SME | FSBA - Finance Solutions for Companies

Deficit reduction or growth – which is the chicken and which is the egg

25/01/2012 By Mushroom Internet

Small business that get into trouble by over-borrowing, end up making no money, or even worse, making a loss because the cost of borrowing gets to be greater than their profit.

Where do they go from there?

Growth: you need money and resources for that and if there is none, you have to find it.

Deficit reduction: cost reduction is an absolute must for businesses in this position to free up some cash.

Restructuring: this is the White Knight option – someone, often a predatory acquirer, comes along who will take on the debt at a lower rate of interest – not many of those around today.

Default: for some companies going into Administration is the only option, with a pre-pack to take out the best bits and leave most of the debt behind. Shame for the the creditors, especially the tax man and the small shareholder.

So what about the National Debt?

Default – think of Greece.

Restructuring – think of the ECB and the IMF.

Deficit reduction – think of the UK and other realistic national plans to reduce government spending.

Growth: we need some or all of these to work if Government funding is to be available for growth.

So where does that leave us small business owners?

Sure, the government is doing its best to find some money, but we can’t rely on that really. It is being highly targeted, and there just ain’t much available, realistically.

So for most of us we are on our own. We have to find the resources from somewhere to grow our own businesses, and if there isn’t much cash the only thing we have is time, and making the best use of that.

Chicken or egg?

I’d argue that the egg is growth – its the future produced by the old chicken! Look after the chicken!

Posted by Peter Johnson, business growth advisor with SGBA. Contact Peter on peter.johnson@sgba.co.uk if you would like to discuss your business with an experienced advisor and fellow business owner.

Get a grip on your cash flow

24/10/2011 By Mushroom Internet

Predict and plan: work out in detail when you can expect cash to come in and plan how you will spend it. It will help you to see where you can generate extra cash to fund new projects if you are growing, or even pay off old creditors if you are stressed.

While this applies whatever the size of business, it is particularly critical if you are a micro businesses or a small businesses with significant order-to-ship lead times, buying materials and selling products on credit terms, when you will have a significant working capital – cash – requirement to fund the work in process.

On this article we’ll show you how to put together a cash flow management workbook that will help you to manage your cash, month by month.

Start with your order book and prospect list

Starting with cash coming in, you’ll know your order book, but what about beyond that?

This is the hard bit – study your prospect list and write down when you can expect to get new orders from those clients. For this you have to really understand your clients’ intentions and buying behaviour.

Then, for your current order book and your prospect list you document your cash inflow:

order dates;
shipment dates; and
client payment dates and amounts.

Suppliers and inventory

Do the same with the supplies, or the stock replenishment you will need to complete those orders – one of the major parts of your cash outflow:

supplier order dates;
goods in dates; and
supplier payment dates and amounts

VAT

At this stage you can then predict the two main elements of your VAT liability. This is particularly important if your are on the accrual system when your VAT is pinned to invoice dates rather than cash payments and receipts.

From your order book and your purchasing plan you have the tools to start to calculate the VAT reserve you will need at the end of each VAT quarter.

Staff costs

You should be able to predict these and add them to your spreadsheet, including PAYE and employer’s NI liability.

Overheads

These, you can obtain from your management accounts. If you don’t have monthly management accounts – and you should – you can use your bank and credit card statements, and your cash book.

The simplest way is to include monthly averages, making allowances for any known increases and decreases. You can then account for any VAT recoverable on overhead supplies.

Cash flow management workbook

So there we have it – your cash flow management workbook. From it you’ll be able to see:

what funds your have to pay off overdue creditors if your business is stressed;
what funds your have to fuel your growth;
which areas to tackle to improve your cash flow – for example see our article on creditors; and
what extra funds you will need to bring in to accelerate your growth.

Essential tools for well managed businesses!

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, please call Peter on 07714 093406 or send him an email to peter.johnson@sgba.co.uk.

Selling into export markets

10/10/2011 By Mushroom Internet

Occasionally you come a cross a business that reminds you of what it takes to be successful. Here was a export business that was selling process control instrumentation into a well defined global niche market.

Selling was done by a UK-based sales engineer who had intimate knowledge of his market place, and with a market-leading technology, the company had been able to price its products to make a handsome profit.

Support costs were low and the products were made entirely in the UK. What more could a government want – a tax-paying export-led business that created employment in the UK!

Many different ways of selling into export markets

However, for most businesses, growing an export business is not going to be quite that straightforward.

A product that someone wants; selling it to them; shipping it; getting paid; low aftercare costs; and making a profit – in principle doing business overseas is the same as doing business at home, but it is certainly more complex, and it is the complexity that adds cost and increases business risk.

How you deal with overseas clients is key

But fundamentally it is how you access and deal with the overseas clients themselves that will determine the success or failure of your export venture, and that will depend on the territory, your product, its addressable market, your target sales volume, and the level of expertise required by sales personnel etc.

