1. Seven steps to increase your profit through understanding business costs
Andrew Mault ACMA

2. BASIC FINANCIAL REPORTS
Introduction
CREDIT
COST CONTROL
BUDEGTING
BENCHMARKING & KPI’S
PRICING STRATEGIES
Controlling and understanding the different types of costs a business incurs is an essential discipline to maintaining profit margins. The ability to analyse financial reports and highlight where corrective costing or pricing action is required is key to improving business profitability.
An understanding and analysis of your basic financial report
Dynamics of cost and costing techniques
Pricing strategies (including breakeven calculation)
Benchmarking and Key Performance Indicators
Budgeting
Cost Control
COST DYNAMICS
BASIC FINANCIAL REPORTS

3. The Picture
In the current challenging global economic environment, there is downward pressure on sales and margins.
The overall effect is an adverse impact on the bottom line, leading to lower profits or even losses. In such times, reigning in costs and expenses are even more crucial.
Let’s explore some cost control strategies that could help a company adapt and survive through the current uncertain economic times, as well as to position it strongly for the upturn.
On the day of the presentation - add in any recent economic news from the media.
How do the business owners in the room feel about the current economic environment? Confident / Cautious / Worried
Ascertain an audience matrix / cross section:
Business type - Retail / Manufacturing / Logistics / Wholesale / Other
Entity type – Sole Trader / Partnerships / Ltd’s.
Market types - B2B / B2C / Both

4. Financial Elements Successful Business Management Accounts
Financial Expertise
Working Capital
Management
Effective
Credit Control
Forecasting
Book Keeping
Year End Accounts & Tax
Financial elements include:
Management accounts, Relevant – useful information that the reader wants
Accurate fully reconciled – do your management accounts match your year end accounts
Timely – no put in producing figures 3 months old, try and use information for the future
Sollertia produce - Should include P&L – at least reporting to budget and last year, maybe including variance analysis
Balance Sheet, and cashflow statement
Access to Financial Expertise – Interpretation of data (Come back to this in more detail), funding (bank / board/ stakeholder / HMRC representation), experience, no emotional.
Sollertia are raising finance bad company, good company that has been working with Sollertia MI and timely can raise money the other company cannot.
Working Capital management, matching the funding for its need, managing debtors, creditors and stock performance, does anyone know what their cash cycle day are? Or there cash burn rate?
Credit Control – we all know the key is to reduce debtor days and therefore improve cashflow into business – how many can confirm average debtor days / longest debtor and confirm what action is underway?
Forecasting – seeing potential problems months down the line, easy and regular updated with actual positions
Sollertia produce – 6 months day cash flow reconciled with balance forecast
Bookkeeping – accurate, correct treatment and timely, get out what you put in……don’t play at it.
Accurate Statutory accounts – produce on time and quickly reduce accounting fees and time to discuss tax strategies Audited accounts, feedback and analysis rather then mere production.

5. Basic Financial Reports
Profit & Loss Account
A summary of business transactions for a given period, and displays the turnover (or revenue) and the costs associated against the turnover figures.
PROFIT = TURNOVER LESS COSTS
It shows managers, directors and investors whether the business made or lost money during the period being reported.
Ascertain what the business owners produce? (USE OF WHITE BOARD REQUIRED)
Year End Accounts No.
Management Accounts No. - Monthly / Quarterly
What’s do your MA contain? - P&L / Balance Sheet / Cashflow / Budgets / Variance / Variance Analysis?

6. Basic Financial Reports
Ascertain what the business owners produce? (USE OF WHITE BOARD REQUIRED)
Year End Accounts No.
Management Accounts No. - Monthly / Quarterly
What’s do your MA contain? - P&L / Balance Sheet / Cashflow / Budgets / Variance / Variance Analysis?
Balance Sheet
Is a financial statement of a business at any given point in time and is often described as a “snapshot of a company's financial condition”. It shows what a business owns or is owed (assets) and what it owes (liabilities) as of a specific date such as the end of its financial year (Year End).

