.00
Net Operating Income 13,500.00
Y Amount ($) %
Sales 110,000.00 100%
Less Variable Exps 38,500.00 35%
Contribution Margin 71,500.00 65%
Less Fixed Expenses 55,000.00
Net Operating Income 16,500.00
Assume that each company experiences a 10% increase in total sales and the newincome statementwould be as follows:
Company Y has experienced a greater operating income due to its higher CM ratio.
Even though the increase in sales was the same for both companies.
Cash flow Budget
Creating a cash flow budget that specifies precisely when you will receive income and when you will have to make payments.
A cash flow budget is an estimate of all cash receipts and all cash expenditures that are expected to take place during a certain time period.
Estimates can be made monthly, bimonthly, or quarterly, and can include non operating income and expenditures as well as other items.
Importance of Cash Flow Budget
A cash flow budget is a useful management tool because it:
§forces you to think through your business plans for the year
§tests your business plans, such as if you will produce enough income to meet all your cash needs
§projects how much operating credit you will need for your business andwhen loans can be repaid
§provides a guide against which you can compare your actual cash flows
§helps you communicate your business plans and credit needs to your lender
Review your customer list
Ø Ranking customers by sales volume
Ø Determine the effect of losing a customer or two customers at once, and your ability to remain in business.
Ø Create a plan to reduce your reliance on one or two customers and see if you can survive without them.
These could include factors such as the following:
1.Proximity to store.
2.Customer demographics.
3.Range of purchase channels used.
4.Purchase regularity.
5.Depth and types of products purchased.
6.Receptiveness to offers and communications.
Account Receivable/Collections
The money that a company's customers owe for goods or services they have received but have not yet paid for is referred to as accounts receivable.
For instance, the amount owed is added to the accounts receivable when customers purchase goods on credit
The collection of a company's debts is called collections
Steps:
1.Identifying the debtor is the first step,
2.followed by finding a way to get in touch with them and demand payment.
Analyze your lines of credit
Analyze your credit lines to see how losing one or more lenders would affect your business.
Though there is difference between bank loan and lines of credit that come in form business overdraft and credit card.
Essentially, an overdraft is a line of credit arranged with your bank to a set amount.
It allows you to withdraw money from your account even when the balance is zero.
Abideen Adeniyi
Financial Data Analytics, Power BI Consultant & Financial Planning & Analysis manager
08077928659
