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Increasing profits with faster stock turnover

Case study: Crematech Pty Ltd
The problem
Crematech was an importer and wholesaler of café supplies and equipment. Despite the quality of its products and a healthy market for coffee, the company was having difficulty increasing sales.

One reason was that its products were expensive compared to its competitors. Higher prices resulted in slower turnover, which in turn meant reduced cash flow. Consequently, the company could only afford to buy three shipments of stock per year.

The solution
Crematech’s owners decided that they needed to accelerate the cash flow cycle by increasing stock turnover.

After talking to a Commonwealth Bank Trade Specialist, they used a Trade Finance facility to fund extra shipments of stock. At the same time, they cut the mark-up on their products from 50% to 20%, significantly reducing their prices.

Lower prices soon meant higher sales. In a short time, Crematech was turning over stock monthly, rather than quarterly, generating sufficient cash flow for 12 shipments a year.

The result
 

Even though each individual sale was less profitable, Crematech’s lower prices created enough new sales to cover operating costs and still leave the company with a higher profit. Meanwhile, the company’s Trade Finance facility helped it to cover any cash flow gap between paying for stock and being paid by its retail clients.

As a result, Crematech was able to earn a higher profit on the same initial investment, while still lowering its prices.

  Old Pricing New pricing

Cost of stock (per shipment)

$250,000

$250,000

Mark-up

50%

20%

Gross profit (per shipment)

$125,000

$50,000

Shipments per year

3

12

Gross profit (per year)

$375,000

$600,000

Operating costs

$120,000

$120,000

Operating profit

$255,000

$480,000

  • This is a hypothetical example for illustrative purposes only and does not represent any particular individual or company.

 

  • Important information
    As this advice has been prepared without considering your objectives, financial situation or needs, you should before acting on this advice, consider its appropriateness to your circumstances. Applications for finance are subject to the Bank's normal credit approval. Full terms and conditions will be included in our Loan Offer. Fees and charges are payable. Financial markets’ products contain an element of risk: the level of risk varies depending on the product's specific attributes and how it is used. The Bank will enter transactions on the understanding that the customer has: made their own independent decision to enter into the transaction; determined that the transaction is appropriate; ensured they have the capacity to evaluate and understand the terms, conditions and risks, and is not relying on any communication or information from the Bank as advice.

 

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