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Wednesday, May 17, 2017
One of my friends likes to have a drink most evenings. A glass of wine with dinner or a pint in the pub is just a nice way to unwind with family and friends. But every year, there’s one exception. He always commits himself to Dry January, and for that month, he won’t even enter a pub.
Why does he do it? Because he likes to prove to himself that he doesn’t actually need a drink. That he can quit, cold-turkey, if he wants to. It proves he’s not an alcoholic.
Business debt is just like alcohol. Great in the right circumstances, but you must be sure that you’re not relying on it to get by.
Unfortunately, too many businesses do rely on it.
These businesses may even have forgotten why they originally extended their overdraft or started using invoice financing.
Since (unlike loans) these have no repayment schedules, they have never thought about how they were going to meet their obligations.
On the contrary. They continue to use these facilities until they simply become a fact of business life….. A given, not an exception…. Something they don’t even think about as unusual any more.
They use these facilities freely, and often for unsuitable things, for example to purchase large pieces of machinery.
But this is not right. These type of continuing facilities are only designed for emergencies and are not a long-term solution to any problem. They should not be used to fund long-term investments such as assets.
Borrowing must never be seen as something inevitable, and it must never become a habit. How healthy are your finances really, if that is the case? And what happens if your overdraft gets reduced or even removed?
If you have no firm plan in place for how you’re going to pay off new debt, you shouldn’t be getting into it.
This is extremely important because if you’re taking on debt in order to cover a financial emergency or gaps in your cash flow, it’s likely that you’re not great at managing your money in the first place (even if you’ve been brilliant at building up your business!).
This makes it more likely that an overdraft will become a permanent feature in your business, leading you down that rabbit hole of debt.
If your business has a nasty debt habit that you need help kicking, please get in touch. We’ll make sure you go “dry”, putting in place measures to pay off your debt – and ensuring that your finances are managed so well, you’ll never have to fall back on borrowing again.
Monday, May 15, 2017
Question: What have fast cars, beautiful women and invoices got in common?
Answer: If they’re not handled correctly you won’t get very far!
You’d be amazed how many companies do a great job winning contracts and delivering products but let themselves down when it comes to the invoicing.
So, here’s our top 3 invoice essentials that will ensure you get paid first.
1. The devils in the detail
- The obvious ones like business name, trading name, address, company registration number, registered office address and contact telephone numbers. Top Tip: Your company letterhead is a great starting place for your invoice template.
- If you’re VAT registered, you must show your VAT registration number and the VAT rate being charged. Show the date and have a unique invoice number. It should show the Net total, VAT total and Grand Total.
- Have a clear description of what the expenditure was for and include references useful to your customer such as order numbers or part numbers. Make it easy for them to identify what you are charging them for.
- Show your payment terms – 30 days, immediately upon presentation, 60 days
2. Make it easy peasey lemon squeezey
- Make it REALLY easy to pay you. It’s amazing how many companies don’t put their bank details on their invoice. Include as many ways to pay you as possible, BACS is one of the quickest and easiest but make sure you show your correct bank account. Top Tip: If you change your bank it’s always good to send an announcement around to those companies that pay you regularly, they may not notice a subtle change to a regular invoice and may try to pay into an old account.
- Some companies show details of what you should do if you have queries and perhaps impose a time limit to deal with queries when the product is supplied.
- Make sure everyone knows your terms and conditions of sale.
- Take the time and trouble to find out exactly where your invoice should be sent to ensure they are properly processed and go into your customers payables system. Don’t just assume it’s the place the goods or services were supplied. Large corporates are notoriously bad at paying if you don’t follow the system.
Wednesday, May 10, 2017
“What are these three loans for?”
“Oh, we needed them to tide us over. Money just wasn’t coming in fast enough. No big deal.”
I was taking a first look at the accounts of a new client. Their balance sheet wasn’t in great shape, but at first glance there wasn’t anything too disastrous either. Then I noticed the three loans, which had been taken out roughly once a year for the past three years.
It was an immediate alarm bell – and should have been for the client, as well, alerting them that there was a serious problem with their finances. But it wasn’t.