7. Basic Financial Reports
Ascertain what the business owners produce? (USE OF WHITE BOARD REQUIRED)
Year End Accounts No.
Management Accounts No. - Monthly / Quarterly
What’s do your MA contain? - P&L / Balance Sheet / Cashflow / Budgets / Variance / Variance Analysis?
Cashflow Statement
Is a financial statement that shows how changes in balance sheet accounts and income, affect cash and cash equivalents. All cash received (inflows) and spent (outflows) by the business will be shown in this statement.

8. Accounting Ratio’s
Ratio analysis provides a starting point for further investigation into the performance of a company.
Profitability Ratio’s
Profit Margin is an indicator of a company's pricing strategies and how well it controls costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies. Two types: Gross & Net
Return On Capital Employed (ROCE) is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit.
Exercise to show how to calculate profit margins (Gross & Net) from using the P&L example
Company 1:
Gross Profit 46% 50% 53%
Net Profit 9% 4% 2%
We can see that although GP is rising yr-on-yr NP is declining yr-on-yr.
Company 2:
Gross Profit 35% 37% 38%
Net Profit 0% 0% 0.5%
We can see again that GP is slowly rising yr-on-yr but NP is below or 0% (making a loss or breaking even).
Company 3:
Gross Profit 46% 46% 46%
Net Profit 0% 3% 8%
We can see that GP is stagnant yr-on-yr. However NP is rising yr-on-yr from 2007 loss.

9. Dynamics of Cost Costs can be categorized by:
Nature or element: materials, labour, expenses
Functions: production, selling, distribution, administration, R&D, development
As direct and indirect
Variability: fixed, variable, semi-variable
Controllability: controllable, uncontrollable
Normality: normal, abnormal
Exercise to show examples of the different costs associated with audiences businesses.
Direct costs - expenses that can be directly identified with the costing object such as a product and department. Examples are direct materials, direct labour, and advertising outlays made directly to a particular sales territory.
Indirect costs - expense that is difficult to trace directly to a specific costing object. Example: National advertising (brand awareness) that benefits more than one product and sales territory is an example of an indirect cost. Fixed factory overhead is another example.
Fixed Costs - business (costs) expenses that are not dependent on the level of goods or services produced by the business Examples : Rent, Rates, Salaries, Accountancy costs, Most marketing costs.
Variable Costs - These costs would not change whether you made 0, 1 or 10 sales today. Variable costs would be directly associated with that one sale :Raw materials, Commissions, Online bank charges (per sale), Delivery costs
Controllable cost - a cost which can be influenced by its budget holder or department. Variable cost such as direct materials, direct labor, and variable overhead that are usually considered controllable by the department manager.
Uncontrollable cost - can not be controlled by the specified member of the undertaking. Most fixed costs are uncontrollable cost. For example business rent or lease cannot be controlled by the Managing Director its is influenced by external source (land owners).
Normal cost - It is the cost which is normally incurred at a given level of out put. These costs are part of cost production.
Abnormal cost - It is the cost which is not normally incurred at a given level of out put. These costs are not charged to the cost of production. It is transferred to the costing profit and loss account.

10. Costing Techniques Activity Based Costing Lean Accounting
Margin Accounting
Standard Costing
Job Costing Accounting
Main theories of Cost Accounting
Summary of what each is, we don’t have time to discuss all theory in detail but we will use the theory most common used Standard Costing:
Example and an exercise.
Activity Based Costing - (aka ABC) is a system / model for assigning costs to products based on the activities they require. In this case, activities / processes are those regular actions performed inside a business. "Talking with customer regarding invoice questions" is an example of an activity that occurs inside most businesses.
Lean accounting - Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change & improvement, provide information that is suitable for control and decision-making, provide an understanding of customer value, correctly assess the financial impact of lean improvement, and are themselves simple, visual, and low-waste.
Margin accounting - Mainly used particularly for short-term decision-making.
Its principal tenets are:
Revenue (per product) less variable costs (per product) = contribution (per product)
Total contribution less total fixed costs = (total profit or total loss)
Standard Costing - establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. This is the most common used
Job Costing - Job costing involves keeping an account of direct costs (labour, machine time, raw materials) and indirect costs (overheads). It’s an order-specific technique used in situations where each job / project id different and specific to a customers specifications. Example: a builder provides a quote for a new brick wall.

