There are statistics and lies. Can a single number ever tell the whole story?

I appeared on BBC Radio Coventry and Warwickshire this morning, to give my views.

www.bbc.co.uk/iplayer/episode/p0062shx/Annie_Othen_28_01_2010/

I start to talk about an hour and 20 minuites into the programme…

Time is money. We all know that. But do you know how much your time is worth? I recently helped a self-employed client work out this cost, and thought I’d share the process.

The starting point is to work out how much it costs to “keep you alive” each month. This should include your rent or mortgage, your utility costs, average food bill, travel costs, a contribution to a small annual holiday, and a little contingency “just in case”. Let’s say, for example, that this amounts to £1,200.

You now multiply this cost by 12 to get your annual cost: £14,400.

Assuming an average working year of 220 days, you need to earn just over £65 every day to stand still. However, that’s after paying tax. So your gross earnings would need to be in the region of £80 per day.

So assuming an 8 hour day, it costs you £10 an hour to sit still.

It might not sound much, but every hour you don’t earn means you have to earn more in the other hours. Let’s say you only earn in 60% of the time. You need to charge about £135 a day, or £17 per hour.

So when you sit down to read or do something that you are not being paid for, ask yourself, is it worth £17 per hour?

Things go wrong in business all the time. Key to your success in business is the ability to recognise when something has gone (or is about to go) wrong, and then to do something about it.

Thankfully most things that go wrong can be corrected.

But are there things that can go wrong that you can’t correct?

What is it that tips a business over the edge and into administration, or bankruptcy?

Top of the list has to be cashflow. No cash means no business.

Also up there is an inadequate capacity to deliver.

Perhaps the most difficult to deal with is a lack of confidence. It’s intangible. It’s not always something you know about, or can do something about.

Confidence is one thing you can create without spending a lot of money. Being positive can have a huge positive difference on you, your business, and your customers.

Listening to the radio today, I was struck by the speaker’s complaint about how “the credit crunch” was still causing problems to his business.

It got me thinking. What was really at the heart of his problem?

The Credit Crunch refers to a bank’s unwillingness to lend money. Was he looking for a loan? If so, what for? To invest in greater capacity? To launch a new line of products or services? To help with poor cashflow?

If it was the last reason, I can understand the bank’s reluctance to lend, and crunch his credit.

Banks have not helped themselves in recent months, but their core purpose remains the same: to lend money to businesses. In return they expect a profit on their investment.

If you are having difficulties convincing your bank to lend money to you, maybe it’s because of something you need to do, or say.

If you need help talking to your bank, let me know. I might be able to help.

I seem to have talked to lots of people in the last week about the Balance Sheet. A bit like Finance Directors, they are a generally misunderstood, and dare I say under-rated, source of information.

So what is the Balance Sheet? In a nutshell it tells you three things:

1. How much you owe to others
2. How much other owe you
3. How much cash you have

Now I may be simplistic, but I would say these three facts are the three most important things every business owner needs to know – all the time.

There is a lot of jargon in finance and accounts. I make it my business to explain everything in plain English.

The Balance Sheet is getting a lot of air time because it’s important. If you still don’t know what it’s about. Call me!

I presented a seminar last night to a group of business managers in Derby on the above subject. So that we all got to the pub at a reasonable time, I covered a few key points:

• Ask yourself every day: “Am I doing the things today that will ensure my business is here in 12 months time? “
• If you are not doing things that are about your business being here in 12 months time, why are you doing it?
• Understand the difference between cash and profit – you can make a loss and make money, and you can make a profit and lose money.
• Learn what the Balance Sheet is.
• Write down what your business is for in less than 20 words. Print it out, laminate it, and stick it above your desk.
• A bit of luck can go a long way.

These all seemed a bit obvious when I was preparing the talk, but after the presentation the audience reminded me how easy it is to forget the basics.

With thanks to Martins Money Tips (www.moneysavingexpert.com) , welcome to the new tax year, here is a brief summary of the highlights (last year’s figures are in brackets).

The good:

Personal allowance UP! Every man, woman and child can now earn £6,475 (£6,035) before paying income tax. For those aged 65-74, it’s £9,490 (£9,030), and for over-75s, £9,640 (£9,180).

