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.

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.

I found myself despairing today, about the lack of interest in the Balance Sheet by some businesses. I believe it is the single most important piece of information every business needs. Why?

Look at it this way, as an individual, we tend to know how much we owe other people, how much we own, even how much we are owed. It’s nice to have sense of how much we are earning, but the bit that gives us the warm fuzzy feeling of stability – or the cold shivers of concern – is the detail of where we are financially right now.

That’s what the Balance Sheet is. It’s a snapshot of who owes you, who you owe, and what you own.

As a barometer of your organisation’s health, check out the Balance Sheet. And if you want an idea of what shape you are going to be in, then ask to see the Balance Sheet’s forecast position. It’s not rocket science, and could save you from some very unpleasant surprises.

financial business support
Just had a really interesting chat about accounts packages (no, really!). It boiled down to compromise. There are a number of “must have’s”, including basic transaction recording, simple reporting for statutory purposes, and more complex reporting for management.

Unless you have £20,000 to spend, its unlikely you will get everything you need from a single piece of software. So how much functionality do you require your accounts system to have, and how much do you export to excel?

On one level, you spend as much as you can in order to get as much out of your accounts as possible, using excel to tidy up the presentation. On the other hand, you can get a simple accounts system that copes with the basic transactions (reconciling actual activity to the bank for example), and export key figures to excel to provide all your management information.

Both are compromises, but I suspect the latter could cost a fraction of the former. Its worth thinking about, and could save you a lot of money…

Recession. What is it? What does it mean? And most importantly, what does it mean to you?

The sales are in full swing, parties are loud and late, cars are travelling far and wide. Some days it feels like there are two worlds, the one we live in and the one we read about.

Losing a job is not fun – I know from personal experience – but take this out of the equation, and what else is happening? Food prices are down, fuel is just 86p a litre, variable mortgage rates are at an all time low. The spectre of recession might be based on little more than a perceived worsening of our world.

Perhaps the biggest thing we have to fear, is fear itself.

Another subject that is covered by a thousand books, prompted by a business running an on-line shop selling stylish products for the home and garden.

Assume a marketing spend of £1,000, how much of this should they spend on getting past customers to come back, and how much on finding new customers?

My view was a split of about 20:80, with the majority of spend on finding new customers. The type of products on sale are not daily purchases (think Christmas, birthdays and special occasions), so customers may come back, but maybe only twice or three times a year tops. To me, the key to driving revenue up is to find new customers.

How do you allocate your marketing and advertising spend?

The root of the problem is that most small businesses are selling to companies larger than themselves, who have the advantage of a full-time finance director. These seasoned professionals know how to manage cash-flow, and therefore how to improve their companies’ bottom line instantly by quietly moving payments from thirty to ninety days.

You would do well to support your sales operation with a finance specialist. If you do not have a full-time finance person, then pay a little extra and get someone appropriate to help supervise the sales process.

They will put in some sensible precautions, such as credit controls on small and medium-sized businesses who might want to place orders. In my experience, it is rare for a company to turn down business from someone purely on the basis of a poor credit rating, but it does improve the negotiating power of the salesperson to ask for a substantial up-front deposit.

If the potential order is with a large organisation who have an excellent credit rating and who represents a substantial share of your revenue, there is still the problem of their moving the goal-posts on payment terms. The solution is to have an open channel of communication between your finance specialist and their finance director.

The reality is that few large organisations want to be seen to be bankrupting small companies by applying unreasonable payment terms. Problems usually arise because the salesperson does not have the knowledge and patience, or even vocabulary to discuss these issues with finance people at an early stage in the process.

Left to their own devices, finance professionals will usually come to a sensible conclusion which represents a win for both sides. The supplier might be happy with longer payment terms in exchange for a larger order, or you might offer a price discount in exchange for an up-front payment.

Late payment is a natural consequence of difficult economic conditions and has no easy solution other than to employ the services of a professional. This could be either a finance expert or a company who knows how the system works. It may be expensive in the short term, but represents an excellent return on investment over time, the same argument you should use to promote your own products and services.

If you want to talk this through in more detail, call me on 07913 895798.

I just picked up this article – although brief, it points the finger at what I believe lies at the heart of the economic “crisis”.

http://www.charityfinance.co.uk/home/content.php?id=2424&pg=&cat=58

Who is asking the hard questions in your organisation?

The dust seems to have settled on media speculation about VAT – just how many sexy headlines were they ever going to come up with anyway?

So what should you be doing to make the most of the change?

Number one, now is the time to make large purchases, such as computers and other goods and services that have a high cost. The reduction on VAT should mean that they will cost you less. Don’t forget to haggle on price as well.

Number two, check your purchase invoices from suppliers. Make sure you are being charged at the lower rate of 15%.

Number three, check the sales invoices you are issuing. If you can justify making a supply at the old rate of 17.5%, then use it.

Number four, take proper advice if you are unsure what to do. Behind HMRC’s PR is an army of folk whose job it is to collect tax.

Talked to a friend this morning about their work, and in particular about how much “Pink Stuff” she had to deal with.

“What is Pink Stuff? I asked. Pink Stuff is all the paperwork, correspondence and other stuff that clogs up your day, preventing you from focussing on whats really matters. Pink Stuff might be administrative or financial tasks, reading general information, or just junk mail, but it demands that you deal with it.

How much time though? Do you ever sit back and wonder where the morning has gone? Maybe you are dealing with more Pink Stuff than you think…

If you are spending too much on the Pink Stuff, maybe you need someone to help look after it, so you can focus on the important stuff.