Back to the fray

For many businesses, after the initial panic and scramble to ensure survival, lockdown has been a time of treading water.

Employees on furlough, rent holidays negotiated with landlords, non essential spending halted, loans secured. Then its been a matter of waiting for things to change.

There is still a long way to go as the Government advisors keep reminding us but lockdown is starting to ease with the re-opening of non essential retail imminent. The hospitality sector is expected to follow soon.

The ‘new normal’ means social distancing and strict hygiene measures will remain in place. Business owners and their teams have been planning how they will re-open in these circumstances.

Much of the planning will be operational - one way systems to limit contact, hand sanitiser stations, screens for employees, restricted customer flows and so on.

There are other factors to consider which may get less attention in the rush to re-open. 

The biggest of these is answering the question, ‘Is your new business model viable?’ 

In other words, after estimating your sales and allowing for costs of your new way of working, are you making a profit? 

If not, what is your ‘break-even’ level of sales?

Knowing the answer to both of these questions is critical in my opinion. 

The first because it is the acid test for your recovery plan. If you are losing money to start with you need to know this and have a projection of how long losses can be sustained for. 

The second is the initial target you are aiming for. Reaching break-even as soon as possible is imperative if the business is to maintain financial viability in the longer run.

I would argue that the most important aspects of financial management at this time are forecasting (of projected profits and cash flows) and regular monitoring and review.

The easing of lockdown is a time for optimism and hope.

Combining this with good financial management will increase your chances of weathering the storm until we reach calmer waters.

www.base52.co.uk

Managing your business finances in challenging times

Coronavirus is dominating all the headlines at the moment.

For small business owners, particularly those in sectors which will be affected most by measures to tackle the spread of the virus, these are worrying times. Travel companies, event planning businesses, pubs, restaurants and other businesses in the retail and leisure sector are amongst those who will be impacted severely. In reality, all businesses will be affected to varying degrees and will need to take steps to protect their short term and longer term prospects.

There is a lot of information out there about how to protect ourselves and others, self-isolating and so on. There is less advice for business owners to help them get through the next few months.

The Government, to its credit, did announce some support for small businesses in the recent Budget. This included some relief on Business Rates, changes in Statutory Sick Pay and support for 'Business Interruption' loans. These measures help a little but business owners need to take practical steps to manage their business finances during these challenging times.

These are my suggested steps for small businesses to prepare for the next few months:

1) Forecast

I think it is really important to forecast profits and cashflow for the next 3 to 6 months. The future is uncertain but we need to make our 'best guess' allowing for predictions of what may happen - restrictions on mass gatherings, school closures, more employees self-isolating or working from home, less discretionary spending etc. What does the 'first draft' forecast show? For some businesses, things may not be too bad, profits may be down but they have reserves and cashflow holds up. For others, the situation may be much more severe - monthly losses and negative cashflow.

2) Consider what you can change

If your first draft forecast looks unsustainable, what can you change? Start with income. Can you do things differently to generate more sales? Then look at every item of cost. What can be eliminated or cut back to ensure cashlow remains positive until we get back to a more stable trading environment? How does the revised forecast look? If things still look bleak in the short term, you may need to look at emergency funding to get you through this period.

3) Consider funding

Where do you go to get help with funding? The first port of call for most businesses will be their bank or their accountant. A bank will probably want to see a profit and cashflow projection and your accountant can help you pull this together. The projection should determine how much funding you need and what type - loan, overdraft etc. It will also be necessary to take a longer term view to ensure that the loan repayments are affordable and the business finances will improve over time.

These are exceptional times and for some businesses, keeping calm and carrying on will not be enough.

From a financial management perspective, I recommend a pragmatic look at your future income and expenses to ensure you can get through the next few months.

If you can, that's great and this will be the case for many businesses. Tough times, but they can knuckle down and carry on.

For those with insufficient cash reserves or financing facilities who are predicting negative cashflows, they need to act now to make some radical changes and seek emergency funding if they need it.

Their future may depend on it.

www.base52.co.uk

Learning from the Babylonians

If someone asks me to recommend a book on personal finance I choose George S. Clason’s, ‘Richest man in Babylon.’ 

