Retail Case Study

Cashflow problem sorted

The problem

A suburban retailer, our client was facing cashflow problems (negative cashflow). Supplier bills were hitting before income had arrived – and whilst on paper they were profitable, there wasn’t money in the bank to pay creditors and tax bills. On-time payments were a continual problem.

Their “solution” was to put in $70,000 of their personal capital to keep the company going. It wasn’t going to work in the long run.

Our approach

The numbers tell the story – if you know where to look.

Accountants First’s Business Builder tools help provide the analysis so we can clearly see the problem and the root causes. We produced a company health check and diagnostic report. A proper diagnosis would provide us with the information needed to work out an effective cure.

What we did

Our analysis highlighted what can be a common problem. The profitability of the company had actually increased but cashflow had become negative.

Our key findings were:

• The debtor’s days had increased by 20 days in the last 3 months. Debtors were not paying on time.
• Advertising, wages and delivery expenses were climbing.
• Stock levels were higher than necessary.

We did the following

• We put in place better systems of Debt collection.
• Cost cutting measures were also put in place to control expenses especially no productive wages and advertising
• We advised the client to buy more regularly in lower quantities so as to not tie up cash in stock
• We also identified that they could increase prices by 10% without affecting sales.

Results

It took three months before the changes had a visible effect. However, within 12 months there was a $100,000 increase in cashflow. As an added bonus, profitability increased by 16% as well.