Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

Successful business leaders have all the information they need to make good decisions…Do You?

Thursday, August 17, 2017

When to spend your business’s spare cash

When Thelma and I were first married, we were both earning good salaries. We put some money aside each month, and soon we were able to move from our maisonette straight into a big family house. 

We missed out the stepping stone of buying a smaller house first, and it stretched us financially. But we felt confident we could do it.  

We were both in our 20s, and the alternative was to spend on amazing holidays, eating out regularly and partying. It would have been fun, but we preferred to take a long-term view.

I sometimes think about the choices we made then when I’m talking to clients about what they should do with any spare cash they have in their business. If you’re profitable, it’s a decision you’ll have to take sooner or later. 

The choice is whether to take all or some of it out of the business to spend on yourself and your family, or leave it all in the business and invest it right back in. 

After a good year, it can be tempting to take out money out of your business to use personally – and that’s not necessarily the wrong choice. Perhaps you need to take money out of the business to move house because of a growing family. Or do up your home – often a wise investment. Everybody has important priorities.

But you should never, ever do it without first gaining a proper understanding of what funding your business will need over the next few years. It would be a terrible mistake to drain your business of money it needs to grow (and make you even more money….). 

“Spare” cash must really be spare – not money your business needs.

The key is good financial planning. If you know where business is heading and what kind of investment you are going to need to get it there, what to do with your spare cash will be decided for you. 

There is another argument for leaving the money in your business. Not only will leaving money in place make the company stronger – it will make it look stronger, too, when customers or suppliers do credit checks. 

Credit companies want to see the value of the business increasing, and that means they want to see cash and resources growing. If you take out all your profit, from a financial point of view it’ll be as if the company hasn’t made any progress from one year to the next. 

In a personal context, everyone agrees it’s better to put some money aside if possible. It’s the same for your business. You will be more comfortable knowing that there is some cash in the bank to cover your business in the case of emergency, or to take advantage of opportunities that arise. 

So try and act strategically. 

It was certainly the right approach with our house, all those years ago. The temptation to spend the money on the ‘here and now’ was massive, but 30 years down the line, our investment paid off. We’re still in the same house.

And with the kids having flown the nest we’ve now got some spare cash again. 

If you want help determining what kind of cash your business will need to grow over the next few years, let’s talk. We can help you set clear goals for your business, and create a realistic budget to achieve them. 

You will know exactly how much money you can take out of the business for yourself and for your family, and how much you need to leave in your business to make sure it grows…

Having your financial cake – and eating it too

I know a business which lost 60% of its turnover in a year. It sounds calamitous, but it’d been running very profitably for 15 years, and most of the value it had built up was still there as cash.

The owner had never had to make any big investments in his personal life, so he just paid himself a salary – a perfectly decent one, but not large. All the ‘super-profits’ which his business was making over all those years were just left sitting in the company. 

If and when he comes to sell it, its value will be significant – despite the recent downturn in the business’s fortunes.

Keeping that much money in your business isn’t a route I’d recommend to everyone. But it does illustrate the choice you have, if you are intending to exit your business one day.

You can have the cash now, as you’re building the business; or you can have the cash later, when you sell it. You can’t have both.

It’s perfectly reasonable to want the cash now, and pay yourself a massive salary or dividends each year. It won’t necessarily kill your business: A successful company will keep on creating value.

But you have to remember that any cash you take out now won’t be there when you come to sell it, so the business will be worth less at that stage. The value that the business has created over the full term will be more or less the same, it’s just that you’ll have taken some of that value out early. 

If you were relying on a humungous payday when you sell your company to fund your retirement, that won’t happen.

If, on the other hand, you want that final sale to be as large as possible, it’s better to take a smaller salary as you’re growing the business. Many people take very modest salaries when they’re starting up, while later their pay may be more in line with what they’d expect as an employee. (Perhaps a well-paid employee…)

Anything above that might be called super-earnings.

When I have conversations with clients thinking about taking super-earnings, I try and make sure they have solid reasons. What are they planning to do with the extra money? 

There’s nothing wrong with deciding to benefit from your business’s extra cash as you go along. But you have to remember: there will be consequences when you to come to sell.
It all depends on your long-term priorities and strategy (and of course if you have several owners all with different strategies, it will be an extremely complex decision!). 

The million-dollar questions are: 
     What’s your big plan? 
     What do you really want out of your business, now and in the future? 
     How much value do you need in your business, when you sell it?

