With most of the country in drought there are bound to be a few casualties in the garden. To minimise the impact some individuals will already have prepared and have a water butt (or 2) standing full and ready to help, others may chose to flout all the bans and use a hose pipe, and another group may just passively accept the impact (which, as it turns out, may be a flood!).

The economy also continues to be in a sorry way and yet many businesses are thriving, not just surviving. In many cases these will be the businesses that have (flexible) plans in place, understand their market and their cashflow, and know what KPIs are important in their business.

Both the economy and the drought have arisen from matters beyond most people’s control – but understanding how they impact your environment, on a timely basis, means you can take control and minimise the impact rather than just sitting, suffering and blaming someone else.

Written by Caroline Billington of www.a-count-a-bility.co.uk

Bookkeepers are the key to maintaining an accurate set of accounts.

They may be employed on a part-time basis and can often be an outsourced resource. Remember the old adage garbage in, garbage out.

It can often be the case that people are employed and given the title “bookkeeper” when in fact they are merely “input clerks.”

A bookkeeper will not only  understand how to correctly enter data into accounting software, but also how it affects the consequential entries in the profit and loss account, balance sheet and trial balance. In addition, a bookkeeper fully understands the whole concept of double-entry, knows how to reconcile all the balances that make up each balance sheet account and how to create an appropriate coding structure within the accounting software.

Input clerks may enter data in a particular way, because they may have always done it that way and may not realise they have unwittingly created a problem within the accounts.

Bookkeepers must therefore have a full understanding of how the business operates and know the context in which separate analyses and reports are used.

In recent times, banks have been on the receiving end of some very bad press coverage.

Amongst other things, banks have come in for criticism over their failure to advance funds to independent businesses either via loans or overdrafts.

It is my view that in the past, banks have been reckless in advancing funds to businesses with little or no consideration of whether they had any prospect of repayment. Today, banks are understandably far more cautious.

Bank managers need to understand their customers’ businesses. In part, this can be achieved by visiting and talking with their customers.  In reality however, this only gives them a partial view. Many business owners fail to regularly and adequately update their bank manager how the business is performing against budget. They don’t therefore share their aspirations for the business and those that do, don’t quantify or periodically update those aspirations.

Without this information, bank managers will have a very hard time supporting a business. They need information from their customers, not data. In challenging times that may inevitably lead to cashflow problems. If so, then talk to your bank manager at the earliest opportunity. The sooner you talk to the bank, the more likely they will be able to help. Talk also to suppliers. If you don’t take action in good time you risk affecting your relationships with your bank, suppliers and customers.

Tip: Invite your bank manager for a quick meeting to update him on business progress. Tell him your plans, show him your latest monthly accounts, but do this when you don’t need anything from him! Bank managers are well connected and like to be kept up to date on progress and when they see a business that’s organised and doing well, they will often go out of their way to help, sometimes sending new customers your way!

Everyone knows that the longer it takes your customers to pay you, the worse your cash position will become.

However, just because your debtors are high at the end of the month, doesn’t necessarily mean your debtors are taking longer to pay!

For example, if your annual sales are £2.4m with debtors at £800k, all this tells you is that you are owed £800k!

From these figures it is impossible to ascertain if this is good or bad news. It does show that on average your debtors are taking four months to pay you. However, that may not be very useful information because your debtors may be high because you’ve just had the best monthly sales performance of the year. Therefore, it is imperative to know the level of your debtors in the light of the actual sales you have made in recent months.

The best way to measure this is to calculate how many days of your actual sales are equal to the total of your debtors at the end of each month. This is known as the Days Sales Outstanding. Simply, if the DSO is growing then your debtors are taking longer to pay and vice versa.

When businesses have a large number of debtors, not all of whom are paying slowly, it is helpful to analyse only those who are taking over say, three months to pay. An aged debtor listing can help establish the real position and enable those responsible for collection to become more focussed on the task in hand.

In one recent experience, the aged debtor listing eventually revealed that virtually all the slow payers had been offered extended terms by the sales team in return for new orders. Armed with this new information, not only did the MD rule that in future extended credit could only be authorised by him, but the sales team bonus structure was changed to be based on sales made less debts owed. After all a sale isn’t a sale until it’s been paid!

Businesses can be aware of the profits or losses they are making during the year.

However, many business owners do not understand why their bank balance may have reduced even though their accountant tells them their business is profitable.

Very few business owners have a clear understanding of whether their business is generating cash or just consuming it. It’s crucial that you know the sources of the cash coming into your business and how these funds are being applied.

This information is not available from a cashflow statement, yet is one of the easiest parts of a business to analyse, if it produces regular profit and loss accounts and balance sheets.

Virtually all businesses need money continually revolving in their business to buy their stocks and fund their work in progress, debtors and creditors. These items are referred to as the “working capital” of a business. If the stocks, WIP and debtors increase, then they will need to be funded from your bank account. If they fall, that will mean that money is coming into your account. The opposite is the case with creditors, if your creditors are rising, this means that you are using your creditors funds, if they are falling, you are paying more out of your account.

For a free analysis of cash movements in your business, please email admin@financeheads.co.uk and let us help you take the first step to understanding your accounts.

Do you believe that raising prices will turn customers away?

Do you think that dropping your prices will bring a flood of new customers?

Do you think that either will make your profits soar? The truth is reality can be very different!

For example, a 10% price increase on a gross profit margin of 30% will mean that you could afford to lose up to a quarter of your customers without damaging your profitability.

The fact is, the larger your gross margin, the less likely your business profits will fall if you increase your prices. Too many business owners fail to understand how many customers they can “afford” to lose.

