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, April 27, 2017

Cash Cycle: The Farmer vs the Grocer...Which Are You?

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

No One Will Buy Your Company Without This

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

Rogue Shareholders

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.

Monday, April 24, 2017

Is Your Business Too Dependent On You?

“It was the most stressful period of my life – I could not believe what they were doing with my business!”

I’ve seen several cases like this former client of mine: Entrepreneurs who are asked to stay on when they sell their business to a new owner.

It always ends badly.

The problem is that the owner has sold too early, when they’re still intimately involved with their company, and when their company depends on their skills and knowledge to function and thrive.

It’s not that they can’t accept suddenly having a boss, it’s that they can’t bear someone else taking decisions about the company they founded.

To sell your business, you need to make yourself irrelevant to it. If you don’t, people aren’t buying the business – they’re buying you.

And let’s face it. That is a substantially less attractive proposition to a prospective buyer than a company that works like clockwork, regardless of whether the former owner is there or not.

It’s also not great for you, either, for the reason outlined above.

The stage where your business is dependent on you, the owner, is called ‘Infancy’.

Michael Gerber, author of the E-Myth, has an interesting idea on how to help your company emerge from that state.

He says that you should try to build a business that you could franchise and replicate.
It doesn’t matter whether you have any interest in franchising per se, it’s simply a way to help you focus on building a business which isn’t dependent on any individual. Instead, you put in place systems and processes which anyone can use and execute.

That way, when the time comes, you can sell the systems and processes, and just step away.

A good example is financial systems, like the ones we put in place. You need to ensure that your company has smooth billing and credit control, outstanding cash management, the right accounting platforms, sensible budgets and risk management in place.

That way, your accounts are managed exactly how you want them to be, and even if your bookkeeper or accountant resigns tomorrow, someone else can pick up exactly where they left off.

Building these systems and processes does not happen overnight. It’s a long-term project, so if you have any ambition to sell your business one day, you need to get started now. (Systems will also help your business run more smoothly, even if you have no intention of ever selling it!)

There was some university research published this year which found that when male entrepreneurs looked at the logo of their company, they experienced the same surge of pride, hope and attachment as a father when he looks at photographs of his children.

No wonder we call the stages of a company ‘infancy’, ‘adolescence’ and ‘maturity’! And no wonder that man I mentioned earlier was so upset when somebody else started taking decisions about his ‘baby’…

If you want help systematising your accounts, get in touch. Even if you’re nowhere near selling your business, this is a crucial step in achieving a more professionally run company.

Friday, April 21, 2017

Thinking of Selling Your Business?

Thinking ahead several years, what’s your long-term plan for your business?

There are many possibilities, of course, but the majority of people are happy owning a ‘lifestyle business’. They’re not really interested in growing their company aggressively. Their main priorities are generating a comfortable income and having flexibility and control over their time.

Others see themselves passing it on to family members when they eventually retire.

Then there are those who plan to sell up some time down the line. They want to build up their business to the point where it is an attractive purchase, make their profit – and then either retire happily on the proceeds, or start the entire exercise again with another company…

If you think that is even a vague possibility, you need to start planning now.

Even if you’re not yet ready for a detailed exit plan, it’s never too early to conjure up a clear idea about where your business will be when you sell.

You see, with that vision in mind, you can systematically build your company the right way, so that when the time is right, you can exit.

If you allow your company to develop more organically, you may find that your company is not attractive to a buyer when you decide it’s time to sell up, and that you have several years of work to do to make it ‘fit for sale’.

Things might take you in a completely differently direction – no-one can predict future, and this isn’t about being rigid in your approach. But like everything in business, you should begin with an end in mind.

So visualise what your business will look like when you sell it. How big will it be, how many locations will it have, what management structure will it have in place, and how much money will it be making? Bearing all that in mind, what might be your target price?

When you approach an agent to sell your business, their first question will be, “Who might buy it?” And that’s the most important part of your vision – to build a company that is attractive to potential buyers.

There are three different categories of people or companies who might be interested. First of all, there are those already in your market – probably a competitor or perhaps your own management. Then there are passive investors, who would continue to run your business as it is now.

Finally, there are companies who want to expand, perhaps doing something aligned to you but not competing with you. For instance, if you make plastic widgets, you might be bought by another company in your chain – a plastics manufacturer say, or a widget distributor.

The way you develop your business might change if you know you’re aiming to sell to a competitor, as opposed to one of your current suppliers, because their needs will be different.

Here at Insight Associates, we get involved in any number of exit plans, as well as the sales that follow.

None of them come out of the blue. All successful sales take place on the back of decisions about the strategic direction of the business which were made long, long before.

Very often, we were involved there as well, because to build your business the right way you need to ensure you have the funding in place for the necessary steps, and that your money is being spent in the most sensible way. As your outsourced finance department, that is the kind of strategic insight you get from us.

So if you don’t already have a clear idea of how you want the sale of your business to work, it’s time you did.

And if you think you could use some help either with a sale, or getting your company into shape so that it is sellable,
let’s talk.

Insight Associates, Insight House, Riverside Business Park, Stoney Common Road, Stansted Mountfitchet, Essex, CM24 8PL, UK
Tel: +44 (0)1279 647447 Fax: +44 (0)1279 814512
Insight Associates is a trading name of Financial Catalysts Limited. Registered in England and Wales Number: 5670047. Registered Office as above. Disclaimer | Cookies