One of the things we love to do at Accounting Heart is to champion financial confidence and one of the ways we do this is by having quarterly catchups to talk all things numbers…profit & loss, balance sheet, break-even, budgets, cashflow, long term forecasts, tax etc.  Sounds like fun, I know 😊.  In recently preparing for one of these catchups I opened up our client’s Xero file to find a very different set of numbers to what I was expecting, and the colour drained from my face.

Twelve months ago we set about putting a budget in place for the 2019 financial year.  Everything pretty much tracked to budget right up to our last meeting in early April, so we were confident in our forecast for a strong finish for the year and our expectation of a healthy tax bill.  You could imagine my horror when I saw that the results were close to $100,000 down on where we expected them to be.  How could we get it so catastrophically wrong?

I immediately went back and checked everything several times and didn’t find any rogue formula’s in my calculations so what I was seeing was correct.  It was clear that something big had happened to revenue and not something that could be explained by a decrease in customer demand, as industry demand remains strong even during periods of economic downturn for this type of business.  The only thing that made sense to me, by looking at the numbers alone and my understanding of the business, was that the capacity of the team to deliver services had been severely reduced.  But the exact reason for this was going to have to wait until our meeting later in the day.

My client opened the conversation by saying “take a seat and I will tell you what has happened.”  I asked, “Lack of capacity?” and they said “Big-time!”  It turned out that one team member had resigned, another team member was seriously ill and a third team member had taken time off to get married, all at the same time!!  It was the perfect storm!

My client was clearly traumatised by what happened, but very glad that her business was still intact, even though slightly bruised.  We spent the next hour analysing how the business managed to survive and this is what we uncovered:

  • Knowing the break-even point for each month helped to manage recurring cash shortfalls for those few months.
  • The budget, although clearly off the reality of what was happening, acted as a compass and still held strong to manage costs.
  • Having a system of bank accounts to manage business liabilities such as tax, super and leave meant that funds to meet these critical liabilities were readily available.
  • The strategy of having a buffer of cash from the business being held in a home loan mortgage off-set account was a good one. Three months of operating expenses had been set aside for emergencies.  This provided huge piece of mind.
  • Being on top of the numbers meant that the business could survive three months of down-turn as they were across what was happening financially, had system in place for managing cash and had time to put a strategy in place to return to a normal pattern of trading.

With the post-mortem complete the next logical thing to do was to answer the question: “What would my business need to look like so it isn’t so vulnerable?”  A totally enlightening period of calculation, more questions and conversation ensued.  The outcome:

  • The business needed revenue to just a little bit more than double in size.
  • This would require 3 additional team members.
  • An office manager would be required.
  • Getting the business to this size is going to take a lot of work and the profitability, while increasing, is not increasing at the same rate as it has to date due to the addition to the office manager.
  • This quickly led to the question, “Why would I do this? Does the additional work justify the outcome?”  The answers being yes! It is worth the additional work so that we don’t end up in the same place that we have just came from.
  • Planning has now started on growing the business to support the additional team members.

Although losing almost $100.000 was a stressful situation it was not nearly as stressful as what may have been.  This case study really highlights the importance of being on top of your numbers and having cash set aside to cover your statutory liabilities as well as a buffer.  While the cash buffer wasn’t called upon in this case, it provided immense piece of mind during some pretty dark days.  This was one very thankful business owner that was so glad that they invested in their financial literacy.  It was also another reminder of how much I love doing what I do.

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Disclaimer: This is general information only and is not advice of any sort.  No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this summary Readers of this summary should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.