As we looked closer at their books, we saw that even though they were bringing in a lot of new clients, they had severe cash flow issues. They just weren’t getting paid fast enough to cover their expenses.
Each time, when they thought they were going to run out of money, they used a loan as a stopgap measure, allowing them to continue functioning smoothly for another few months. Then the old cash flow issues reasserted themselves and they took out a new loan.
It was a vicious cycle which they had no intention of getting out of, because the loans created the illusion that all was well. In reality, not only were the underlying financial issues still there, but they were burdening themselves with piles of debt.
Recently I’ve been talking about one of the hidden dangers of fast growth, which is that it is very expensive. One way to overcome that is to shorten your cash cycle, as I explained last week.
But sometimes that’s just not enough. There may come a point where you need to finance your growth in other ways, by borrowing money. This could either come from a bank, or (the more modern way of doing things….) peer-to-peer lenders or some other type of loan.This is not inherently a bad thing. Every engine needs oil.
But there is a big difference between borrowing to grow faster, and borrowing to stop yourself going under.
If you are performing well and are profitable, and want to borrow to give your company the tools that set it up for future success – for example, paying for essential new equipment or larger premises that allow you to process more orders, or putting the right staff in place – that’s great.
The loan will actively build your business, and the money you’re generating can be used to pay off the debt.
But that can never happen if you're borrowing to try and cover a loss, or cope with financial problems such as cash flow. That’s a sticking plaster solution which can only get you into more trouble, as in the case I told you about earlier.
I do understand why companies take on debt for the wrong reasons.
When you are growing fast and things feel like they’re moving in the right direction, it’s so tempting to believe that you just need a little bit of cash to help out, and that everything will sort itself out in a few months’ time. Sometimes business owners are so confident in the future of their business that they are even willing to prop it up with a personal loan, which is easier to get.
It could be called an optimistic approach – but it’s misguided. In a few months’ time, chances are that all those recurrent, underlying financial challenges will still be there.The only real solution is to put in place proper financial planning and management.
That’s what we did for the client I mentioned before. With good cash flow management, they could stop using borrowed cash to plug gaps, and instead use it to improve their position, and even start paying off their debts.
I compared debt to oil before, but it’s like fire too. Used carelessly it becomes destructive and uncontrollable, but used wisely it can be an extremely useful tool.
If you need to borrow (for wise reasons!) we can help you find competitive funding. But equally, if you think you need a loan “just to tide you over”, we can help you with that too. Just get in touch and let’s talk about how we can get your finances in order – so you never need loans for the wrong reasons again.
Wednesday, May 03, 2017
Now, all those late and sleepless nights, all the time away from your family, all those meetings, and all the fights, mistakes and tears – they’re all starting to pay off.
Not only have you just hired the team of your dreams, you’ve just walked out of a meeting with a potential client who could push your business ahead even faster than before – perhaps adding 10% to your revenue single-handedly. That new sports car is looking more likely now…..
It’s a dream come true, right?
Not so fast.
Here’s a little secret which many business owners only recognise when it’s too late.
The moment when your business really takes off is a moment of grave danger. That is when your finances risk spiralling completely out of control – without you even noticing.
Growth is great. But financing growth, especially rapid growth, can bring its own problems.
Your expenses suddenly multiply: Think of all those new staff members you have to bring on, the additional raw materials you need to pay for, all the new equipment you must invest in, and the new office space you need. It adds up fast.
Your profits? They often they lag behind.
It can really be a case of “be careful what you wished for”, if the result is that you struggle financially – and even put your business in danger – because you’re just not bringing in money fast enough to cover your expenses.
So what to do?
There are, of course, many ways to finance growth – and most people’s first instinct is to make a bee line to their bank manager.
But I want to suggest one different, cheaper way.
It goes back to the idea I introduced in my last email, of knowing your cash cycle. As I explained last week, a cash cycle is the time it takes for money you spend today on things like raw materials, inventory or staff to come back into your business, when customers pay for your product or service (along with, hopefully, a healthy mark-up!).
