Cash flow is the blood supply for your business, without it the whole body (business) stops working. If you don’t have money to pay suppliers or utilities you don’t have a business that can continue to trade, regardless or not if your business is trading at a profit. Yes that’s right you can run out of cash even if your business is making a profit.

How can this be you may ask, well assume you start month one with £1000 in the bank, and all your monthly bills added together amount to £2000 and all fall due during the month, Lets assume you have secured a contract to work all most full time for a large multi-national company photographing products for their website, which amounts to £5000 income per month. But the multi-national company has payment terms of 60 days, which means you won’t get a dime for two months. Now although you have revenue of £5000 a month and your total outgoings are just £2000 per month meaning you are making a profit of £3000 a month, because you are not getting the first months payment for 2 months you have incurred £4000 of costs before you have received any money back. and as you only started with £1000 cash in hand you are £3000 short of paying your bills. Now unless you have access to an overdraft or other funds, you are not able to meet your debt obligations as they fall due, which means you cannot pay your bills and are out of business. The way around this would be to;
• Have additional funds to plug the two month gap before getting your first payment or
• Insist that your customer, in this case the multi-national pays you straight away or use a factoring company as an intermediary
• Arrange to pay your suppliers on 60 days credit terms, so that these bills are only due once you have been paid by your customer.

All of which are easier said than done, but these either done in isolation or together are the only way around your cash flow problem.

Although this simple example has happened at the start of you trading, cash flow problems can hit you at any time. If your company is experiencing rapid growth, cash flow can become a major problem. Suddenly you are paying more for inventory or in wages and bigger contracts / customers are expecting to receive better payment terms from you.
Always keep your eye on your cash cycle. Generally speaking the cash cycle decribes the;

time that elapses between the delivery of inventory and its conversion into sales (1 week)

PLUS time that elapses between the sale of goods and services to customers and receipt of monies due from these accounts receivable (nil – payment terms are cash on delivery)

LESS time that elapses between the receipt of goods and services from suppliers and subsequent payment to these accounts payable (4 weeks)

Cash cycle = 1 week + 0 weeks – 4 weeks = -3 weeks

Your aim as a business owner is to get better terms from suppliers (increase creditor days) and reduce customer payment terms (reduce debtor days)

The balance sheet is a financial snapshot of a businesses worth. It shows all it’s assets and liabilities at a particular moment in time (usually once a year). A balance sheet will often be out of date almost as soon as it is assembled.

Understanding of business can often seem very complex, but all businesses can be simplified into its key elements. The basic building blocks that all business need to be founded on. All businesses exist to provide their stakeholders with a return. The ultimate goal is to provide a reasonable return on equity. If a business is unable to provide this then there is little point in that business existing. There are 3 key elements that tell us how to acheive the 4th.

Profit making process

1.  Raising funds to finance assets (cash management)

• Funds raised by shareholders
• Money borrowed

To enhance gearing

• Increase proportion of funds that are borrowed – Be careful not to fall short of sales otherwise could negatively impact ROE

2. Turning assets into sales (cash management)

To enhance asset turnover

• Increase sales from existing assets
• Maintain current sales with fewer assets

3. Turning sales into profit (profit management)

To enhance profit margin

• Reduce costs as percentage of sales
• Cut costs – may adversely impact sales and margins.

4. Return on equity is the overall objective (1, 2 and 3 key elements and tell us how to achieve 4 which is key.

To enhance ROE

• Increase gearing
• Increase asset turnover
• Increase profit margin
• Keep monitoring to see if any given strategy is working

Following on from the previous two posts about starting up a photography business, post one and post two, we now cover adding the detail to your business model. The three choices, highlighted above, together, create a configuration that is permanent. The individual business model components may undergo constant incremental change. Wholesale, radical change of any one element (e.g., serving an entirely new customer group) will be inhibited by the other two model elements.

While each element is a necessary (but not sufficient) component of a business model, the three are not equally important.

• Business models are built around customers. They’re the most important element.
• Without a compelling value proposition, there are neither revenues nor profits.
• Resources and capabilities are strategic only to the extent that they fulfill the promises (explicit and implied) made to the customer through the value proposition.

1. Customer – who will the business serve? – for instance families, teenagers, maybe schools, businesses via product shots or covering events. Think about how frequently customers come to buy from you and the value as a proportion of sales that each contributes. A good mix of high frequency, lower value and low frequency, higher value is something we aim for.

2. Value proposition – “offer” that will be made to the customer. Marry experience, with a physical product at the end of it. Barrier to entry lays in the expertise and relatively med/ high capital costs of getting such a business started.

