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Successful business leaders have all the information they need to make good decisions…Do You?
Friday, March 24, 2017
Wednesday, March 22, 2017
By now you’ll have heard the screeching tyres and smelled the burning rubber all the way from Downing Street, following Philip Hammond’s spectacular U-turn on plans to increase National Insurance contributions for the self-employed.
Half the media attention focused on the fact he broke a Conservative manifesto pledge.
I don’t know much about that; I’m not a political creature. The other half seemed to claim the U-turn as a victory for the small business owner.
Not if you look at the bigger picture.
If you ask me, the commentators have all missed a much bigger issue: What is the government actually doing for entrepreneurs?
Now, I know that this isn’t my usual blog topic, but please bear with me.
When I think of small business owners, one word comes to mind: Risk. These good people take on a huge personal risk financially, and even physically and mentally. Setting up and running a business involves huge amounts of work, and the stress can be debilitating.
Yet SMEs are the backbone of our economy. We need entrepreneurs to create jobs and shoulder risks in order to create a productive and diverse financial ecosystem.
We’d be sunk without them.
So what does the Government offer as incentive to start a business? ...Very little.
The biggest tax incentive you get is Entrepreneurs Relief, a concession where the first £10 million of gains is taxed at only 10% (rather than the normal potential 28%).
That’s all well and good when you’ve slogged for 20 or 30 years - possibly longer - and can look forward to giving the Government “only” 10%!
Day-to-day, however? You get very little.
A long-standing client of ours has run a successful business for many years. Thanks to some careful tax planning, he has now built up huge cash reserves. If he was to withdraw them, he’d be paying up to 50% in tax. If he waits and sells the business, he would only pay 10%. In the meantime, the cash is losing real value, gaining only a small amount of interest.
It makes no sense.
If you own a Limited company, on the other hand, you can pay yourself in dividends rather than salary. In effect, you’re compensating yourself as an investor. Quite above board if the circumstances are right, and you save yourself up to 25.8% on National Insurance.
Last year, everything changed. The Chancellor changed the whole structure of the tax on dividends from a system which actually gave you a reasonable advantage to one where only your first £5,000 of dividends is taxed at zero percent. After that, you pay more tax than you did before. From April 2018, this zero-percent band plummets to £2,000.
Isn’t it clear the Government is not rewarding the hard-working entrepreneur? Do they really care?
Entrepreneurs deserve a clear allowance, concession or benefit to compensate them for risking their all to build businesses which create jobs and benefit the economy.
In reality, Westminster pays lip service to our small business owners, but it needs to wake up to the very real challenges these stalwarts of our economy face on a daily basis.
As for the media, they need to stop tallying all their petty political victories and losses, and focus on the bigger challenge here:
How do we encourage people to start businesses, instead of punishing them?
Rant over… But I’d love to hear your opinion too. Please do let me know whether or not you agree.
Wednesday, March 15, 2017
Wednesday, March 08, 2017
Tuesday, March 07, 2017
Imagine that there’s a serious flaw with the way your bank calculates your balance.
The computer keeps accurate track of all the money you have coming in. But for some reason, it just doesn’t “see” the payments you make by cheque. Those never show up on your statement. Similarly, your bank balance never takes into account any money you transfer to your spouse.
Once a year, the whole system is brought up-to-date, and at that point the balance appears correctly.
How much confidence would you have in your bank statement, every other day of the year?
Not much, right? It would be really difficult to trust a system that routinely left out some crucial facts.
Unfortunately that’s exactly what happens in many businesses - without anyone, certainly not the business owner, really noticing.
Last week I started telling you about some of the biggest accounting mistakes which routinely happen in businesses, making it impossible for you to really understand your financial position correctly.
Missing information is one of them.
All too often, your bookkeeper will only process what lands on his or her desk. They won’t pick up on things if there is no paper record.
Take payroll, for example. Perhaps they might process what employees are paid, but never take into account the tax and national insurance you’ve paid on top of that.
Equally, there is no piece of paper to show how your assets have depreciated, so this isn’t factored into your accounts – at least until your accountant gets around to it at the end of the year.
There are all sorts of other missing expenses. What if your MD spends time wining and dining a potential client, but only submits an expense claim every six months?
In the interim, your accounts will simply be wrong – sometime sseriously so. And yet, business owners very rarely question the figures they are given. They make all their decisions based on a bottom line which is skewed.
Luckily, once a year you should get your real figures, when your accountant comes along to do your annual accounts, and gives you a complete picture.
But that isn’t really good enough. You need accurate information all year long, if you are to avoid terrible mistakes.
That means that you need monthly accounts, done to the same high standard as your annual ones.
Is your bookkeeper qualified to do this?