To achieve financial stability while you’re growing, it’s vital that you shorten that cash cycle, keeping the gap between when you spend money and when get paid as small as possible, so there’s always cash on hand.
Perhaps the most obvious route is to incentivise your customers to pay you sooner, so that money comes into your account faster.
You can give a small discount if an invoice is paid in full within a short, defined period.
If you're carrying out a big project it may also be possible to get paid in stages rather than at final delivery, or to get an up-front deposit. That way you are not waiting for the full amount for long, easing your cash flow situation.
You will be surprised how many companies are happy to pay an upfront or staggered fee. (And by the way, if getting clients to pay you on time – let alone early – is a struggle, make sure you’ve downloaded our guide to getting them to pay you faster.)
At the other end of the cash cycle, you can try and keep money that’s in your account there a little longer. Talk to your suppliers about whether you can negotiate longer payment terms. You may have to give something in return – for example, perhaps be more flexible with your delivery times – so think creatively.
And then you can make use of invoice finance (or factoring). Factors take outstanding customer invoices off your hands – for a percentage fee – allowing you to access their value before the customer has paid them.
Of course, in the long-term a profitable business is more likely to generate enough money to fill its cash cycle. So if you have cash flow problems, the first thing is to make sure your business is profitable – it’s surprising how many businesses are happily growing without realising they’re actually losing money.
But when you shorten your cash cycle enough, your cash flow problems alleviate considerably. Your growth will be a source of pleasure and excitement – not a source of financial stress!
If you’re growing fast but having problems managing your cash, please get in touch. We’d love to help you.
Thursday, April 27, 2017
A regular reader of my blogs recently told me I’m always going on about forecasting cash flow.
I hold my hands up – guilty as charged. I don’t think you can overstate the importance of having a clear view of how much money there is coming in and out of the business for the foreseeable future.
When you are never sure what your financial situation is going to be in a month or two, it’s like living on the edge of a precipice. You never know what’s coming up – and when you’re going to stumble over the edge, and run out of cash. Having to scramble around to pay your bills, worrying about the future of your business and your own income is nobody’s idea of fun.
When you can see ahead far enough, though, you can predict trouble points ahead before they hit you, so that you avoid the financial crises that take up all your time and threaten your business (and sanity….).
You can also answer vital questions like:
“Are we going to have enough money to buy new equipment in June?”
“Will we finally be able to afford a new member of staff next month?”
“How much do we have to invest in training for our staff this summer?”
Being able to plan ahead allows you to manage your business more efficiently, grow faster – and feel firmly in control.
But how far ahead should you forecast?
Well, that depends :)
The answer is different for each business, and depends on your ‘cash cycle’ – a key metric which goes hand-in-hand with your cash flow, but which most business owners know very little about.
Your cash cycle is the time it takes for a pound you spend today to come back into your business (along with any mark-up).
Take a company which buys raw materials and turns them into something else in their factory – a process which might take a few weeks. The finished product might sit in stock for another week before a customer comes along and buys it, and then they might pay the invoice two months later.
If it takes five months, on average, from the moment it buys the raw material to get that invoice paid, that’s its cash cycle.
The length can vary hugely between businesses. For example, a farmer has to wait months before he sees the money he’s spent on carrot seeds and fertiliser come back to him after harvesting. But the greengrocer who buys those carrots in the market one morning will probably have sold them by the end of the day – one of the shortest cash cycles there is.
You need to be able to see that entire period – whatever it is – to make sure you have enough money to stay afloat until that cash you spent comes back, or you will run into financial difficulties. If your cash flow report doesn’t do that (or if you don’t have one at all), it’s risky.
So now that we’ve cleared that up, how long is your cash cycle? Are you the farmer… or the grocer?
And are you able to forecast your cash flow through that entire period?
The answer has to be “yes” in order to answer all those critical “Will we have enough money?” questions with confidence – and avoid falling over that precipice.