Just remember, you can’t have your cake and eat it too.

If you would like help figuring out the long-term plan for your business, and ensuring that it fits your financial needs, hit ‘reply’ and let’s talk.

A tale of two purchases

Recently I mentioned that companies need to be very agile because, in our fast-paced society, opportunities can present themselves very suddenly. 

Here’s a tale of two purchases I was recently involved in.

In the first case, the competitor of a client of ours went into administration, and was looking for a buyer. In cases like that, the sale is likely to happen very fast.

Our client understood that this was a brilliant opportunity to make a good purchase at a good price. 

It was a big decision, but they had decent cash reserves, and would only be risking 20%. 
They were able to act quickly and secure the deal they wanted.

In the second case, I saw a similar story from the other side. This time, it was one of our clients that was looking to sell off part of their own business. 

I was brokering a deal with a larger competitor, a company which was substantially indebted. And that meant that when they went to the bank to borrow the money they needed, the bank said no – and the deal was off.

Why was one company able to take advantage of the opportunity which fell into its lap, while the other company was not?

Simple. The former had spare cash, the latter didn’t. 

It sounds obvious, but just like you need savings in your private life, your business needs savings too.

It can be crucial in exploiting all kinds of opportunities – not just buying companies. There might be a chance to go into a new market for instance, or buy stock at a discounted price.

And if it’s not an opportunity which comes your way but a threat or a disaster, that cash can be the cushion in your system. You need to put money away for that rainy day. 

Now, you may be thinking: “But we don’t have any spare cash!” or (if you’re the business owner), “Any spare cash we have is going straight into my pocket…..”

It’s important to realise that having cash doesn’t necessarily mean having money in the bank. Cash can also mean arranging ready access to credit lines. 

That credit doesn’t have to come from a bank or whoever’s financing your business. It could be from, say, factoring or crowd funding. But wherever it comes from, you should make sure it’s available for when you need it. 

If you already have access to debt (hopefully for a good reason, to invest in your company’s future – not to prop it up when it fails!), keep some powder dry. So if you really need a £0.5m facility, get double that, so you can have some room to manoeuvre when opportunities present themselves.

I’ve seen too many owners think that because their business is doing well they don’t need to think about putting aside spare cash. But of course it’s much easier to set up a credit line when you're thriving, rather than rushing to the bank at the last minute, cap-in-hand. 

Having the credit doesn’t mean you have to use the money. It’s just good financial management to have access to cash when you really need it.

If that’s something you’d like in place let’s talk. Whether you already have spare cash and need to work out the best thing to do with it, or whether you want to manage your finances better so that spare cash becomes available, we’d be delighted to help.

Thursday, July 20, 2017

The Age of Immediacy

It’s been an amazing couple of weeks. As a couple of eagle-eyed readers who know me personally noted after my last email, I’ve just returned from holiday.

My last decent break was about 10 years ago, when I went with the family for 3½ weeks to visit friends in Australia. This time, my wife Thelma and I conducted a ‘Great North Tour’ right here in England. It was closer to home, but just as rewarding.

Highlights included two visits to Beamish, an open-air recreation of a real, working Victorian town, complete with shops, houses and colliery, and a visit to Lindisfarne, also known as the ‘Holy Island’. That’s a place just steeped in ancient wisdoms, with the ruins of a monastery that dates back 1,400 years. My wife, who’s into alternative healing and spirituality, felt a real connection.

And I felt a real connection when we ended our tour visiting Talyllyn Railway in Wales, where I’m the railway CFO. For a committed railway buff like me that was one of the holiday’s biggest highlights!

It’s been very relaxing and a complete change of pace from my normal, hectic daily routine, running a thriving business.

What struck us again and again during this very historically-themed holiday is just how busy we all are compared to the relatively sedate pace of life experienced by most people historically.

I’m not just talking about the monks at Holy Island, but even the Victorians of Beamish. They may have thought that their life was unbelievably fast-paced following the Industrial Revolution, but compared to 2017, it really wasn’t. News could still take time to travel. It could still take days to get hold of someone. Most business was probably still conducted quite locally.

Even the 1980s were slow compared to today, without the Internet, mobile phones and 24-hour cable news.

This is the age of immediacy, and for business owners, this means that we are under an unprecedented amount of pressure to be on-the-ball.