If you’re not sure, time to start asking some difficult questions.
Whoever handles your accounts on a day-to-day basis needs to understand enough about your business to know what information they’re not getting, as well as what information is landing on their desk.
When we do our clients’ monthly accounts, for example, we work to a strict checklist. We also double - and triple-check that what your accounts say is happening matches what your bank says your position is. If not – alarm bells ring. All that should be happening regularly in your business, too.
You wouldn’t dream of accepting regular personal bank statements that weren’t accurate. Don’t accept any less for your business.
And if you would like to receive complete and accurate accounts every month please get in touch. We won’t just send you over the figures, but make sure you can use them to make the best decisions for your business, too.
Monday, March 06, 2017
You’ve just invoiced your clients for the work you did over February. It was a good month – you’ve never been so profitable!
For a long time, you’ve sworn that when you have enough cash, you’ll invest in a new piece of equipment that will push your business ahead.
Should you go ahead and buy it?
Now, obviously there are many variables here so this is a bit of an impossible question.
But I’ll give you my two cents (or rather, two pence) anyway.
Until you see that cash in the bank, you can’t count on it ever materialising.
It may look like you’re in profit, but that’s just theoretical until your clients actually pay up, and your money is safely in your account.
If that didn’t occur to you, you’re not alone.
Many business owners find it hard to internalise the difference between profit – and cash. It’s one of the main reasons companies go out of business.
Here’s how I think of it.
Profit is a number your accountants create to show how much money your business is making. It is both theoretical and subjective. People can have different opinions about just how profitable their company actually is, and there are different ways of measuring it, too.
Cash, on the other hand, is real and objective. It’s the money you have in your account at any one time…. You can always put a figure on it.
The problems start when you confuse the two.
As a business owner, you might see lots of money in your account and think it’s all there to spend.
But whoah! Hold on a second. Lots of cash doesn’t mean you have any profit.
Later in the month, you might have a lot of obligations coming down the line: Tax, wages, rent and so on. If you’ve already spent that money you won’t be able to meet those liabilities, and the very viability of your business will be threatened. Your “cash” doesn’t become “profit” until you’ve covered all your overheads.
The example I started this email off with is the polar opposite. Business is going well, you look profitable on paper. But that doesn’t mean you actually have any cash.
Ask all the businesses I’ve come across who have had to sue to get money owed to them.
And by the way, that’s a good example of a case where profit is subjective.
What if you think that the money will be easily recoverable, while your business partner has written it off as uncollectable? You might think that despite the delays in collecting your cash, you are still quite profitable. Your business partner, on the other hand, thinks your profit has disappeared.
For a long while, it really might not be clear how profitable you are, if at all.
And that really is the key. To understand how much money you’re really making, you need to take the long view.
You need to understand not just what’s in your account and on your balance sheet today, but what’s going to happen tomorrow as well: Which bills are coming in, which payments are going to materialise…. How much money you’re really going to be left with a few months down the line.
For that, you need excellent accounts, which look forward as well as back.
Over my next few blogs I’m going to show you other common accounting mistakes that business owners either make themselves, or overlook when their bookkeepers make. These can be ruinous, because they give you a skewed view of what’s really going on with your finances, and lead to bad decisions.
Sunday, March 05, 2017
I’ll tell you what drives me crazy.
This is where I let out my primal scream…..! (I’ll leave it to your imagination.)
- Creeping costs: These are little charges that get added to a bill you’ve already agreed to, just like the delivery charge above. Another example might be a supplier telling you once you were halfway through a project that an additional investment is necessary.
- Stealth price increases: All those regular expenses you pay such as electricity, gas and travel? The companies love to hike up your tariffs when you’re not looking.
- Additional costs you haven’t considered: This is your own oversight. For example, if you’re buying from outside Europe, you might forget you have to pay a duty. Similarly, if you are not organised enough to collect your goods promptly once they reach port, the port can charge you (“demurrage”).
- Suppliers passing on costs to you: One of our directors, Shirley, used to work for a Pharma company. If, when they imported their raw materials, there was a delay, they sent the materials by air freight instead of shipping them – and passed on that cost to the client.
As the business owner, ask to see all invoices from the last three months and audit them.
Do you know what money is being spent on? Do any of the sums surprise you? Who’s approving what? Are existing procedures being followed? Are there any additional costs (such as demurrage) you seem to be paying repeatedly, which can be prevented?
Then ensure that someone is held accountable for every penny you spend.
Saturday, March 04, 2017
Nowadays passengers aren’t allowed into an aircraft cockpit. But all of us can picture it: A tight space crammed full of hundreds of mysterious controls and displays, showing navigation information, engine information, speed, altitude and so on.