I’ve given copies to my kids (I’m not sure if they ever got round to reading it) and to several other friends and acquaintances over the years.

Clason was born in 1874 and started writing this book as a series of pamphlets in the 1920s. The pamphlets were circulated by banks and insurance companies and became very popular. Eventually they were compiled into the famous book.

The book is a series of stories which purport to draw on the wisdom of the Babylonians, some 6,000 years ago. They built a prosperous and successful city and dynasty that survived for centuries, founded on principles of trade and sound financial management.

The principles are timeless and if followed, with application and some luck, over a period of time should make anyone wealthier.

Here is a brief summary of the 7 rules for acquiring and retaining wealth as described in the book:

1. Start thy purse to fattening.

Simply put, save 10% of what you earn. Easy if you have a decent income, less so if you don’t. Very true, but Clason argues that whatever your income, regular saving is key. 

2. Control thy expenditures

Self explanatory this one - having a budget and sticking to it. Save the 10% and make sure you spend no more than the remaining 90% each month

3. Make thy gold multiply

As the 10% builds up into a reasonably-sized pot you need to make this work for you and generate an income. In today’s world Clason would say speak to an Independent Financial Advisor or propose investing wisely based on knowledge of likely risks and returns. He guards against. 'Get rich quick' schemes.

4. Guard thy treasures from loss

Clason’s view was that you should ‘protect your principal, ie if investing £1,000 make sure this is protected and is your minimum return. So under this rule the stock market or property investment would be ruled out. I suspect he might modify this rule in today’s world but the principle of being cautious about losses still holds true.

5. Make of thy dwelling a profitable investment

Again, self-explanatory but easier said than done for youngsters in the current housing market. House price inflation has outstripped wage growth for many years making it harder to get a foot on the housing ladder. My personal view is that it is still worth making the stretch to buy if at all possible. Government-backed incentive schemes can help and once on the ladder things should improve over time if household wages continue to grow.

6. Insure a future income

In other words, make sure you have some income for when you no longer work. For many of us this is an employment pension, supplemented by State pension. For the self-employed pensions often get neglected, especially in the start up years. Thinking ahead and providing for this well in advance is sound financial planning

7. Increase thy ability to earn

Learn a new skill, get a new qualification, keep learning. We know that pays off and increases earning potential in the longer run

That’s essentially it. The stories bring the rules to life and keep them in the memory.

By a mixture of luck, a fortunate upbringing and some mistakes made along the way I’ve kind of fallen into doing these things consistently over a period of time.

They’ve worked for me and I think can work for others too

Babylon may be no more but the Babylonians certainly knew a thing or two about the acquisition and retention of wealth.

www.base52.co.uk

The annual budget still has its place

Accountants like scorekeeping.

Keeping accounts up to date, reconciling the bank accounts, reporting monthly profits. This is  'bread and butter' work and an essential part of maintaining financial control for a business.

Another key tool is the annual budget. Typically in our business we do this towards the end of the current financial year. Already at Base52, we are thinking ahead to the next financial year. Plans are taking shape, things we would like to achieve. Extra costs we need to allow for. Pulling the budget together brings this to life. 

In a larger organisation, preparing the annual budget can be a major exercise taking a Herculean effort from the company accountants and senior management. In a small business, it might just be the business owner and their spreadsheet. 

Often the first draft is a disappointment. The projected profits are lower than expected. Then some tweaks and adjustments and it starts to take shape. Decisions are made about priorities.

Voila! You have it. 

Your financial plan for the year. You now know what is possible and what you need to do month by month to reach your financial goals.

Of course, that's the easy bit. You now need to work with your team and your customers to deliver the plan.

Without the budget or target, scorekeeping on its own is missing something. A bit like a runner recording his time without having a target time to aim for. Roger Bannister would probably never have achieved the 4 minute mile if he hadn't set it as a benchmark.

So in my view the annual budget should be an essential step for all small businesses.

It's one more thing to add to the already very long list but it should pay back many times over by providing clarity and improved financial control.

www.base52.co.uk

Why I like financial forecasts

Most of accounting is about compliance or looking backwards

Much less is about looking forward. From a business management perspective however, I believe this is where most of the value can be gained.