3. Resources and capabilities – will create/deliver the value propositionIncludes:

•  Suppliers
• Staff
• Equipment
• Expertise
• Pricing / Cost structure

some examples include Photographer skill and expertise (which is still the key ingredient) and equipment, Studio facilities, Graphic designers and equipment, Framers and framing equipment, Stylists and hairdressers providing services providing support services, Clothing suppliers – ball gowns, evening dresses, wedding dresses.

All these points need to be considered when looking to start your own photography business. Doing your own research is critical, preparation, preparation, preparation is as important as location, location, location.

Understanding your businesses financial profile is key to establishing pricing strategies that will ensure you are charging enough to make a profit and stay in business. So many photographers look to undercut competition to gain market share without understanding how this pricing strategy is going to affect their goal of turning a profit. Above is a model of how costs and revenues can be categorised to understand this alittle better. All of this information can be found in the profit and loss account of any businesses financials statements.

Costs are made up of :

COGS (cost of goods sold) which refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out (FIFO), or average cost. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs of goods made by the business include :

• Raw Material costs
• Direct Labour costs
• allocted overhead costs
• Direct sales costs

The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.which are direct costs of producing the goods and services that the business produces/provides.

Variable Costs include things that vary with the volume of output, these can often include many of the same things listed under COGS, items such as electricity and gas useage that cannot be directly allocated to COGS may also be added. When we were looking at our businesses financial model we found that most of our variable costs were also our COGS.

Fixed Costs – Are made up of costs that don’t change with variations in a businesses output. Things such as Rents, Rates, insurances, administration labour costs etc

Gross Profit – is calculated by taking away the COGS from the Total Revenue (Turnover). Gross profit can be converted to gross margin which is the same figure represented as a percentage. Gross Margin Percentage = (Revenue-Cost of goods sold)/Revenue. Your Gross margin will tell you what contribution your sales will make to your fixed costs.

Gross margin is an important figure to know when you are trying to establish what level of sales you would need to achieve to cover your total costs.  Lets assume your fixed costs are £1000 per month. Your Gross margin is 60% of your sales. 1000/.60(60%) = £1666.66. You would need to achieve £1666.66 of sales to cover your COGS and fixed costs.  This is also known as the breakeven point. So lets have a quick look how this might actually be used in practice. Lets assume you decide to rent a larger shop unit than the one you are currently renting now and you want to work out how much more business you need to bring in to pay the extra cost. Lets assume you are currently paying rent of £600 per month and the new shop is going to cost £800 per month, an extra £200. How much extra business do you need to bring in pay for the extra rent, £200? Wrong! Lets assume your gross margin is 60% You would need to bring in not £200 but £333,33. Why? Well because the extra £200 is a fixed cost (your rent), but as you sell extra products to cover the additional rent, you are also incurring extra COGS to produce those products. So for every additional £1 of sales, you are incurring £040 cost of goods sold (COGS). Which means that only £0.6o (gross profit) is actually going towards your extra rent costs. So when you have sold the extra £333.33 of products you will have covered your rent £200 and the additional COGS £133.33. The calculation is fixed cost (£200)/GM .6 (60%) = £333.33

Net Profit is calculated by taking away Total Costs from Total Revenue. Also known as the “bottom line” due to the fact that it can be found at the bottom of the profit and loss account. This is what is left after all costs have been accounted for. Of course a negative figure means that  the business is loss making.

Deciding which costs fall under which category can vary considerably from business to business, In our business, some parts of our advertising costs are allocated under COGS, while others are categorised as a fixed cost due to the fact that they are contracted on a yearly basis and don’t alter depending on output. Same with our labour costs. We put photographer payments as a COGS but administration labour costs under fixed costs. It is best to consult your accountant for further advise if you are still unsure how to categorise each of your costs.

Disclaimer, release and acknowledgment
Mike Turner, is not a financial planner, adviser, registered accountant or financial professional. The information presented in this blog is based on his personal experiences as business owner, researcher, and others he has modelled in detail. You may have to modify them, do further research on them or adapt them to suit your personal financial situation. Any information presented on this blog, or any support materials, are given purely as illustrations and should not be construed as specific investment recommendations. The laws relating to investment, taxation, benefits, and the handling of money are constantly changing and are often subject to changes in government policy, and whilst every care has been taken to ensure the accuracy of the material contained herein at the time of publication and presentation, Mike Turner will not bear any responsibility or liability for any action taken by any person, persons or organisations on the purported basis of information contained in this blog, or any supporting material.
Without limiting the generality of the foregoing, no person, persons or organisations should invest monies or take other action on reliance of the material contained in this blog, or any support material, but instead should satisfy themselves independently (whether by expert advice or otherwise) or the appropriateness of any such action.