Okay, so this is number two in the series of three specifically talking about your cashflow. We just spoke about three very important items which were your debtors (actually getting paid), your creditors (making sure you’re not paying them too quickly or even taking too long) and also inventory (how much cash is tied up in your inventory). If you haven’t listened or watched that episode, go back and check it out.
What we are talking about now are four important parts of cashflow where I find there’s a lot of wastage and a lot of mis-understanding. Number one, without a doubt, it’s my first go-to item is drawings. Drawings is not an expense. What that means is it’s not going to show on your profit and lost statement. Drawings is cash that you just go and take from the bank account to pay yourself. A lot of people say, “Well, it’s my business and I make the money so I’ll take what I want.” Or maybe at the end of the quarter, your accountant or bookkeeper will account for those drawings as some type of the wage or dividend, however you’ve got that setup. So that’s another discussion; I’ve got another blog on that about how to pay yourself from your business.
So what I find is when small business owners don’t pay themselves a specific amount on a regular basis, they end up taking sort of willy-nilly and most of the time, they get out of control and they’ve got no idea how much they’re taking from the business. Now bare in mind, once it has left the business, once it’s gone, us, your CFOs won’t able to track what you do with it and how it is spent. Everything that’s in the business, we’re able to keep a track of and we’re able to see where it’s gone.
So what I want you to look at is you’re going to have to access that or look it up with your bookkeeper or accountant to pull the numbers for you on that. Have a look at your drawings and specifically on a month by month basis, how much cash are you drawing from the business for personal use. I find it usually a lot more than what most people presume it’s going to be. That’s one area; it’s usually two areas, is how long on average the debtor takes to pay you and how much drawings you’re taking from the business, they’re my first go to items every time. So check that out, and put something in place. Work with your advisor, your CFO to determine how much you’re going to be drawing from the business. Because remember, if there’s surplus stock in the business, you can always end up drawing more if that’s going to work for you as suppose you’re just liquidating all the cash out as soon as it comes in.
Now there’s three other areas I want us to look at, in no particular order. But drawings are always looked at first. Let’s look at occupancy expenses. So what’s occupancy? That’s things like, rent, paying for utilities, maybe fit out, furniture and fittings like desks, and laptops and computers and things like that. So now with the Cloud, with new technology, with the ability to work from anywhere, well, that’s very much debatable and a good discussion can be held around, “Do you still actually need an office? Why do you have an office?” And the premise of this is I want you to start questioning everything.
Yes in this example, question whether you need the office. But your business in general I want you to start questioning a lot of things. Just because you’ve done this one way doesn’t mean you should continue doing it. Just because everyone else is doing it the certain way, does not mean you should or shouldn’t be. So regardless of occupancy, talk with your advisor, do you really need an office? Yes, there’s going to be some businesses but there like doctors, like lawyers, maybe like mortgage brokers, they legally are going to be required to have a premises. Lawyers need a premise where they can store your documents, or they need a registered office for the clients. Doctors for obvious reasons, mortgage brokers, they’re holding sensitive and private documents they need to be locked out and secured. But a lot of other businesses out there have just got an office because they always had one, you might bought the business and they already had one, maybe you just think you need one, maybe you don’t.
The thing with occupancy is, the starting price is at least $25,000 to $30,000 a year, right? I’m sure you already know that. You’re looking at least $2,000 minimum a month to have an office, a small office. So if you don’t need one, if you just got one from the sake of having one, then that’s an area where you need to have a bit a look at.
The next thing we’re going to look at is Employee or Employment Expenses. So that’s how much it is costing you to have your team? Think about you’ve got work cover, you’ve got their wages, you’ve then got to withhold tax and remit that to the ATO, you’ve then got superannuation. The reason why this is really important is because if you’re overstaffed, meaning you’ve got too much staff than what you need, you’ve then got this extra expense that’s going out which is a sizeable amount. Let’s be honest you know, minimum wage, even if it’s only an admin role, you’re still looking $40,000 or $45,000 a year. That’s a lot, especially if the job is redundant; it’s no longer required. So that’s an area to have a look at this, what are your staffing needs?
Now, if you become more efficient which I’m going to cover up in the third part of this series, Capacity and Efficiency, you can potentially restructure your team and that might mean some jobs may no longer be available.
I’ll give you a quick example. A colleague of mine went in to a business that were turning about $14M a year, so bit of larger business than say most of the businesses out there. And based on the accounting software that we’re using at the time, they required two full time staff and one part time staff, just to process all the accounts payable, the accounts receivable and enter all of the bank statement transactions. There was a bit of work involved. Now, just by putting them on Xero, yes there’s another shameless plug for Xero, what they’re able to do was the efficiency that they gain through just Xero, they no longer require one full time staff member and the part time. So they’re basically able to drop back from 2.5 employees to one employee. Not only was that an efficiency saving of making a software in that system operate a lot better, but cashflow wise and also profit wise, they’re able to cut out $60,000 to $70,000, maybe $75,000 worth of wages just by making an improvement to their efficiency. So don’t discount, and don’t just say, “I’ve always had this team member,” or “I need them or this or that.” Question it.
Now the fourth area I want you to look at is marketing. So might be saying, “Hang on, you don’t want us to stop spending on marketing, do you?” And no, I don’t. If anything, small businesses need to spend more time and invest more funds into improving their marketing and their sales. But what I want you to look at with marketing, what is your return on the investment? Because a lot of businesses spent money on marketing and they’ve got no idea the return they’re getting on. You could be spending $10,000, $20,000 more a month on marketing, what’s the return?
This will be best example. You spent $10,000 a month on marketing and you can see that there’s $30,000 a month of new work coming in. That’s pretty good. But what if you were spending $10,000 a month on marketing and there’s only $3000 of new work coming in? Well, maybe we then need to look at it. If you would ask me, I’d still be saying if you’re getting $30,000. Let’s work out why, how can we even get more out of that marketing spend. And that’s called your return on investment, that’s how you should look at marketing all the time. It’s not an expense, it’s an investment so you want to return on it. Same as your working with your accountant, with your CFO, that’s an investment. You want to get a return on it.
So have a look at your marketing, if you are doing it yourself, if you’re working through an agency, maybe a digital agency, a creative agency, you might do some stuff online, offline, I want you to start looking at what channels, what areas work, what areas are not, where are you putting a lot of money where there is maybe a lot of wastage. You can be hyper targeted nowadays on your marketing. I’m not going to try and brand myself as a marketing expert because I’m not, but what I do know is a lot of small businesses spent a lot of money on marketing that’s just gets them in nowhere and does nothing for them.
So there’s your four areas to look at. Drawings is number one, Occupancy (your team, your staffing) and your Marketing. Stay tune because on the next one we’re going to be talking Pricing Capacity and Efficiency.