Now one thing we all know about forecasts is that they are likely to be wrong. As the famous saying goes, 'Forecasting is the art of saying what will happen, and then explaining why it didn't!'

But I think it's worth the effort. I had a good apprenticeship on the benefits of forecasting as a management accountant at Tesco Stores, the U.K. Supermarket chain. I was slow however to implement forecasting in my own accountancy business, focussing more on historical management accounts and targets. It was an external consultant who introduced me to his simple forecasting model and it's something I've used ever since.

Basically its an Excel spreadsheet that I update most days and sometimes several times a day which forecasts sales, cost and profits for the financial year. So if I gain a new client or lose a client (not a regular occurrence) or put a proposal to a new prospect or have an unexpected increase in a major area of cost, these all get fed into the magic spreadsheet and out pops my new profit figure

It's great because it keeps me in control and reduces the risk of  being caught out by any surprises. Once set up it takes hardly any time to maintain and I think it is the best financial management tool I have in the business

Henri Poncaire' was a very clever man who was one of the creators of chaos theory. He said, 'It is far better to foresee even without certainty than not to foresee at all.'

If it's good enough for Henri, it's good enough for me

www.base52.co.uk

The power of forecasting

One of my annual rituals at this time of year is to prepare a detailed financial forecast for the next financial year.

It's part of my training as a management accountant and I spent many years as a retail accountant compiling company budgets and forecasts so I guess it is in my DNA now.

I've developed a simple but accurate template for this and with a day or so's effort my first draft emerges from the magic of Excel and I can reflect on how it looks. Inevitably it's below my expectations. After allowing for clients who have stopped trading or their circumstances have changed and factoring in cost increases and new costs, I'm usually left with something of a gap between where I want to be and where my forecast is pointing. So although a bit disappointing, that's not necessarily such a bad thing. At least now I know there is a gap and I can think about what to do about it.

The two ways to close the gap are more sales and reduced costs. I will always give a lot of thought to how we can increase sales - attract more customers, look at the services and value we offer to our existing customers and what new services can we offer. As far as cost reduction goes, a proportion of our costs are fixed but some are discretionary. I will look at these and ensure they provide good value for money and are affordable. So with some tweaking and decision-making I will start the financial year with a forecast that shows a good improvement on the previous year and a plan to make it happen.

In some ways this is the easy bit. It's the month in, month out effort to deliver the plan  which is the bigger challenge. I find this annual forecasting process really valuable and an essential part of my business routine. It gives me comfort that we have a plan to move forward and something to measure against during the year.

So here is to another good year with more sales, satisfied customers, more customers and more profit. That's what the plan says so we now need to roll up our sleeves and do it.

www.base52.co.uk

Accountants aren't just for the year end

Many business owners have a 'once a year' relationship with their accountants. They do their own bookkeeping and VAT administration in house, maybe with a part-time bookkeeper and their accountant is engaged to prepare the year end accounts, possibly with a bit of payroll thrown in.

This arrangement can work fine, especially if you have a good and reliable bookkeeper. It may be more problematic if the in house bookkeeper is not very good or if they decide to move on. In the latter case, finding a replacement can be difficult and an overhead as the newbie learns the ropes and settles in.

So what about outsourcing as an alternative? Outsourcing all of your financial administration including booking and VAT to your accountants can have a number of benefits, including:

• Continuity - the firm you engage should have cover so that if there are staff changes, it's their problem, not yours
• Scalability - if you business grows or contracts they can adapt the level of resources (and costs) to suit your needs
• Synergy - as your accountants are dealing with your bookkeeping they should gain efficiencies on year end work, reducing costs
• Familiarity - with regular contact they get to know you and your business and what makes it tick. They can add value by preparing monthly or quarterly management accounts on the back of the bookkeeping work
• Certainty - you should be able to agree a fixed monthly fee for all the accountancy work so you can budget with certainty

For a small business, outsourcing can be a cost effective and attractive alternative to 'bookkeeper plus accountant'.

A high proportion of the accountancy support we provide at Base52 is as a comprehensive outsourcing package. We like it because we get to know our clients better and we think we can provide a more proactive service with regular contact with our clients.

Please see our website and video for more details

www.base52.co.uk/services/outsourced-accounts-and-tax