11. Standard Costing
Extract from a company who manufactures Jeans P&L reporting variance to budget……
Actual
Budget
Variance
Cost of Sales
960.00
54.00
But why did the variance occur…….
Standard costing can help with this………
Cost Accounting work sheet, example and exercise.

12. Standard Costing Standard Actual Actual Jeans manufactured 160.00
Standard
Actual
Actual Jeans manufactured
160.00
Standard metres of denim per jean manufactured
2.00
2.44
Total standard yards of denim for the actual good Jean manufactured- the number of yards of denim that should have been used to make the good output
320.00
390.00
Standard cost per metre
3.00
2.60
Standard cost of denim in the good output -the jeans actually produced
960.00
Cost Accounting work sheet, example and exercise.
What does this tell you?
- Other Variance analysis that could be used
- Direct Labour: Standard Cost, Rate Variance, Efficiency Variance
- Variable Manufacturing Overhead: Standard Cost, Spending Variance, Efficiency Variance
- Fixed Manufacturing Overhead: Standard Cost, Budget Variance, Volume Variance
Standard
Actual
Variance
Variance £
Direct Material Usage Variance
320.00
390.00
(adverse)
Direct Cost Variance
3.00
2.60
0.40
156.00
(favourable)

13. Job Costing Revenues Costs Job P&L Job Costing
Essentially job costing uses the technique of assigning all costs and revenues associated with a ‘job’ or project to calculate the profit margin of each particular job or project.
Order-specific costing technique, used in situations where each job is different and is performed to the customer's specifications. Job costing involves keeping an account of direct costs (labour, machine time, raw materials) and indirect costs (overheads). Since both types of costs are usually closely related (a job requiring high input of labour and material is likely to consume more power, machine time, supervision time, inspection time, etc.) indirect costs may be applied as an estimated fraction of direct costs. Job costing methods are similar to contract costing and batch costing methods, and are used in construction, motion picture, and shipping industries, in fabrication, repair, and maintenance works, and in services such as auditing.
Job costing is mostly used in the construction industry for ‘one-off’ projects.
Other trades such as plumbers, electricians etc can also use job costing.
If we look at job #476T22JE on the slide (highlighted). We can see the total revenues and costs associated with that job #.
We can then work out the job profit margin, and margin % if we wanted too.
What do we do with this information? We can compare to the ‘jobs’ original quote to client.
Did the costing meet the budget? Was the job over or under budget.
This will also help with future budgeting / quoting for jobs.
Job P&L

14. Pricing Strategies How can it improve the business? Costing helps to:
Set prices
Control and reduce costs
Plan for the future
Make better decisions
Write a business plan to obtain credit
Steps:
   1. Identify cost components
   2. Systematise costs
   3. Calculate variable costs
   4. Calculate fixed costs
   5. Calculate total costs per unit
   6. Set Prices, deduct the breakeven point
Many people are unaware of costs and waste scarce resources.
Cost calculation is the way to calculate the total costs of making and selling a product or providing a service.

15. Pricing Strategy Matrix
QUALITY
LOW
HIGH
LOW
Economy
Penetration
PRICE
Examples:
ASDA launch a new range of own-label soups. This is an economy brand.
VIRGIN HOLIDAYS launch two new cruise ships. The service is high price and high quality with a premium price.
PLUSNET (a broadband supplier) moves into a new area and needs to achieve market share. The company uses a penetration approach to gain market share. Prices could increase at a later date. Current TV ads.
Nokia launch a new 3G videophone. This is a new, innovative product that can claim a higher price. Skimming is only an option in the short-term since competition will be inevitable.
HIGH
Skimming
Premium

16. Break Even Calculation
Breakeven analysis is used to determine how much sales volume your business needs to start making a profit.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.
To conduct a breakeven analysis, use this formula:
Fixed Costs divided by (Revenue per unit - Variable costs per unit)
The break-even point (BEP) is the point at which the cost of producing a product or providing a service exactly matches the revenue gained from selling that product or service. For example, if a firm’s total annual costs are £1m and in the same year it generates £1m of revenue, then the firm is said to have broken-even, as it hasn’t made any more or less than it has invested.