Market conditions can change at the blink of an eye. Your company’s financial picture, your customers and your suppliers can all change radically without much warning. It is taken for granted that we are always available, answering messages immediately and taking important decisions at short notice (which explains why so many business owners find it difficult to take a real holiday…).

This means that we can’t run our businesses in the laissez-faire manner business owners might have been able to get away with several decades ago. We must be far more agile.

We need the right information at our fingertips. For example, in the past it might have been enough to have annual accounts once a year, but now our financial information has to be almost continuously updated. We need to know our exact financial position at all times.

We need to have the right systems in place so we can avoid threats and take advantage of opportunities when they appear out of the blue. It will be much more difficult to change tack if the exchange rate suddenly changes… or buy a competitor quickly… if you’re not sure what your costs really are, what your financial position really is, or what your long-term strategy is.

We need to build businesses that take strategic, well-thought decisions – because no one has time for mistakes any more.

That is exactly what we create for our clients by giving them top-notch financial management. With clear financial information and great financial planning, it becomes much easier to steer your company through these demanding times.

So if you feel that your financial management is holding you back then let’s chat.

It might take me a little longer than usual to get back to you as I'm just back from holiday - but let's face it, you'll still hear back from me within an hour or two. All par for the course in our fast-moving world...

Wednesday, July 19, 2017

Don’t mention the war

“Don’t mention the war!”

It’s a sentence that any Brit of a certain generation (mine) will immediately recognise – and chortle at. 

It comes from the classic episode of Fawlty Towers, where hotel owner Basil is warned not to mention the war to his German guests – and of course, can’t help hinting at it at every opportunity.

You can watch the classic clip here:

The point, of course, is that sometimes you just can’t help saying the very worst thing… You may even feel a compulsion to do so.

I was thinking about that recently, after writing my last few emails about how to raise your prices.

Because there’s a bit of a paradox at play here.

You see, if you are determined to charge what you’re worth, price is the very last thing you should discuss with potential clients. In fact, even if you’re not ready to raise your prices yet, you need to move the conversation away from price – right now.

For many businesses, pricing is front and centre of their marketing. “Best value-for-money”…. “Reasonably priced”….. “No one will beat us on price”.

They believe (mistakenly) that price differentiates them.

The problem is that when you put so much emphasis on price, that’s exactly what your customers will focus on, too. They’ll start asking you to justify what you’re charging and try and bargain you down.

You can’t win that way.  No matter what you’re charging, there will always be someone cheaper, who seems more reasonable or who seems to offer more for less. Often they’re just a click away online.

Focusing on price makes it virtually impossible to raise your prices, because as soon as you do, you need to explain yourself.

So what should you focus on instead? 

The quality of your service and the value you provide.

If you can make your prospects believe that you will solve their biggest problems and improve their lives, you’ll find they will be much less price-sensitive than they would otherwise.

Take Rolex for example. You’ll never see pricing mentioned on their website. All the focus is on the quality of the watches and the feeling of luxury you’ll get when you put on one of those beauties. People will pay enormous amounts for that.

But you don’t have to be a luxury brand with very wealthy customers for this approach to work.

I’m heavily involved in Talyllyn Railway, a historic narrow-gauge railway in the Welsh countryside. Many of the people who ride the train are young families, who are comparing our price to those of other local tourist attractions.

By that count, we are certainly not the cheapest day out. But the railway is loads of fun and can provide hours of entertainment for young children.

Parents will pay quite a bit to keep their children amused! 

Raising your prices, therefore, is as much a marketing challenge as anything else. 

Make sure you are providing a quality service for the top of the market – not the bottom, where price really does matter – and then talk about the incredible value that you provide.

Just don’t mention the war cost….

Friday, July 14, 2017

Who's Afraid of Losing Customers

Last month, my sister-in-law was looking for some workmen to move a partition wall in her cottage.

After getting her first quote, she phoned my wife in frustration.

“You’ll never guess what they quoted…. I don’t know how they could justify asking so much money for such a small job!”

Here’s what I guess probably happened.

The tradesman didn’t really want the job, which was probably more trouble than it was worth for him.

So he deliberately priced himself very high, to make sure that if he did get the job, it would be really profitable. And if he didn’t get the job, it was a lucky escape.

For him it was win-win.

There’s a lesson in there for the rest of us business owners, no matter what type of business we run.

You must be prepared to lose prospects – and even existing clients – if they are not worth your while.

