INVOICE FUNDERS
MAKING MONEY MADE EASY
Sarah Lochead-MacMIllan, BDM, Invoice Funders
© 2014 Funders Group
Making Money Made Easy
It is very easy to make money; it is even easier to get into debt. At the time of writing
my eight-year-old son has experienced a ‘business venture’ at his school, where they
had groups, made a product and got to ‘run a business’. Now whilst I have changed
some of the wording, his theory on business profit remains correct:
Looks obvious I know. However, when people start a business and get passionate
about making their difference in the world and helping solve a problem, common
sense, for some reason walks quietly out the door.
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 2
You must understand the foundation of making money. Spend less than you earn.
That is ALL there is to it. Even when rolling in money if you spend more than you
have you will eventually lose. Yes there are those who say it takes spending money
to make money, I agree. Look carefully, the statement is exactly that, spend to
make. The statement is not "spend all you have and then some to make money".
Once you start trading though you may get caught up in such terms as "profit and
loss" and "cash flow" and, dare I say it, "margins"! However, if you continue to
spend LESS than you earn you will survive. Lets simplify some of these terms.
Profit and Loss
Well actually just profit please! This is your financial statement; it shows when you
raised invoices in your business and when you received supplier invoices in your
business. It does not usually equate to the movement of actually money through
your business. However, if you spend less than you earn you are likely to be
profitable. Depending on the timing of this, your cash flow may not agree. BUT
consistently spending less than you earn will have a positive cash flow effect
eventually.
Cash flow
Is exactly as it sounds. This is the movement of actual cash, actual payment from
customers and you paying bills, through your business bank account. If you spend
less than you earn you will create a few things:
-
a positive bank balance
-
the ability to reinvest in your business
-
a tax bill
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 3
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 4
Of course, as you trade costs fluctuate and lots of other pesky things can effect
how you make money. So to make money you need to monitor and measure and
be flexible. For example, pricing. Say your product/service sells for $500 and the
current cost of making this is $450, therefore $50 is profit. What happens when the
cost becomes $550? Unless you can flex either your price for your product/service
or analyse and reduce the cost to make your product/service you start losing
money.
If you find your buyers will tolerate a higher price, then you were possibly
undervaluing yourself in the first place and this is the value of a mentor/coach who
can see this pitfall way before you can.
If you can cut the cost of making the product/service then you have been
overpaying and potentially did not do enough homework the first time around!
The gap between the price of the sale and the cost of making the thing to sell is
also referred to as a ‘margin’. The common ones are gross profit margin and net
profit margin. Again a coach/mentor can guide you in this detail as can your
accountant; you simply need to ask them to explain your margins to you!
However, remember, to make money you MUST spend LESS than you receive.
The Cash Conversion Cycle
The cash conversion cycle, or CCC, is the process of understanding how your cash
moves, from when you spend until when you collect it. It measures the time it takes
to do this.
The CCC will give you an indication of how much you need to invest into your
business and/or how much you need to borrow, to ensure your success.
Understanding this will eventually feed the information into successful cash flow
construction.
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 5
The Cash Conversion Cycle Diagram
Once we understand our CCC we can then start to construct our cash flow forecast.
We divide our cash flow into inflows and put flows of cash. If you need a template to
get you started email [email protected] for your FREE template.
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 6
Cash Inflows
Accounts receivable incl GST – these are your PAID invoices including the GST
portion. This is when you expect your customers to actually put the money into
your bank account. [If your company is not GST registered simply don’t include a
GST line]
Non GST Income – represents any income you receive which is zero rated or GST
exempt.
Equity Injection – these are funds that you, as owners, directly put into the business
as cash OR your shareholders, as owners, directly put into the business as cash.
Loan Proceeds – these are funds that you have acquired from the Bank or other
lenders that require repayment on a regular basis. This will also include any new
overdraft facility.
Cash Outflows
These represent all the cash payments you make in order to run your business. It
does not include any ‘non cash’ outflows such as depreciation – this is a profit and
loss tool.
Any loan repayments and tax payments need to be for ease of budgeting. This also
means you can acknowledge the payments to the IRD who have the right to close
you down if you don’t pay, and the lenders who usually hold securities and
guarantees. Owner’s drawings should be separated also.
Your cash flow document should be a living document. This means you do not do
it once and then forget about it. If you have XERO you can import details from this
to make it easier for you. However, all of you should be comparing the actual real
cash flow to your forecast. You should examine how your spending habits are
affecting the cash flow of the company against the forecast, which is the model you
made to achieve your goals.
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 7
You can look at the variances and understand if you need to adjust this forecast
moving forward. You can predict if you need funding help and how you will repay
any borrowed funds, long before you hit a crisis. You can also play with an excel
version to ‘sensitize’ any of the figures and run ‘what if’ scenarios. Therefore ‘what if’
we had no income one month – what does that do to our cash flow, how bad does it
need to be before the company is in serious trouble? What can I do about it if that
happens?
Congratulations
You are now on your way to achieving
your goals and controlling your business.
However, remember, to make money you
MUST spend LESS than you receive.
© 2014 Funders Group
Adapted from the original book © SLM Group Limited Business K.I.S.S. 2014 and produced with permission
Page 8