Basic rate tax threshold UP. You now pay 20% tax on the first £37,400 (£34,800) over the personal allowance, meaning under 65s hit the higher 40% rate at £43,875 (£40,835).

National insurance start point UP. You now need to earn £110 per week (£105), before paying for NI, usually 11%.

State pension UP. It’s £95.25 (£90.70) a week for a single person.

Pension credit UP. The minimum guaranteed income’s now £130 for single pensioners (£124.05), and £198.45 for couples (£189.35).

New Health in Pregnancy Grant. All pregnant women will get a non-means-tested £190 in their 25th week.

Inheritance tax threshold UP. You can leave £325,000 (£312,000) tax-free.

And the not so good:

Fiscal drag. This isn’t Alistair Darling in women’s clothes, it’s when increased allowances aren’t as generous as they seem. If wages and/or inflation increase by more than the allowances, effectively the government gets more tax revenue anyway, and the real value of the increase is less.

National insurance upper earnings UP.  You will pay 11% NI on earnings up to £43,888 a year (£40,040) and 1% above that.

ISA limits. No change. Yet again, the amount savable tax-free hasn’t increased with inflation or earnings.

Child Tax Credit family element. No change. Many families get this, and the freeze at £545 is an effective cut. Yet the means-tested element has increased to £2,235.

Remember to take proper advice before making any decisions…

www.moneysavingexpert.com is a great source of advice and help to those seeking to save money.

Cashflow is the heartbeat of every business. Books have been written on the subject – but what lies at the heart of the topic? Talking to a client today, we discussed cashflow in terms of certainty, which seemed to strike a chord, which made me want to share the conversation.

We saw two models of cashflow; the first is usually called the budget, and includes everything you hope will happen. The second (and possibly more important) is the real cashflow, and should only include figures where certainty is close to 10 out of 10.

Certainty of expenditure is pretty easy to plot, wages, rent, telephone bills, they all fall due with depressing regularity.

Certainty of income is far less simple. Not only should the value of the income be certain, so also should its timing. You may know you are expecting a cheque for £5,000, but when exactly will the funds clear your bank account?

When it comes to your cashflow, make sure you are dealing with certainty, not hope.

What is working capital?  When accountants use it they are referring to “Net Current Assets” which are your companies short term assets less your short term liabilities.

To make this easy let’s assume that you have £1,000 of stock, you are owed £500 by your customers and you have £200 in the till.  This means that your short term assets are £1,700, unfortunately at the same time you have £1,000 of bills to pay, which are described as your Short Term Liabilities.

Therefore your working capital, or your Net Current Assets, are £1,700 less £1,000 = £700.

Naturally, you would assume that the more working capital you have in your company the safer your company is, but this is not always true. If too much of that working capital is in stock, it is dead money; which comes alive when sold and then can be used to buy new stock. 

Recently a large furniture retailer went into liquidation even though it had no major debts, because all its money was in furniture and no one was buying their furniture, this led to a major cash flow crisis and its eventual demise.

So you must look where your cash is and whether it is working for you. This is why before Christmas all the major retail chains were giving such big discounts, as it is no good having money in stock, if you don’t have cash to pay your staff and your regular bills.

The message is, if your stock isn’t selling, sell it at any price and use that money to buy stock that will sell.

A good management accountant is worth their weight in gold. Not because they will generate sales, or improve your PR, but because they will keep you focused on what is really important to the long term survival of your business.

It doesn’t matter whether you are a sole trader, have a turnover of £100k, £100M, or are the Chancellor of the Exchequer, the same principles apply:

• Create Key Performance Indicators that are relevant to, and understood by, all those involved – and don’t just focus on the financial KPI’s. Take advice on KPI’s, you need to be objective.
• Identify what KPI’s are leading indicators, and which are lagging indicators.
• Use qualitative and quantitative measures. Ask for suggestions, and not just from those within your organisation.
• Be aware of how KPI’s affect people, and how change makes them feel.
• Know the difference between making an investment, and incurring an expense.

When the world around you appears to be losing its way, make sure you have someone who is prepared to talk to you about the reality of your financial priorities.