Export sales channels

Thus you will be faced with a number of options for each territory you decide to exploit. Here is a brief list of some of the alternatives:

e-commerce: mostly for low-value commodity sales supported by web-based marketing;
Telephone/fax/email: for sales of low-to-medium value commodities, services and configured products;
UK-based Sales executives: for items such as high-value engineering products, specialist niche products and software development contracts, sold through sales visits to clients’ premises;
Agents: commission-based lead generators and often sales representatives, usually for low-to medium volume, high-value goods into territories where the sales are significant;
Distributors / re-sellers: buy and re-sell your products, usually as part of a portfolio of related products into a specific market; and
Overseas offices: replacing distributors, agents or UK based sales executives, where setting up a local office either reduces the cost of selling into a territory and/or enables you to manage better important key accounts along with providing a base for installation and service personnel.

And as you grow your export business, you’ll probably end up with a mix of channels in different territories depending on local factors, whilst ensuring that each one is contributing to profit.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, or your export strategy, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Why are small businesses not borrowing from banks?

04/10/2011 By Mushroom Internet

A recent article in the Daily Mail suggested that small businesses are hoarding cash because they fear overdrafts could be slashed at any moment.

However, isn’t it more likely to be the issue of personal security – business owners are just not interested in offering personal security for what in many instances are relatively modest sums of money, required on an intermittent and short term basis.

What are overdrafts and loans for?

You get the impression that the banks are trying to re-establish the principle that overdrafts are essentially for managing cash flow and that loans are for working capital. This distinction was blurred until recently due to the banks’ historic attitude to risk that has recently toughened, and the risks and time-scales are different in the two cases.

You need a good business plan

But, whether it is for an overdraft or a loan, a good business plan is required to present to the bank, but they are not the same plan – they have different objectives and time-scales to reflect the issue being addressed and the associated risks.

And you will probably be asked for personal security – that’s the rub!

And these days, the plan should include also considerations of personal security or other security as we know increasingly the banks are looking for that, on top of a good plan.

So that’s the rub – no matter how compelling is your business plan, and no matter what size of loan or overdraft your are looking for, you are likely to be asked for personal security or some other form of security to hedge the bank’s risk.

Banks should go back to taking some risk

But it is no surprise that business owners who already have a huge personal stake in their business, don’t want another charge on their own assets.

Business owners want the banks to go back to taking some risk at least for a small overdraft, if the business case is sound. And if the banks say they are doing that – you have to say that is not the impression given.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, or your business plan, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

What do you do when a customer makes a complaint?

21/09/2011 By Mushroom Internet

What will you do if your product or service fails to meet your client’s expectations and they make a complaint?

You certainly don’t put it in your desk drawer and hope it will go away – that’s a sure way to trash your reputation.

And don’t hide behind your Terms and Conditions. We’ve all experienced being given the brush off when we thought we had a legitimate complaint – it makes you think twice about using the same company again.

Actually, you get back to them promptly and talk to them about the issue: you promise to try to resolve it within a given time-frame, and try to keep that promise.

Your client might still be unhappy with what you supplied, but they’ll be happier with you and your company as they will know you have responded to their complaint and their issue is being addressed.

Put in a Complaints Handling System

And you should do this systematically for every complaint.

Faced with this, recently, a client asked me what was meant by a Complaints Handling System that conformed to the guidelines in ISO 10002 – the client was required to do this for their accreditation.

Now, these International Standards don’t normally tell you how to do it, but amazingly there is a really good explanation in that Standard* of a complaints handling process for a small business – essentially this:

Devise a system to log, track and resolve complaints;
Set target time-scales for contacting the client and for resolving their issues;
Tell the client what these time-scales are, and talk to them regularly about your progress;
Appoint someone to administer the system – making sure these commitments are met;
Decide which staff will be involved in dealing directly with your clients, and get them some training if necessary – they may have to deal with frustration, anger or confrontation over the phone;
Take it really seriously – carry out regular audits at director level to ensure things are being done on time;
Use your audits to drive continual improvement; and
Carry your staff with you and reward them for their performance in a difficult role.

This sounds like a lot of work

Not really. If you have a culture of client satisfaction and continual improvement, you are probably carrying out most of these steps anyway.

And remember, most growing, high-performing businesses are process-led, so if you want to be like that I guess you’ll have to start putting some processes in.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, including your complaints handling system, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

*ISO 100002:2004(E) Appendix A.

Business Improvement Strategy

13/09/2011 By Mushroom Internet

Imagine a business that was trying to grow, but was making no profit, generating no cash, and not paying its owner-directors a proper salary or dividends.

By going over their business, end-to-end, and they found 27 areas where their business could be improved, and by implementing their 27-point plan, within a year they had turned their business around to a PBIT (profit before interest and tax) of 17% of sales.

