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Driving Business Performance |
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 'Camwell Consulting' is a Member Firm of the Institute of Chartered Accountants in England and Wales |
 An Old Adage
or Camwells First Law of Business. Why is it important? Cash Flow Forecasts - Timing of Receipts
If you are preparing weekly or monthly cash forecasts, when should you forecast receipts? Does growth generate or consume cash?
If you plan to grow, will you be able to pocket the money or be begging the bank for more cash? Should we trade as a PLC?
If you are starting a business, or have an existing business then would it be better as a Public Limited Company? Making up for losses
If you lose an item through obsolescence, bad debt or pilferage, how many more do you need to sell to cover your losses? How can this be avoided? What Business Metrics should I use?
It's common practice to monitor performance by a metric that divides one measure by another. What proportion of a price is VAT?
If VAT at 17.5% has been added, do you take 17.5% off to get back to the real price? AN OLD ADAGE (or CAMWELLS FIRST LAW OF BUSINESS) Many entepreneurs succeed by spotting opportunities and actioning them very quickly. Great. However it is well worth considering two main issues before going ahead (in addition to routine commercial and legal aspects) : (1) How is the transaction accounted for? How will it hit the P&L account? Will it effect on the balance sheet (and the ability to raise loan capital)? For example, is it an activity that can be regarded as an asset, or will it need to be written off on day one? Can we take revenue up front, or does it need to be spread over a long period? Are there new accounting disclosures, such as related parties, we'd rather not make? (2) What are the tax consequences? Can we structure it differently (and legitimately) to reduce tax? Will it trigger any tax issue, such as the capital gains tax relief position for directors? If an EIS company, does the activity lose status, hitting the shareholders' pockets and the ability to raise further capital? Why is this important? It is far harder (if not impossible) to retrospectively sort a problem. Better to get it right in the first place. Camwells has considerable experience, and when we suspect a problem we know how to check. CASH FLOW FORECASTS - TIMING OF RECEIPTS If cash is tight, or you are assessing the finance needed for your business, you'll want to avoid predictable cash crises. There's two things to remember for cash flow forecasting of cash receipts. These may sound obvious, but the implications are rarely appreciated: (1) You need money in before you can make a payment. It's no use having money at the end of a month to pay what you are committed to pay earlier. You're really looking for money towards the beginning of a period to pay the expenses of that period. (2) Cleared funds are needed before you can make payments such as direct debits, electronic payroll or by ebanking, and do not arise immediately: * at least 2 banking days for payments made by internet banking * at least 3 days for cheques * up to 30 days for internet credit card sales * check your terms for offline credit card sales It's also worth regarding the delay in payees banking your cheques as a bonus to help cover any delays in receipts. Applying these principles to cash flow forecasting means: (A) FORECASTS IN WEEKLY PERIODS If you expect to receive a large cheque at the end of week 3, would you forecast this in week 3, 4 or 5? Receiving and banking it on say Friday in week 3 will clear later in the following week 4. Any slight delay will put it to the end of week 4. As it has to clear before any payments can be made from it, then it is more realistic to put it in week 5. Or later if delays are likely. (B) FORECASTS IN MONTHLY PERIODS If you are selling items in June on 30 day terms, would you forecast the cash receipt in June, July, August or September? Assuming sales are randomly placed through the month, then on average the monies should theoretically arrive throughout July. But in practice sales are often squashed into the end of a month, and many customers pay end of month plus 30 days, or with extended terms. Plus the clearance delay, most monies for June sales may not clear until at least mid-August, i.e. what appears to be an average of 60 days. Furthermore, that may just be in time for the end-of-month payroll, but not earlier commitments such as PAYE payments and any weekly payrolls. Depending on your business, it may be worth modelling the effect of putting half if not all the June sales receipts in September. You can then consider how receipts can be accelerated through deposits, invoice discounting, prompt payment discounts, and other techniques. (C) FORECASTS IN QUARTERLY PERIODS Forecasting in quarterly periods is best avoided unless cash levels are clearly not an issue. DOES GROWTH GENERATE OR CONSUME CASH? Well that