17. Break Even Point
Fixed costs (Pink horizontal line) do not vary with output - they are the costs of running the business.
Figures to produce the break-even chart.
Fixed Costs = £25
Variable Cost = £5 per unit sold
Revenue = £10 per unit sold
Can the audience calculate the figures of total cost and profit for output 0 units up to 10 unit?
See figures below:
OUTPUT
REVENUE
FIXED COST
VARIABLE COSTS
TOTAL COSTS
PROFIT
BEP = 5 units sold, ie Revenue = £50, Total Costs = £50, Profit = £0.
Revenue (Blue line starting from zero) shows the total sales at a given price and volume.
Variable Costs (Yellow line starting from zero) are directly related to volume and increase or decrease as production and sales increase or decrease.
Total Costs (Green line starting on top of fixed costs) are fixed and variable costs added together.
The BEP (Break-Even Point) is the point at which the revenue and total cost lines cross.

18. Break Even Exercise A designer / photographic mug costs £10 to buy.
The variable costs are £6 per mug which makes the contribution [price less variable costs] to fixed costs £4 per unit.
The total fixed costs are £1,200.
The BEP is calculated as follows:
Fixed costs / contribution per unit = BEP
1,200 / 4 (10-6) = 300 units
Or in terms of value
BEP in units x price per unit = BEP value
300 x £10 = £30,000
This is a simple and straight-forward technique that is widely used. It will show the profit or loss made at different levels of output, the BEP at different prices and the effect on the BEP and profit if costs change.
The BEP analysis is often used as a tool in price setting. A company can produce several variations of this chart to compare the revenue, total cost and BEP for different price scenarios. Whilst it won’t give an absolute answer it will highlight the options that should be avoided.
The major disadvantage with break-even analysis is that demand is assumed to be inelastic. It suggests that a higher price will make the revenue curve steeper and therefore lower the BEP.  However in reality there will often be a maximum price that customers will pay.  This will vary by customer and be dependent on many factors including the cost of switching and the availability of alternatives. The BEP is therefore more about whether a company can sell enough to break-even rather than about what volume they can expect to sell. It must be remembered that this is a revenue curve, not a demand curve.
Another downside of break-even analysis is that it focuses on how to break-even rather than achieve a specific objective, such as percentage market share or a specific return on investment (ROI).
That said, analysing the BEP can help to determine whether a new product has enough critical mass to make a profit and is feasible to be launched. It can also be used to support business cases where funding is needed by demonstrating that a product can be made and sold profitably.
As a result, we can see that BEP analysis should be used for evaluation purposes rather than to base decisions on.

19. Benchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper.
Information is available to benchmark your business performance against that of other business in your same market or sector.
Useful websites:
Companies House
Risk Disk
Dun and Bradstreet
Experian
Alternatively, contact St Helens Chamber as UK limited company reports available through the Business Information Team as part of membership.
Example of a benchmarking report we provide for our clients….
St Helens Chamber Membership – Information on UK Limited companies is available through business information support as part of membership. The Chamber use Credit Safe.
Internal Benchmarking - comparing departments, sales reps etc.

20. Benchmarking Report
If attendances are in a similar market then do a quick benchmark exercise with them.

21. Key Performance Indicators
KPI’s are measures by which the performances of organizations, business units,
and their division, departments and employees are periodically assessed.
The principles of SMARTA (Specific, Measurable, Agreed to, Realistic, Timely
and Aligned) must underpin the KPI's.
The measurement must make a difference
Employees must have a significant degree of control over achievement of the KPI.
They need to provide positive reinforcement for desired behaviour.
There needs to be alignment between individual and organisational KPI's.
Types of KPI’s
financial and non-financial measures
short-term and long-term indicators
performance drivers (future-oriented) and outcomes (past-oriented)
quantitative and qualitative measures
'lead' and 'lag' indicators
Ask Audience who has KPI’s in place already?
Examples include: Creditor days, Debtors days, Gearing, Fixed Costs, Variable Costs, Invoice Processing Costs, Profit Per Product, Profit Per Project / Job

22. Key Performance Indicators
Range of indicators to include …
Financial measures – including profitability, return on investment, revenue growth and mix, cost control, productivity, asset use, investment strategy
Customer perceptions – market share, customer acquisition and retention, customer satisfaction
Internal business processes - such as customer service, innovation, operational efficiency, quality, cycles, resource consumption
Innovation & learning – measures that allow the organisation to develop, change, improve, respond to changing circumstances, and remain sustainable. The main categories are employee capabilities/skills, retention, productivity, information systems capability, knowledge management, employee empowerment, motivation and values alignment
How many KPI's?