They then tackled their interest payments: with help, they were able to find lower-cost working capital so that they could pursue their plans for growth, and still have enough to pay themselves a decent return.

Business improvement should be part of your business strategy

There is as lesson to be learned here about thorough and systematic business improvement: no matter whether your business is rocky like theirs, or doing reasonably well, there can be a huge benefit in having business improvement as part of your business strategy.

It can help you to:

Find new opportunities for growth;
Squeeze out additional margin, profit and cash;
Reduce your loans or overdraft;
Increase your working capital; and
Pay yourself more.

And all of this will serve to increase the value of your business when you come to sell it and move on.

Areas of where your business can be improved

There many be benefits to be found, some small, some larger, from every area of your business:

Revenues: existing customers, new customers, pricing, use of assets;
Cost of Goods Sold: development, production, procurement, service, logistics;
Overheads: costs and shared services;
Taxes;
Balance Sheet; receivables, payables, inventory, property, plant and equipment; and
General Management: planning, delivery, performance, operational capabilities, stakeholders and other external factors.

Focus on the issues where the return is worth the effort

So, as part of your annual strategy review, maybe you should crawl over your business, end-to-end, looking for areas where it can be improved.

The only caveat is, recognising your time is your money, you should only work on those areas where the return is worth the effort.

Continual Improvement

And while there may be one-shot improvements you can make, such as outsourcing an overhead function to make a net saving, there will always be those areas that need to be addressed gradually, step-by-step.

These are areas where a Continual Improvement programme can really help.

Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, including your business improvement strategy, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Achieve a good price when you sell your business

05/09/2011 By Mushroom Internet

Its a sad fact that only 8% of small businesses are sold for a decent price. This is not good news if you are relying on selling your business for your pension, or indeed for any other purpose.

However, many more businesses would be saleable for fair value if the owners had planned their exit in good time.

Exit strategy

Will you transfer your business within your family, or do you want to sell it – to an employee, or to an outside purchaser?

How much do you want for it? When? Will you stay with it or move on?

You’ll need to think this through because your exit strategy will determine how you go about positioning your business for its eventual sale.

Positioning your business for sale

You’ll start with a valuation and you’ll almost certainly find it is well below what you need.

So, then you’ll need an analysis of your business to show you what has to be done to achieve your price. This may include:

getting your accounts in shape and audited;
some growth, not the least to show your business has potential; and
positioning you, the owner, so that on the eventual sale the business can be run either without you or on a planned exit path such as an earn-out.

Probably 2 to 3 years – when you have done the analysis, you’ll see this is the length of time it is going to take to put your business in the right shape to sell it for a good price.

Plan and make the changes

Now that you know what has to be done and who you might sell it to, you can get on with planning the changes you need to make to your business and making them happen.

You’ll also need to identify who, in the long run, might buy your business so that you can position it to be attractive to them.

Get the right help

Having gone to all that trouble the last thing you’ll want to do is to sell cheap. So, do make sure you choose people to help you who have a track record in achieving excellent value.

If you are in this situation and would like to talk to someone about it, please feel free to contact us. We can help in every stage from the setting your exit strategy through to finding a buyer and making the sale.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, including your Exit Strategy and Plan requirements, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Continual Improvement

29/08/2011 By Mushroom Internet

As a small business owner wanting to grow your business you will be looking at ways to improve your business to generate more profit and cash, to free-up working capital, and to make more effective use of your own time.

While there may be one-shot improvements you can make, such as outsourcing an overhead function to make a net saving, there will always be those issues where the benefits are obvious but the means of achieving them are not so clear.

Continual Improvement is not just for manufacturing quality

Adopting a systematic, continual improvement approach to those issues could be the answer.

It used to be thought that continual improvement was about manufacturing quality, but these days, quality is seen as something that should be embedded right across a business.

And likewise the continual improvement methodology can be applied to issues, right across a business, in every function, for example:

improving the enquiry rate from an existing marketing budget
increasing the average sale value by designing and up-selling additional features and products
improving cash flow though better credit control and debtors management
reducing manufacturing costs with improved delivery times and no loss of quality
reducing inventory cost and obsolescence
achieving an overhead cost saving by reducing headcount
releasing management time by putting in better delegation, coaching and review processes

And lots more…

The PDCA Continual Improvement Cycle

The PDCA or Deming Cycle

First you set down the objective you want to achieve.

Then you embark on the 4-step PDCA cycle Plan – make a plan for achieving it; Do – carry out the plan; Check -gather and quantify the results; and Act – decide what to do next.

Having decided what to do next, you then make a new plan and repeat the cycle.

Obvious, really – when you sit down to work out how to deal with your issues, your thinking almost certainly follows those steps anyway.

Set a timetable and review progress

But the key to making this work is to get the people designated to resolve the issue – you, a member of your staff, or a small project team you have put together – to set a timetable for each cycle and stick to it.

