FBO: Profits, Cash Flow, and Financing

Changes in the Economy

• The ways of doing business have changed from that of 30 or 40 years ago

• In the past, the economy was a cash economy

• In a cash economy, customers pay for goods and services with cash at the time the service was provided

• Today we live in a credit economy.

• In a credit economy, customers expect to pay for goods and services through the use of credit

Reasons for Using Credit

• Convenient

• To raise standard of living

• Meet pressures of economic necessity

• Enables business to sell more goods

Credit Economy

• Credit purchases allow the consumer to use a product now and pay for it later (usually 30 days)

• This causes the FBO to spend money up front and then forced to wait for payment called a cash flow lag

• Waiting on payments can put a strain on the FBO bank account causing a cash flow hole.

Survival in a Credit Economy

• Businesses have to separate profit from
  cash flow

• The goal to being successful is to have:

  • Positive Profit

  • Positive Cash Flow

  • Budgeting

Planning for Positive Profit

• Clear definition of profit

• Determine a profit objective

• Be profit-oriented

• Cost Control

Definitions of Profit

• Reward for effort or what’s left after all
  bills are paid

• Reward for risk of owning your own
  business

• Return on investment or money earned on equity in business

• Profit to sales ratio by dividing the net profits by total sales

Determining a Profit Objective

• Profit Maximization - examining the point at which the cost of producing one more item would exceed the revenue of selling it

• Satisfactory Profits – setting profit based on what is satisfactory to owner

• Hobby Business – not setting profit goals because business is a hobby

• Social Responsibility – setting profits based on what’s best for the community

Being Profit-Oriented

• Having a positive attitude towards generating profits

• Effectively utilizing management tools to achieve desired profit levels

• Spreading this mindset throughout the organization

Exercising Cost Control

• Knowing and controlling how much you pay for each item

• A business can control costs by comparison shopping

Planning for Positive Cash Flow

• Forecasting Sales and Revenue

• Forecasting Expenses

• Cash flow Analysis

• Techniques for Improving Cash Position

Forecast Sales and Revenue

• For each product and service, there should be an annual prediction of expected sales

• One method of forecasting sales is based on the past year’s performance

• Keeping up with past years’ performances will help you track needs and trends in the area

Forecasting Expenses

• Types of expenses for an FBO:

  • Fixed Expenses

  • Variable Expenses

• Forecasting expenses will mainly focus on the fixed expenses

• Fixed costs although stay the same can change when:

  • Inflation

  • Growth of the business

Cash Flow Analysis

• Set up a month-by-month spreadsheet to determine the break-even point

• Break-even point is the point at which all costs are exactly covered

Techniques for Improving Cash Position

• Use low interest credit cards for business use

• Obtain cash on the spot for most services

• Collect deposits or advanced payments for services

• Charge interest on accounts over 30 days old

Planning Positive Profit and Cash
Flow

• Planning for Positive Profits

  • Clear definition of profit

  • Determine a profit objective

  • Be profit-oriented

  • Cost Control

• Planning for Positive Cash Flow

  • Forecasting Sales and Revenue

  • Forecasting Expenses

  • Cash flow Analysis

  • Techniques for Improving Cash Position

Budgeting

• Budgeting is setting cost limits for each department based on profit and cash flow goals

• When developing a budget:

  • Consider long and short range goals of business

  • Use the forecasted sales and expenses for coming year

  • Set a timetable budgeting activity

  • Exercise control over the operations of business