23. Budgeting Very important and all businesses need them
How we set them with our clients - Zero based using shuttle forms
Analyse the numbers and type of car including mileage travelled etc and all the associated costs.
Analyse staff and their salary overtime other paid components.
All the cost drivers
Produce budget for each cost centre or nominal code.
If don’t have time or the resource or skills for the above, have a look at what you did last year and review the transactions on use as a base for this year -not ideal but better than nothing!
Produce simple Budget for 2/3 small businesses from the audience as an example:
Must remain
Flexible
Easy to produce and report on (Actual vs Budget)
Clear
Automatically produced and updated each Month / Quarter

24. Budgeting
Example of a simple budgeting exercise.

25. Cost Control Your costs Systematic cost control Who is involved?
Identify your major cost centres.
Identify the major types of cost within each cost centre.
Choose the costs to focus on first.
Systematic cost control
Start from your business objectives.
Establish your ‘standard costs’ for achieving your objectives.
Establish realistic ‘budgeted costs’ based on your actual experience.
Record your actual costs and compare them with the standard and budgeted costs.
Periodically review what you are doing and how you are doing it.
Who is involved?
Each cost centre is usually the responsibility of one manager.
Involve employees in cost control.
Include your customers and suppliers.
External consultants.

26. Cost Control Easy savings Opportunities Pitfalls Consultants
Checking supplier invoices may reveal overcharging.
Eliminate unnecessary costs.
Crack down on excessive costs.
Root out inefficiency.
Opportunities
Reduce your payroll costs.
Improve your purchasing.
Find ways to make production more efficient.
Review your finances.
Get the most out of your premises.
Cut the cost of communications.
Pitfalls
Reducing costs which directly impact on employees is fraught with difficulty.
Almost every cost saving has a potential downside.
Consultants
External consultants can offer an advantage over purely internal cost control.
Select a consultant carefully. Negotiate a clear, written contract.

27. 10 Simple Cost Cuts Consumables Energy Efficiency Postage Quotations
Energy Efficiency
Postage
Quotations
Networking
Consumables: Shop around and literally save hundreds of pounds by buying high quality recycled printer cartridges for your office printers. The printer cartridge market is fiercely competitive and so suppliers are also keen to offer ‘best-prices’. Why not review your annual spend on ink to see whether you could save further by buying in bulk to gain the extra discounts that may be available.
Energy Efficiency: Have you ever measured your business’ energy consumption? You may find the results surprising and even if you can’t save on your energy consumption you can certainly shop-around for the best deals for your energy supply using comparison sites or a broker. Did you know you can buy energy up-to three years in advance for your business? Have you also looked at changing your light bulbs to energy efficient ones?
Chamber Membership Benefits: Chamber Utilities – will perform a free review of current suppliers and suggest cheaper options for you.
You may be able to save up to 20% of your current costs.
Postage: Do you send invoices to all your customers by post? Have you considered sending them by ? Why not obtain your customers address and inform then that your doing your bit for the environment by sending invoices electronically (usually in .pdf format), your customers can then choose to print them off if they need to.
E.g. (WITH AUDIENCE ON WHITE BOARD – maybe get specific number from one of the businesses) If you send 100 invoices per month by postage then you will need to cost the following: 100 x invoices printed (£0.03 each), 100 x enveloped (£0.02 each), 100 x 1st class stamps (currently £0.41 each), total cost per month = £45.00, total cost per year = £ If your customers do not have an address then why not try to maximise your postage value by inserting a promotional flyer or newsletter into the invoice envelope as well – after all you have to send that mail so why not include an additional piece of sales literature without going over the weight allowance! Please see the Royal Mail website for postage prices and weights.
Quotations: Make it company policy to obtain three quotes for every new purchase / job you require. This may seem time consuming but it can lead to great cost savings in the long run e.g. printing of 1,000 flyers – every printer has their own ‘mark up’ and actual job cost. Depending on the type of printing machine used each printers ‘job-cost’ may be very different. Also try to get flyers printing digitally you will save a bundle against traditional plating printing methods. If you have a preferred printer that you have been using for years and you feel uncomfortable changing to a new printer as their price is cheaper, then why not call your preferred printer and explain about the lower quote that you have obtained – they will more than likely match the low price if they can. Remember to ensure you are being quoted like-for-like otherwise the quality of print may not be the same!
Networking: Business networking can be a great low cost marketing tool to generate extra revenue for your business. There are many different business networks available in the North West, each with their own style and format. They key is to find the right group that suits you and your business. If you stumble upon a group which is not catered for by your business service, then you may have found the right group for you as you are the only business providing your service in that group. If this is the case, then cease upon the opportunity to generate awareness for your business and potential leads, and create a sense of ‘expertise’ as no-one else offers your business service. However, having said that you should not just discount a group if your particular business service is already catered for in it – there are many benefits from networking with the competition!
Direct Debits: You may receive extra discounts for payments made by Direct Debit each month / per quarter. You may also find that you may incur extra charges for non Direct Debit payments eg. Cheque or Cash – some businesses add-on an administration fee for handle these types of payments so ensure you check the small print.