And if you have the resources to run a number of improvement projects in parallel, you can review them at your management meetings, monthly or quarterly.

The results will come, slowly but surely, and year on year your company’s performance will get better and better!

We can help

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, including how to embed Continual Improvement in your company’s culture, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

Four steps to make sure your clients pay on time

25/08/2011 By Mushroom Internet

We all understand that not collecting payments on time has as a severe impact on your cash flow, but let’s not forget also that you are effectively giving your clients, your debtors, interest-free credit, and this also has an impact on your cash flow and your profit.

Whatever the size of your business – start-up, sole trader, micro business, small business or SME – the remedies are the same. Follow these four steps and you will reduce the amount of money owed to you:

send out the invoice as soon as you ship the goods;
call the client the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
call the client 5 days later to carry out the same checks, so that there no excuses on that front; and
call the client 5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run.

Pretty obvious really, but it is surprising how many companies are not doing that.

DSO – Days Sales Outstanding

Also known as debtor days, this is the average number of days your clients take to pay their invoices.

Let’s take a business that has a turnover of £1,000 per day, typical of many small businesses with a couple of employees. If its clients owe them £75,000 then their DSO is 75 days – 75 days at £1,000 per day – that is what it means.

So the DSO for your business is just the total debt owed to you divided by your average daily sales.

What does DSO tell us?

Well, the £1,000 a day turnover company traded on 30 days terms so it could reasonably expect to get paid in 45 days – the end of the month following the month of the invoice – and it should have debtors of £45,000.

Just imagine the impact on cash flow of reducing the DSO to 45 days – a £30,000 improvement. Even a 10 day reduction in DSO would improve cash flow by £10,000 – certainly worth going for.

Effect on overdraft

One factor that is often ignored is that companies may find they have to borrow to fund the excess credit they give to their customers. Our sample company could have an overdraft of £30,000 – essentially funding the gap between 45 days and 75 days DSO.

The cost to them of funding that gap at an interest rate of 12% would be an additional £3,600 in bank interest, not counting the bank charges that go with it. That is an extra £3,600 cost to their business for giving their clients excess credit on interest-free terms – reducing net profit – madness really.

You could save the cost of bank interest and increase your profit by improving your DSO and reducing your borrowing.

Invoice on time

Strictly speaking DSO does not include your delay in sending out your invoices, but the impact is the same and the easiest way to eliminate that is to send the invoice out as soon as you have shipped the goods or supplied the service.

Manage your clients’ payment expectations

Talking to Graham Sands, a credit control specialist with Amril Ltd, he advises contacting the client at least three times between invoicing and collecting the money:

the day after you send out the invoice to check the invoice has been received and there are no issues with the goods or services supplied;
5 days later to carry out the same checks, so that there no excuses on that front; and
5 days before you expect to get paid to make sure your invoice has gone into that month’s payment run

That way your customers will get to know when you expect to get paid.

They will often delay paying their suppliers where they can get away with it to improve their own cash flow, but if you chase them – nicely – they will get to know you expect to be paid on time and they should begin to act accordingly.

We can help

Even if you follow these steps – invoice on time and contact your clients regularly to ensure payment on time – you may still be left with number of significant debts that are proving difficult to collect. We can help you collect the overdue payments and ensure such debts are less likely to occur in the future.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

We would like to thank Graham Sands of Amril Ltd for his significant contribution to this article.

Collecting cancellation fees

24/08/2011 By Mushroom Internet

People don’t like paying cancellation fees even if they are aware of them when they book their appointment, to the extent that charging a fee often results in the client going elsewhere.

No easy remedies

Apart from asking for a non-refundable deposit, there are no easy remedies.

Charging a cancellation fee to their credit card leaves you open to the client disputing the charge and claiming a refund, the excuse being: they did not receive your service, they were not aware of your cancellation policy (even if you did tell them), and they did not authorize the charge.

Avoid cancellations in the first place

So, by far the best way of reducing lost revenue is to avoid the cancellations in the first place.

Send the client a reminder 24 hours before the appointment either by SMS, email or phone and get a confirmation of the appointment;
Ensure your staff are well trained to handle objections and secure the appointment;
Survey the clients to find out why they cancel and address the issues; and
If a client repeatedly cancels insist on payment up-front. If they don’t like that then don’t make the booking. Let them become the competition’s problem!

Finally, if you can afford it, you could offer a discount for up-front payment. At least then you would have the cash even if your profit is reduced.

Posted by Peter Johnson, Business Advisor with SGBA. If you would like a free initial consultation to discuss your business, call Peter on 07714 093406 or email him at peter.johnson@sgba.co.uk.

We’d like to thank Arnold Toynbee of SolutionWise, Australia, www.solutionwise.com.au for permission to publish this material.

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