In a similar way, decreasing prices or providing discounts will have a severely detrimental effect on your profits, unless you dramatically increase the number of new customers at the same time.

For example, a 10% discount on a gross profit of 30% will mean you would need to increase your number of customers (or sales volume) by 50% in order not to damage your profitability.

In the next tip we’ll be looking at how to keep an eye on where your cash is going on a monthly basis!

For a free analysis of cash movements in your business, please email Gordon@financeheads.co.uk and let us help you take the first step to understanding your accounts.

http://www.welsbyassociates.co.uk

Continuing on from part one last week, here are the remaining tips on how to  manage your cashflow in business.

5         Always find out what the credit terms are for each of your suppliers. If a supplier is expecting to be paid at the end of the month after the invoice was raised, then don’t pay it until then. Your supplier isn’t expecting it until then! For every £1,000 that is paid early, that is £1,000 that is not in your bank account. Delay payments if you can, try to negotiate with your supplier however certain creditors should always be paid on time,  HMRC being the most obvious (PAYE/NI and VAT).

6         Get the best return for your cash. If you have money in the bank you need to ensure you are getting the best return possible. If you are operating an overdraft, you will be charged interest by your bank for every day you are overdrawn. Following the above steps will ensure that your overdraft is kept as low as possible.

7         Monitor, monitor, monitor! When you drive a car you regularly monitor all the information displayed on the dashboard and in the mirrors. You should operate your business in the same way by regularly monitoring the important Key Performance Indicators in your business. By developing your business dashboard, you will remain in the driving seat of your business.

8         Don’t stick your head in the sand. Don’t be a financial ostrich. If you are in any sort of financial crisis, find out what is causing it. It may not be the obvious answer.  Prioritise the steps you need to take by speaking to key customers (you may be able to negotiate more favourable terms for a while.) When a supplier does not get answers from an overdue creditor, they are far more likely to stop supplying. In addition, ensure your business chases all the overdue debtors.

In the next tip,  we’ll be looking at the dramatic effect pricing can have on your business.

For a free analysis of cash movements in your business, please email Gordon@financeheads.co.uk and let us help you take the first step to understanding your accounts.

http://www.welsbyassociates.co.uk

Many people assume businesses collapse because they are loss making. However, the reality is businesses go bust because they run out of Cash. Always remember “CASH IS KING”

The primary purpose of a business is to attract, maximise and retain customers. Everything that contributes to this is an investment; anything which doesn’t is a cost.

If cash is tight in your business, here are the first four of our eight simple steps to boost your cashflow:

1. Aim to Invest, rather than Spend. When you buy a product or service from a supplier, think about whether you are making an investment in the business or just spending money. Being aware of the difference should make it easier to eliminate non-essential purchases.
2. Choose your fixed assets carefully. Many businesses need fixed assets in order to operate, for example premises, machinery, vehicles etc. Before making a purchase find out if you can buy it second hand and save money. However, ensure you are not just deferring spending on repairs and maintenance to a future date. Consider financing fixed assets through leasing to avoid the heavy initial outlay.
3. Measure your stocks and work-in-progress.
   1. Stocks: Do you have too much stock in your business? How much is slow moving, even worse, obsolete? Do you know what the stock turn of your business is? If not start measuring it now! Remember for every £1,000 of stock you have, that is £1,000 less cash in your bank account.
   2. Work-in-progress in service based businesses: If the service is provided over a period of time, then before the invoice is raised for the work, there will be uninvoiced work that has been done – work-in-progress. The smaller the value of work-in-progress, then the more cash there will be in your bank. Consider asking for deposits in advance or payments on account.
4. Curb bad debts quickly, collect money due from customers. Before you make a sale to anyone, try to get payment up front or on delivery. If you have to offer credit terms ensure you run a credit check on your customer. Ensure your credit terms are written down clearly and signed by both parties. Gain understanding that these are the terms on which both parties are prepared to do business.

In the second part of successfully managing your cashflow we’ll look at four more simple steps to help boost cashflow.

For a free analysis of cash movements in your business, please email me at Gordon@financeheads.co.uk and let me help you take the first step to understanding your accounts.

http://www.welsbyassociates.co.uk

The problem for many business people is the sheer volume of numbers they receive from accountants and bookkeepers.

As a business owner you need to know which numbers are important and what they reveal. In other words you need information, (and not data), presented in a way that makes sense for your business. There are a number of key measures, (often called Key Performance Indicators) you need to know and they will vary depending on the type of business. They may include:

1.            Stock turn – important for business holding resale stock

2.            Days sales outstanding – important if you offer credit to customers

3.            Occupancy rates – important for hotels & restaurants

Ideally, this information should be produced at least monthly. All too often businesses only gleam information in their annual accounts, often produced nine months AFTER year end.  At this stage the information is historic and of little use for effective planning.

Limited companies are required to prepare and file annual statutory accounts. However, monthly management accounts will give you real information about how your business performed over the last month and indeed every month in your financial year. These should be checked back against the annual budget to see if the business is on track to achieve its objectives.

Your management accounts should be customised to reflect how your business works, for example:

1.            Are there types of sales than need to be shown separately?

2.            Do you know the cost of sales for these sales analyses?

3.            Are overheads shown by your departments or locations?

In addition to monitoring financial criteria, there are other non-financial measures to consider. Numbers alone can’t give you the full picture. Performance graphs over time will show trends month by month which are particularly useful if the business is seasonal or has predictably different months for trading in for example, August and December.

http://www.welsbyassociates.co.uk

In the next tip, I’ll be looking at the eight simple steps you can take to boost the cash in your business.

For a free analysis of cash movements in your business, please email me at gordon@welsbyassociates.co.ukand let me help you take the first step to understanding your accounts.