Have you run the numbers to test your thoughts? Can you or your in-house finance team produce the required numbers to undertake this exercise?

I can point to a number of clients who have been surprised after I have undertaken an in-depth analysis of their numbers. The results have run counter to their views of the business or uncovered previously unidentified opportunities and issues.

Responding to this analysis and making number-based decisions has led to much improved results.

There is no one-size fits all formula here but the key is understanding the key drivers of your business, what influences these and their relationship with expenses. The tools are meaningful, trustworthy financial reports, management reports focused on the keys and financial forecasts.

The post Manage by the numbers first appeared on Business Modelling Adelaide.

This is designed to provide senior management and the Board with the key stats that influence the business’ performance in a highly visible and easy to read format. This allows the discussion to be focussed on strategy and the key metrics.

No more hunting through pages of reports to find the key numbers, with the hunt throwing up distractions and resulting in discussions on issues that are not relevant for a Board.

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The post One Page Executive Summary first appeared on Business Modelling Adelaide.

He found me via my membership of the Association of Virtual CFO’s. He was largely unaware of the emerging Virtual or part-time CFO sector until he came across the Association. He wishes to obtain the same benefits for investments in smaller companies but understands that most of them cannot justify employing the required calibre of CFO on a full-time basis. He understands now that these businesses can access this skill set and realise these benefits by engaging a Virtual CFO.

The post Private Equity Manager Understands The Benefits Of A CFO first appeared on Business Modelling Adelaide.

Do you understand why this is?

Here are some areas to review. What is the business’:

• Profitability – past and more recent
• Working capital position – stock, debtors, WIP
• Status of major projects, any timing issues
• Growth profile – high growth generally absorbs cash
• Seasonality issues

What does the future hold?

Prepare a financial forecast based on the business’ key drivers to gain an understanding of the future.

The post Cash Flow Tightness first appeared on Business Modelling Adelaide.

They credit some of this success to the financial model that I built upon commencing my involvement with them. They now have full visibility to the profitability of individual products and of product categories, customers and sales channels. This has enabled them to focus sales efforts on the more profitable elements of the business, work to reduce costs in some areas and have an understanding of the impact of certain actions on future profit.

The model is detailed – starting at an individual product level and the entry of input costs such as purchases, production, freight, packaging, discounts/rebates and marketing costs to produce a profit for each product. Various summary reports, the ability to run scenarios and the standard 3-way financial reports, namely profit & loss, cash flow and balance sheet are the outputs.

This business had been operating for a number of years before my involvement and hadn’t previously utilised a financial model. It took some time for the CEO to adopt the model and incorporate it into the business’ decision-making process. He is now the biggest user of the model and a version of it is kept live with a link to the production schedule. Their understanding of the elements driving the profitability of their business is now much better, the model gives them much greater visibility and a better basis for decision making.

Over my commercial career I have utilised financial models in every job/ business I have been involved with. To build a model you need to have a good understanding of the operations of a business and I have always found this learning exercise invaluable. The model gives you a view of the future helping to minimise surprises and provides targets to chase and against which actual performance can be assessed.

From my interactions with businesses and their owners over the last 18 months it has surprised me how many businesses do not utilise financial models and incorporate them into their decision-making processes. More surprising is the number of business owners/managers who do not even understand what a financial model is and how it can be utilised to help run a business

The post A Client’s Financial Forecast – A Reflection first appeared on Business Modelling Adelaide.

Are you making decisions supported by numbers? Is your in-house finance team providing you with the information that enables you to make informed decisions, do you feel you truly understand your business’ financial position and performance. Do you have a view of the future, use financial forecasts, cash flow forecasts and understand what to expect and have targets to aim for and against which you can measure performance.

Providing key decision makers with access to the information and tools to answer these questions is a key responsibility of a CFO. One with experience and the necessary skill set can quickly and efficiently identify the key drivers of your business, profit improvement opportunities and identify issues and suggest resolutions.

Below is an example of a Summary page from one of our financial position and performance assessments.

The post Business Key Drivers first appeared on Business Modelling Adelaide.

This is a level of analysis below the traditional sales/GP$ variance against budget and gives more insight into actual results.

The analysis looks at share of total sales & GP$ by category/product and is relevant when there is some variation in the GP% produced by these different groupings.

We are looking for instances where material differences between sales & GP$ share occur. These differences are driven by GP% ie. a below average GP% will result in a GP$ share % less than its sales share, conversely an above average GP% will result in a GP$ share higher than Sales share.

Obviously, we are looking for the higher GP% products/groups and then looking for strategies/plans to increase their sales volumes. The other strategy is how can the GP% of below average GP% categories be increased.

It is interesting to run scenarios changing product/categories sales shares and or GP% and view the outcomes. This gives an indication of the quantum of the profit improvement available.

I have developed a simple excel file and I am happy to share this no obligations, just contact me.

The post Product Mix Analysis first appeared on Business Modelling Adelaide.

One metric is a multiplication (markup) and the other is a division (GP%).

When pricing goods a markup % is applied to an item’s cost to produce a selling price that produces a target GP%.

How do you calculate the markup % required to produce a target GP%?

The formula is 1/(1-required GP%).

1. if require a GP% of 60% = (1/(1-0.6) = 1/0.4 = 250% or 2.5x. This factor is applied to the items cost. If an item costs $12.00, then the selling price to produce a GP% of 60% is $12.00×2.5 = $30.00. Check: GP$ = $30.00-12.00=$18.00. GP% = $18/$30 = 60%.

I have developed a simple excel file and I am happy to share this no obligations, just contact me.

The post GP% vs Markup % Explained first appeared on Business Modelling Adelaide.

Sales $ Volume/Price breaks the variance analysis into consideration of unit sales and average price realised by splitting the Sales $ variance into volume and price $ variances. This provides an extra layer of granularity and enables the real issues to be more easily identified.

Obviously, such an analysis requires the production of budget/forecasts with this level of granularity. This detail may not be within the budget document, but the Sales/buying team are likely to have this sort of detail eg. a buy plan, purchase order plans.

In a retail environment this detail should be in the Merchandise Plan.

GP$ Volume/Rate breaks a GP$ variance into Volume (Sales $) and Price (GP%) components.

This level of analysis provides Managers/Owners with information at the level where actions can be taken eg. improve the GP% of a product/category.

I have developed a simple excel file and I am happy to share this no obligations, just contact me.

The post Volume/Rate Variances first appeared on Business Modelling Adelaide.

The other critical element is the total job costing base upon which a markup can be applied. That is, you need an understanding of the volume of work you will win in a year. Typically, it is best to build this detail up on a project by project basis.

Once you know your job cost base and overheads it is possible to calculate the markup % to apply to the cost base to generate sufficient gross profit to cover overhead expenses. To generate a profit add a profit target to the overhead number.

Unfortunately I suspect that the size of the markup % may surprise many.

I have developed a simple excel file which allows for the costing base to be built on a project basis. I am happy to share this no obligations, just contact me.

The post Job Costing first appeared on Business Modelling Adelaide.