The Key Financial Drivers

The Key Financial Drivers - Volume

julydrivers By Sue Hirst, Director, CAD partners Pty Ltd

This is the second in a series of articles on the eight Key Financial Drivers for Business Success.
The eight Key Financial Drivers are:

    • Price
    • Volume
    • Margin
    • Cost of Goods
    • Overheads
    • Accounts Receivable Days
    • Accounts Payable Days
    • Inventory Days

As explained in our first article the Key Financial Drivers are the main power affecting the Financial Results in business. By breaking it down to eight Key Financial Drivers, Financial Control is much easier to manage. By zeroing in on these eight drivers we can get the best ‘bang for our buck’ in terms of managing improved financial results.
In our first article we discussed the issue of *Price and the importance of charging the ‘right’ price for goods and services. This time we will discuss the issue of ‘Volume’.

Volume
What does ‘Volume’ mean? In the Oxford dictionary one of the meanings listed is ‘bulk’. This is a great place to start to discuss the issue of ‘Optimum Volume’. For the purposes of this exercise ‘Volume’ is the ‘Quantity’ of product or service that you sell.
*If you missed our Autumn 2005 newsletter containing the article on ‘Price’ please ask and we will be happy to forward a copy to you.

Optimum Volume
If you ask a number of business owners about Optimum Volume in terms of sales you will probably get back the answer from a large percentage……. ‘Maximum’ is the best amount of sales obviously!

This is not always true. You may get a better profit and cashflow result by selling less product or service at a better price and quality. The problem with aiming at maximum volume is that you often have to reduce prices to get the sales volume. Unfortunately costs don’t always follow suit so you can be trading profit for volume sales.

Some businesses like to boast about their turnover figure. Turnover means nothing if you aren’t making a profit. All you are doing by focusing on volume is creating more work for yourself as business owner and for your employees. This can cause unnecessary stress on all of your business resources.

An important business resource is Cash. ‘Volume’ sales can have a hugely detrimental impact on ‘Cash-flow’. We can show one *example where a 20% increase in Revenue can cause ‘Cash-flow’ to decrease by nearly $88,000! Many businesses have failed due to poor management of Sales Volume. A big sale is made and the champagne bottle is opened. It may be some way down the track before the cash-flow impact of a big sale is felt. The issue comes when cash is required to pay for the goods and labour before the sale is even made, let alone before the invoice is paid!

Let’s show an example of how Sales Volume can negatively impact Cash-flow.

cashflow

You can see in the above example:
   • On day 1 we buy in the stock
   • On day 101 we sell the stock
   • On day 46 we pay for the stock having had 45 days credit from the supplier
i.e. Number of days to sell stock = 101
Less number of days to pay for stock = 46
Days negative Cash-flow = 55

This gives us 55 days negative cashflow from payment for stock to sale of stock.
On day 217 we get paid from the customer for the sale having given 116 days credit. (not difficult if no debt collection process in place)

Let me ask you a question – do you know your number of average customer payment days? This is the average number of days it takes from when an invoice is sent until payment received from your customer. Accounts Receivable Days is another Key Financial Driver we will explain in article six of this series.

This creates another 116 days negative cashflow from payment for stock to receipt of payment from customer.

You can see from this diagram that it takes 171 Days from when the goods are paid for until the customer pays for them. This means that the cash has to come from somewhere to fund these sales. This means that someone else has got your cash for 171 days until you collect it from your customer. That is your supplier or your customer.

You can see from this example that selling more could cause severe cash-flow problems if you are not managing your Accounts Payable Days and more importantly your Accounts Receivable Days.

Our next article will be on ‘Margin’. If you would like to discuss this before the next issue of this newsletter, please feel free to call us on 0800 180 400 One of our Partners will be happy to discuss all of the 8 Key Financial Drivers with you and the potential impact on your RESULTS.