What are your fixed and variable costs?
Most businesses have both fixed costs and variable costs. Fixed costs are expenses that don’t change over the short term (e.g. a retailer pays the same amount of rent whether they’re having a busy or slow day). Examples of fixed costs include:
- Payroll costs for permanent employees
- Repayments on term loans
Variable costs typically change as your sales rise and fall (e.g. a retailer pays more for stock when sales rise). Examples of variable costs include:
- Raw materials
- Shipping costs
- Short-term labour costs (for example, seasonal employees to meet increased demand)
- Repayments on flexible finance facilities, such as overdrafts
- Sorting out your fixed and variable costs helps you understand how your expenses could change in line with your sales, and how much revenue you need to earn to cover the unavoidable costs of doing business.
How are your costs likely to change?
The RBA Board increased the cash rate target by a further 50 basis points to 1.85% in August, the fourth consecutive monthly increase in the cash rate. The RBA have delivered a very significant amount of tightening in a short space of time. The hike means that they have taken the cash rate up by 175 basis points between 4 May and 2 August – over just three months. CommBank’s research team forecasts another two interest rate rises by November 2022 with the expectations the RBA will increase the cash rate by 50 basis points at the September Board meeting and one further 25 basis point rate hike in November which would take the cash rate to 2.60%1.
While no-one can be certain how costs and interest rates will change, it’s a good idea to be prepared. So, calculate how they would affect your expenses and factor them into your cash-flow forecast to make sure you’re ready.
What are your margins today and how might they change?
Your profit margins are a comparison between your revenue and your costs:
- Your gross profit margin compares your revenue with your variable costs.
- Your net profit margin compares your revenue with all your fixed and variable costs.
Higher margins tend to mean higher profits. If your costs increase, your margins will be reduced, unless your prices also rise. That’s why it’s important to keep an eye on your margins and consider whether you should focus your spending on the highest margin goods and services for your business.
What's your adjusted cash balance after pending costs?
Your adjusted cash balance is the total amount of money your business has in the bank, allowing for any pending transactions. It will tell you if you can afford any immediate payments due or upcoming bills.
What's your current ratio?
Your current ratio is a measure of how solvent your business is. Solvency is the ability of your business to pay its debts. The higher your current ratio, the more able you are to pay your bills. Current assets include things like unpaid invoices and cash in the bank. Current liabilities include unpaid bills and customer prepayments for work not yet done.
Do you have any spare capacity?
Know when you can take on more, or when you need to work within current capacity. You can use your cash-flow forecast to work out when your busy periods may be and look to your business plan to find when you may have time for extra activities.