CASE STUDY – GOVERNANCE – Knowing your Figures
A business running for seven years had grown revenue from $1.6M to $2.2M but had a $50,000 loss this year. They held their first Board Meeting to review where they are at and to plan for improvement. They knew cash flow was a bit tight but thought all was well.
As soon as their figures were put in the Board Pack it was identified their Gross Profit (GP) had reduced from 84.68% to 76.07% (bad) but Operating Expenses had reduced from 84.51% to 78.62% (good). They had made a profit from lowering their expenses but failed to notice they had effectively lost a further $150,000 potential profit from letting their GP slip. The reduction in GP was the cause of their reduced cash flow.
The company has implemented a better quoting model to ensure the margin they place on material and labour achieves an appropriate GP so that the current year makes the expected profit (a target of $200,000.00).
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CASE STUDY – GOVERNANCE – AN INDEPENDENT PERSPECTIVE
A married couple sold their previous business. They have found a new opportunity in bundling services of larger companies but need additional working capital of $300,000.00. Prior to their first Board Meeting, they had presented to several interested parties and were hopeful of an investor putting this sum in for a 30% shareholding.
On their very first engagement with an Independent Company Director, the Director asked: “If you’re providing such value to your key suppliers, why don’t they pay $100k each as advertising in advance?” The question appeared to be an obvious one to the external Director but had been completely missed by those caught up in the intensity of the opportunity.
The couple were about to sign a sizeable first order. They recognised it was better to complete this and use it as demonstrated proof of concept. They could then approach the key suppliers, with an invitation to put some promotional budget their way in return for more customers and this allows the couple to retain full ownership and not have a loan to pay back.