28. 10 Simple Cost Cuts Direct Debits Paperless Business
Telecommunications
Brand Visibility
Credit Checks & Control
Paperless business: We live in an age of advancing electronic communication, we should endeavour to embrace and utilise the technology available to us. Faxes can be delivered in your inbox as an . s – do you need to print these? Can you send invoices by ? Online filing at HMRC - extra incentives on VAT returns. Online banking enables you to download statements in to csv format and view on your PC / Laptop.
Telecommunications: Skype can be downloaded free from the internet and can be used for phone conversations or meetings – all you need is a Skype phone or webcam. Why not negotiate on mobile phone contracts, investigate VOIP (Voice over Internet Protocol)?
Brand Visibility: Is your business officially listed on Google for FREE? You can put your business on Google & Google maps. It’s easy to do and will drive free traffic to your website. Other free and useful traffic driving websites are:
Credit Checks & Control: Your business is taking a risk every time you give credit to a customer. Make sure you understand the risk and closely monitor it to ensure that you are paid on time. Ensure you minimise the risk by using a credit checking facility – after all it’s there to protect businesses and consumers! Also set up a good credit control procedure / system as this is the starting point for both optimising cash flow and avoiding bad debts – two key objectives of any successful business.
Again mention websites:
and CHAMBER MEMBERSHIP BENEFITS from slide 19.

29. Effective Credit Control
Optimising cash flow and reducing bad debts are two key objectives of any successful business.
Setting up a good credit control system is a starting point for both:
Improve Cash flow
Reduce bad debts
Increase profits
Build customer loyalty
Build financial confidence
Increase sales
Credit Account Application Form
Your business is taking a risk every time you give credit to a customer. Make sure you understand the risk and closely monitor it to ensure that you are paid on time. Efficient and effective credit control is a priority, approached in a regular and systematic manner, will avoid the 'squeeze' situation with suppliers giving you less credit and customers taking more -- your cash flow will soon start to take a beating!
Take a proactive approach to managing their credit while benefiting from up-to-date online debtor's & creditor's details each month.
Show - Credit Account Application Sample Form.
Credit Control notes……
Keep close to Suppliers & Customers

30. Summary Understand Analyse Listen to your business
Focus on key areas of cost
Take Advice
Watch for signs
Plan
Budget
Forecast
Reduce Costs
Increase Profits!
Business produces information – “use it to your advantage”
Focus on Key areas – not just production of information but products/ services & customers (focus on those things that are most profitable (assuming you know what / who they are)
Advice – Accountants vary in quality (regular contact needed to be effective) / Business analysts and coaches (in audience?)
Signs – Market / Business / Customers & Suppliers
Organise – Crucial – Plan – realistic / focused & flexible (revisit)
- Budget – Set / Control / Monitor and give/take ownership
- Forecast – Costs / Expenses “prevent nasty surprises) – again produce them and compare and analyse trends