The challenge
The SV Partners Turnaround team recently advised a wholesale and retail business who were experiencing large fluctuations in their sales, profits and cash flow. The business supplies goods to the construction industry and rural businesses, and is required to carry large stock holdings and significant credit accounts. Heavy rains also caused damage to the business stock and premises, and it was unable to supply refrigerated goods for a period of two months.
The owners were seeking advice on how to increase their profits, improve their cash flow management and prevent loss of income from unforeseen events.
This case study highlights the importance of business owners understanding the true costs of running their business and factors influencing their profits and cash flow. It also provides guidance on how to structure funding arrangements for unique business circumstances, and how to use insurance as a means of protecting business income.
Client issues
The client faced a number of issues that were having an adverse effect on their cash flow and profit levels, including:
- An uncertainty of break even sales level
- Lack of understanding regarding the benefits of ratio analysis and budgeting
- Inadequate levels of working capital
- Inadequate business insurance
The solutions
After a thorough review of the business and their current financial situation, SV Partners advised the following recommendations:
Breakeven Sales
A Breakeven Sales Analysis was completed, enabling the owners to pin point the minimum sales required to cover their business expenses.
- Total Fixed business expenses $350,000
- Average Gross profit margin 55%
- Minimum weekly sale required $12,250
Improving profit
To better manage stock levels, a series of key profit ratios calculations were conducted including Gross Margin Return on Inventory and Gross Profit Margin. It was agreed the owners would update their stock management system to improve their gross profit margin and reduce shrinkage.
Improving cash flow
To improve cash flow, a series of key cash flow ratio calculations were completed. This included Accounts Receivable and Stock Turnover and a Flow of Funds Statement. It was agreed that the owners would prepare a cash flow budget every year to determine their funding requirements, and regularly monitor the budget throughout the year to ensure no cash leakage.
The SV Partners Turnaround team were able to negotiate an extension of the business overdraft limit to meet the immediate working capital requirements. This was off the back of an overall debt reduction plan, which saw the extension repaid within 5 months, and the entire overdraft was projected to be repaid within 18 months.
The owners were also referred to a financial planner to establish business interruption insurance, to protect the business from a loss of future income. In addition, given the owners were integral to the business, personal income protection and life insurance was also obtained to protect their personal financial position.
The SV Partners Turnaround Management team will tailor individual solutions to resolve your cash flow issues. We are concerned with the long-term health of your business and consequently the flow-on effect to those associated with it. If you would like further information about how our turnaround solutions can assist you, please call SV Partners on 1800 246 801.