We update our clients’ cash flow forecast every single day, so that they always know exactly where they stand financially, can plan responsibly (with us) and never have to worry about nasty financial surprises. They are in control of their cash – it doesn’t control them.If cash flow is an issue you struggle with, let’s talk about how we can give you those advantages, too.
PS. I’ve been having some fun recently producing a series of videos expanding on some of the ideas in my blogs. Yes, accounting and fun can go together :) Check out my latest below which is about the cash cycle…. Like you’ve never seen it before.
Wednesday, April 26, 2017
Several years ago I was involved in the sale of a business, which involved a very lengthy due diligence process.
Why did it take so long? Because the accountants were desperate to find evidence of financial weakness they could use to push the price down.
They spent weeks examining every financial record in detail, but they couldn’t uncover any ammunition at all.
Eventually the sale went through at the full price, and the buyer asked us to stay on – ‘to keep up the good work’ – as we were responsible for managing this company’s accounts.
But I’m not mentioning this just because it’s nice to recount success stories ;-)No, it’s really because I want to talk about the importance of good governance if you ever want to sell your business. This is no quick-fix solution just before a sale, but more of a long-term investment you need to think about years before.
When I decided to sell my last car, I made sure it had a good deep clean to get it ready. But much more important was the full service history from a main dealer, and the annual MOT certificates showing that the mileage was genuine and that the car had been roadworthy and well-taken care of over several years.
It’s very similar with a business. Just instead of an MOT and service history, you need to show great financial records.
You need to be able to demonstrate you’ve been running a tight ship, with no sinister financial details lurking in the background. That means no personal assets on the balance sheet, no unpaid debts, and no old stock or machinery that should have been sold off….
…No funny numbers to cover up your true financial position, and absolutely no mistakes in your accounts.
Your records need to prove that whenever a third party has looked into your business, you’ve come out smelling of roses. So you need to be ready at all times for an audit report, or a VAT or PAYE inspection, with full records that are easy to access.
Consistency, or your ability to demonstrate that you have delivered strong results year-on-year, is a very important element of all this. Any buyer will want to think they can continue where you’ve left off.
Of course, the other thing any buyer will want is a keen price. And if their due diligence throws up anything even remotely suspect, they’ll be expecting a reduction – assuming they don’t walk away from the deal entirely.
This is crucial if you’re even considering selling your business in the next few years (and equally crucial if you “just” want a company that’s run professionally).
Tuesday, April 25, 2017
Several years ago I was involved in a sale which almost fell apart, because the company had one shareholder who was dead against the deal.
He didn’t care that he was outnumbered three-to-one. He saw himself as the responsible one, holding out against a short-term deal to make a quick buck.
The others had all been courting this buyer for some time, working towards a sale for a couple of years. But they’d never really talked to the fourth shareholder about their plans.
Perhaps that wasn’t surprising, given that he hadn’t been involved in the business for a number of years. But it was a mistake.
If you have multiple owners in your business, you really need to know – way ahead – what will happen if shareholders have differing views about selling up.
‘Rogue shareholders’ can cause huge problems, sometimes by refusing to sell, and other times by selling to the wrong party – a rival company for example. Or they may just threaten to sell, trying to gain the upper hand in a dispute.
It’s essential that you’re covered by a shareholders’ agreement – and that you draw one up early on.
A shareholder’s agreement is a binding contract between the co-owners of a business, outlining how it’s run, and also what happens if anyone decides to sell their shares (a sort of prenuptial agreement!).
It can control when owners are allowed to sell their shares, who can buy them, and what price will be paid. Some shareholders’ agreements will state that shares can only be sold when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies.
Others allow more freedom – but still lay down clear processes to follow.
For example, there’s another company we work with which has two owners, one of whom has decided to retire early, in his 50s, and sell his share of the business.
Because they have a shareholder’s agreement, there is already a defined path to let that happen smoothly.
All the owners of a business want to profit from it. But if you don’t think about exits right from the beginning, disputes will severely damage the very asset you all need to build.
A shareholder’s agreement is just one of the pieces you need in place if you ever intend to sell your business. If you want to get your company ready to sell, please feel free to get in touch and let’s talk about how we can help.