Your guide to business financial mastery
By Robert Jewell
Today I share with you a case study about the challenges and experiences of Raymond, a fictitious Entrepreneur whose business hit tough times. Appropriately the business name is The Guidepost!
History of the business of the Guidepost
Historically, the business had performed well. Sales were sufficient to generate profits, but gradually things deteriorated to where creditors and taxes started to become overdue. Raymond was not in touch with declining sales and profitability and therefore took no action to stem the tide. The Guidepost is now in serious financial distress, so let’s see how it could have been avoided.
Setting sales prices when you receive volume discounts from your suppliers
Raymond, seeking advice at last, posed the following question to me:
“From time to time our suppliers offer us discounts which are linked with conditions that achieve specific volume targets. These only become effective once the purchases from the suppliers reach a certain volume. The only way to reach this target is to sell the products at lower prices. The problem is that this affects our gross profit margins. What is your take concerning this?”
There are many factors to be considered. For example:
- The market in which The Guidepost operates and how sensitive the market is to changes in selling prices.
- The problem with a low price strategy is that it could lead to a situation where your business becomes unprofitable.
- What is the degree of competition in the market in which the Guidepost operates? It may be that a price reduction strategy would be good under certain circumstances. What is very important with the implementation of any pricing strategy, is that you measure and track the outcomes.
What about margins?
“Our goal is to achieve between 20-25% gross profits. How can we break our basket offering to guide us in achieving this? I have identified a few bread and butter lines in our industry. My plan is to be competitive with these and make some money on the other products. Enough stock holding is also necessary. This brings me to another important element – how to budget to pay suppliers on time and also be well stocked up?”
These are key management decisions. Raymond has to apply his mind in order to successfully manage and guide the Guidepost, a retail business, out of its current financial difficulty. It is clear from his questions that Raymond is heading in the right direction, because they recognise the following:
- To be successful not only in business, but in all aspects of life, you must set goals.
- He has recognised that in order to have any hope of achieving his gross profit goal, he has to go granular in the way he manages the Guidepost.
Business financial mastery means that you recognise the difference between the managing of profits and cash flow
- Money coming into your business does not mean that your business is profitable.
- Ensuring that your store is well stocked and paying suppliers on time is about working capital and cash flow management and ensuring that your business does not run out of cash.
- You need to use your stock reports to optimally manage the stockholding of each department and the stockholding of individual line items in each department.
- The golden rule in retailing is to buy right to sell right.
Business financial mastery means that you use the income statement to manage profits and the balance sheet and cash flow statement to manage cash flows.