No pilot would fly without this information, because it enables them to make good, safe decisions. Without it, they are ‘flying blind’, and risk crashing.
That’s how I think of businesses that don’t produce management accounts every month, too.
To make the right decisions you too need hard data, telling you what’s really going on in your business. If you try to chart your course without the financial facts, you too are ‘flying blind’. You may not crash, but you’re unlikely to get where you want to, either.
As I explained last week, monthly management accounts are an internal document that do what it says on the tin: They help you manage your business better.
So what should be in them?
Every management account pack includes the basic information you’d expect to see:
Turnover, gross margins, operating profit, overheads, cash in bank, debtors and so on. But that’s not where it gets interesting…….
Every business has key facts they need to monitor to know how well their business is doing. These will be unique to you.
For example, one of our clients operates on very tight margins. If the cost of their raw materials moves even by 1%, their profit can easily be wiped out. They need to keep an extremely close eye on this, so that they can adjust accordingly.
Another client is very dependent on two large customers. One of their key objectives for this year is to increase their client base, so they are less exposed if one of their big clients decides to leave or to cut their spending. Their management accounts track what percentage of their business these two clients are worth.
What figures are crucial for your business?
Once you’ve established your KPIs, ‘dive deep’.
For example, a clients providing training courses was having issues with profitability. Initially we tracked how profitable each category of course was each month. With time, we realised that this wasn’t detailed enough. They needed to see the profitability of every single course in order to make more informed decisions.
What kind of detail would be useful for your KPIs?
Show progress over time.
Your figures are not meaningful until you can see them in context.
£200K in sales in January can be good if that’s up from £100K last January, or bad if it’s down from £300K.
Benchmark against previous results, showing progress over time. Compare, also, to where you thought you’d be – those figures are in your budget. Use charts or graphs if necessary to make the material palatable….
Your management accounts are not there to help you understand the past. They’re there to help you manage the future (although those are intertwined…).
Set out on paper what you expect to happen over the next month. What do you already know about your cash flow? What do you already know about your KPIs?
Over time, you will learn what information is useful to you, and adjust your management accounts accordingly.
When we work with a new client we start with a monthly management account template, which we tweak as we learn more about the client’s business and their challenges. Over time the accounts become ever more bespoke – and progressively more valuable.
This is the kind of information mature businesses take for granted.
If you have big ambitions for your business, but lack the financial information you need to grow strategically get in touch. With proper management accounts each month, every decision you take will be more effective.
We’d love to help you fly…
Friday, March 03, 2017
You flip through them, and note that profit is up this year, but that so are overheads.
Why have overheads gone up? Which overheads, specifically, are costing you more?
You resolve to look into what happened over the last few months (although realistically, it might take several weeks to put together a detailed picture of what exactly happened).
In the meanwhile, you are just relieved that the end-of-year accounts were completed on time, satisfying your legal obligations – and go back to work.
That, I hazard, is a best-case-scenario for most business owners, because most people don’t even read their end-of-year accounts.
The reason is very simple:
End-of-year accounts are important, but not actually useful when it comes to managing your business. They provide an overview of what happened last year, but often raise more questions than they answer, telling you what happened – but not why (“Hold on, why was March such an exception?”).
They don’t help you run your business any better.
For that, you need management accounts.
These are prepared monthly, not annually, and you don’t file them at Companies House – they are strictly for internal use, and to help you, the business owner.
Most importantly, their aim is not to provide a general overview of how you’re doing (which I consider a form of score-keeping), but to provide you with the exact information you need to tell how your business is performing, and make informed decisions about what to do next.
So what do they include? I’ll give you an in-depth picture in the next blog. But the key principle is this. Management accounts should look different for every company, because while you might need to keep a close eye on your overheads, the company next door might have particular issues with cashflow…. Or old debt… Or might be struggling to tell which of its products are profitable.
Your report should be tailored to you, giving you the financial information you need not just to understand the past, but to navigate the future.
For that you need an accountant who is interested in more than bottom-line numbers. He or she will need a clear view of how your business works, what your goals are and what issues you are facing.
When we start working with a new client, for example, we spend a lot of time getting to understand their business. Many of the owners we work with have never actually seen a really good set of management accounts, so we work with them to figure out what information will be useful to them.
This is an iterative process. Once they get their initial figures, they suddenly realise that they need to get more in-depth information in one area, and that there are other pieces of information they could use, too. Very quickly, their management accounts become indispensable!
If you’re relying on your annual accounts to give you the financial information you need, you’re running your business with one hand tied behind your back.
If you would prefer to get regular, clear financial information that will help you run your business better, hit ‘reply’ and let’s chat. We find that company owners who make decisions based on clear facts not only see their businesses grow much more strategically, but feel more in control, too.