Adam Turner
Technology Journalist

Adam Turner is a Sydney Morning Herald senior technology columnist who has been writing about the challenges facing Australian business for more than a decade

Adam Turner
Technology Journalist

Adam Turner is a Sydney Morning Herald senior technology columnist who has been writing about the challenges facing Australian business for more than a decade

Here's how can you maximise your returns by better understanding costs.

Cash is always king, but even if cash is flowing it can be a heart-stopping experience for a business owner to discover that you can make a $100,000 worth of profits, and still risk going under. 

There are many KPIs involved in a start-up, or an existing business, but few are more important than cash flow. People get into business because they have a passion, but then can find running a business is a whole separate job. 

Few relish the idea of doing administrative work and even fewer would rush to sort out accounts. And when you do, it’s usually because the quarterly accounts must be done for compliance reasons. The truth is, few of us have any real interest in knowing how you record expenses like Costs of Sales or Operating Expenses.

Young boy sketching buildings
A good book-keeper makes sure the business meets its financial obligations, and also can review the financials, produce ratios which the business owner can track and manage.

DEBRA LEWIS, BOOKKEEPING INSTITUTE OF AUSTRALIA

Do your homework

Millions of Australians need their daily coffee fix. The most recent ABS data shows there were 13,987 cafe/restaurant businesses in Australia. Statistics provided by Food & Catering Association suggests that once the number of fast food outlets and restaurants are factored out of the gross numbers, there are more than 8500 café businesses in operation across Australia. 

Gross data shows the operating profit margin for those businesses is 3.8% - this is below bank term deposit interest rates. Many new entrants lack the business skills necessary to survive. Anecdotal evidence suggests that 1 in 3 of these businesses go under, or simply give up.

George Sabados, a 20-year hospitality industry veteran; who owns GS Roasting and industry portal YourCafeSuccess.com.au says, “It’s a joke; the number of people who come into this game under-funded, believing that they make a sustainable business.

“A majority of failures are due to a lack of proper planning. They don’t understand they need to be able to fund the business for 12 to 18 months; in order to meet the capital requirements of upfront lease costs, fit out, stock, equipment and working capital. First timers often get burnt."

“Invariably they start running out of funds in the first three months. The tendency is to cut back on costs. They cut back on the amount of product in the display cabinets; they cut back on wages. This is not a good look. What they need to do is understand all the cost inputs along the supply chain. They need to shop around and get the best deals for their consumables and equipment, including service contracts.”

Get some advice

Sound financial controls lie at the heart of any sustainable small business, but often remain elusive in this industry.  

Debra Lewis, chief executive officer of the Bookkeeping Institute of Australia, says that many small businesses cut corners and fail to keep adequate records. She says the Australian Tax Office (ATO) has identified a direct link between good record keeping and compliance, embracing superannuation contributions, staff liabilities, and how much is owed to the ATO. 

“A good bookkeeper makes sure the business meets its financial obligations, and also can review the financials, produce ratios which the business owner can track and manage.”

Many small business operators can be blindsided by financial statements and reports.  Wayne Burgan, founder of CashFlow Manager says, “Most people don’t particularly like or understand financial management. They leave it to others. That can be a problem.”

Understanding costs

  1. When things are tight people look at how to reduce costs, but they should always be careful about cuttings costs that could be detrimental to the business, for example, marketing spend and presentation materials. 
  2. Some business owners discount their products without fully appreciating the impact on profits. You need to have a significant increase in volume. For the average retailer a 10% discount would require something like a 20% increase in volume to maintain profit levels.
  3. A business owner needs to map out the supply chain and identify opportunities to gain discounts, to buy in bulk, to pay promptly. Every business owner should have a basic understanding business’ cost drivers.

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