depends on two things: (1) The extent to which payments to suppliers, staff, rent, etc are ahead of customer receipts (2) The level of investment in plant, stock, marketing and overheads ahead of revenue Usually this means growth consumes cash for a long time before cash is generated. And as banks will typically only match the level of equity in the business, this means careful planning to minimise the cash and equity requirement. To get caught out by this is called 'overtrading'. Conversely if you are able to pay suppliers after receipts from customers, growth will tend to generate cash. But ensure there is sufficient profit to pay overheads, otherwise a dip in business will trigger a cash crisis. There are various cash management techniques Camwells can apply for you - just give Camwells a call. SHOULD WE TRADE AS A PLC? This is not a quick subject, and we can only scratch the surface here. Legal advice is advised - indeed whenever non-bank finance is required. If you have an existing business to convert into a PLC, you'll also need to take advice on the tax position. The company doesn't have to be quoted on a stock exchange to be a Public Limited Company (PLC). A PLC gives you several advantages: (1) It looks more prestigious in attracting customers and staff (2) It appears more secure for suppliers granting credit (3) It lets you raise capital from the public (there are significant restrictions on how an ordinary private company can raise capital - see the section entitled "Before you do anything read this!" - page 53 of the PDF) (4) It avoids issues if there are 50 or more shareholders. This can arise quite easily if other businesses have been acquired for shares (5) It is in a form ready to float on a stock exchange if you plan to do so But it also has several costly disadvantages, including: (1) You must comply with various additional rules relating to PLCs, including when you can start trading (2) You usually need to use a formal prospectus to raise capital (3) As a small company you will need an audit when you would otherwise not need one (4) You need at least £50000 in share capital. However, only £12500 (25%) is needed to get a PLC started, as long as you realise that the remaining £37500 can be called up by the company if it needs it. A PLC is therefore not a route to be taken lightly. If you want to consider your position further, Camwells can help. MAKING UP FOR LOSSES If you lose an item through obsolescence, bad debt or pilferage, how many more do you need to sell to cover your losses? Well that depends on margin, but it's a simple calculation. You need to sell as many at that profit margin as is needed to cover the cost of the item lost, i.e. cost % divided by margin %
As your margin reduces, the number you need to sell rises sharply, and the more painful each loss becomes:
However, this is simplistic. Don't forget there are additional costs such as sales commissions, administration costs and possibly loss of business through letting your customer down. So you need to sell even more to cover your cost. Camwells can help: For the earliest and most reliable warning of bad debts, see the unique
MasterWatch CreditCheck WHAT BUSINESS METRICS SHOULD I USE? Business Metrics and KPIs (Key Performance Indicators) are very valuable tools in driving and monitoring business performance. It's said that "what can't be measured can't be managed". But equally, if metrics drive behaviour, guess what bad metrics drive? We'd be happy to talk to you about what metrics and KPIs are right for you. But in the meantime just to mention a couple of basic principles: (1) Metrics need to encourage desirable actions. For example, if you allocate overheads based on headcount, and monitor divisional profit after overheads, this will encourage automation of processes that may be better done manually. In this case probably better to simply monitor "contribution" before overheads, subject to which other metrics are used. (2) Metrics need to be used in sets. This is to counterbalance the ease with which individual metrics can be improved simply by improving the denominator. For example:
You also need to understand how the metric operates over time. In this example a static performance is producing a rapidly improving metric and an apparent improvement in performance:
(3) League tables need to be used with caution. They can be very motivating for people near the top, but equally demoralising and counter-productive for people near the bottom. To take an example outside of business: Some of the school league tables are based on percentage success rates. To improve results, it's easier to stop weaker pupils sitting exams than improving their education. And would you like to be associated with one of the bottom schools? Such downsides can be avoided. WHAT PROPORTION OF A PRICE IS VAT? Just a simple tip - if VAT is added at 17.5%, then VAT represents just under 15% of the VAT-inclusive price:
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