It’s not as easy as it sounds. Over the past couple of weeks, I’ve sent out several emails about how much more profitable you would be, if you only raised your prices, even by a small amount.

Whenever I mention this, the next question always tends to be: “But what about the clients we’d lose…..?”

The fear is that raising prices will harm you. It’s usually misplaced, though.

Every single business has at least a small number of customers it would be better off without. These are the customers who are worth least to you, and who in most cases are not actually profitable once you’ve actually looked into the figures.

Think about the legacy clients you have who are still paying what you quoted them several years back – although your pricing structure has completely changed for new clients……

The clients who take up inordinate amounts of your time, time which you are not fully compensated for…..

Clients for whom you chronically over-deliver, for whatever reason - cutting away your margins.

The truth is that these are usually the clients that you lose when you raise your prices.

In many cases, the honour of having these companies as clients is actually costing you money (!). In other cases, they are taking up valuable time and effort that could be put to better use, servicing other, more profitable clients or developing your own business.

Raising prices is actually a very good way to get rid of this unprofitable underbelly of your business.

The additional revenue you bring in from the clients who do stay with you should be more than enough to compensate for those who go. I actually can’t think of any business we’ve worked with which has raised their prices, and lost out financially – even when they have lost clients.

Like I said last week, if you are worried, you don’t need to raise prices across the board to start with. Test the waters by raising prices for those clients you wouldn’t mind getting rid of, or for prospects that you are actually not keen on.

You may find that once you’re charging them more, they become more palatable :)

And if you would like help figuring out the correct pricing for your products or services, and raising prices in a sensible way, let’s talk.  We’d be delighted to help you become more profitable.

Thursday, July 13, 2017

A small tweak that gets you big results

A business owner I know was struggling with his time management.

He felt that his days were taken up with long, dreary meetings, leaving him with very little time for productive work. Sometimes he held so many back-to-back meetings that he didn’t have time to eat, catch his breath or really absorb anything that had been discussed.

It felt exhausting and unsustainable.

So a couple of years ago, he instituted two changes.

First of all, he decided that he wasn’t going to hold any meetings on a Thursday. Ever. And second of all, he stopped allowing people to book 60-minute meetings with him. From now on, the longest meeting he would hold would be 45 minutes.

The result? He now has valuable time to work uninterruptedly, with a clear head, and when he does have back-to-back meetings, he has some breathing space in between. He is much more productive and relaxed at work.

The changes he made were really very tiny, in the scheme of things. But they had out-of-proportion results.

In business, we very often think that in order to have a big impact, we need to make big changes to the way we work. That is not always true.

Often, small changes can be revolutionary.

According to a 2009 study, when hospitals used a checklist before surgery, the death rate dropped by 40%.

That same year, HMRC managed to significantly increase the overdue taxes they collected compared to the previous year, simply by adding one line to the letter they sent out, telling recipients that most other people were paying their taxes. (That’s social pressure for you.)

And we know from our own experience that when you make it easy for employees to record their expenses, for example through a mobile app, your accounts become more accurate.

It’s a similar story when it comes to changing what you charge.

Raising your prices is by far the quickest way to become more profitable. Yet many companies resist, preferring to spend months and years trying to find ways to cut their costs, which is a much more difficult route.

The reason? They imagine that to seriously impact their profitability, they need to raise their prices by 20%, 30%, 40%, and are afraid of a rebellion from their customers.

It’s not true, though.

Very often, even a tiny change in your prices will have an out-of-proportion impact on your profitability.

Let’s do the maths together.

Say that you sold a £100 product, of which £10 was profit.

If you raised your prices by just 5%, each sale would now bring in £105.

For the consumer, that’s just a tiny increase. They probably wouldn’t even notice it.

But your profits have jumped from £10 to £15 – that is, a 50% increase. Your expenses have not increased at all, so every penny of that extra £5 is pure profit.

Now imagine you applied that across the board. A 50% jump in profits, year-on-year, wouldn’t look too bad in your year-end accounts, would it?

Now, obviously the ‘real’ maths, when applied to your business, will be more complex than that. But the principle remains the same: You do not have to raise your prices by a frightening amount in order to significantly impact your bottom line. A small rise will make a big difference.

If you’re still afraid, why not test a price rise with your least profitable customer, or one product line. See what happens….

And of course, if you would like help determining the best pricing structure for your business, let's talk. Making your business more profitable is what we are all about.

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