Introduction
Finance is the lifeblood that keeps any business moving. Cash is king and for
good reason - a company can be extremely profitable but be in trouble for a
lack of cash. Large amounts of money can tied up in fixed assets such as
property and equipment which cannot be converted to cash at all easily or in
current assets such as stocks and debtors which are more readily converted to
cash but need replenishing in order to keep trading. If things get out of
balance it can soon become difficult to pay creditors or finance new orders.
So managing finance is all about having up to date information and being able
to use it to forecast cash flow accurately and well ahead so that provision
can be made early for any periods when cash balances will be negative. Banks
are full of respect for customers who do this because most applications they
receive are after the company has run into trouble.
Business Finance is summarised into these 3 areas by accountants and is a good
logical placed to begin:
Cash Flow:
Without a steady flow of cash, the business simply cannot trade. It can’t pay
suppliers, wages or lenders and it can’t finance growth or even new orders.
Good Cash flow management is about balancing the inflows against the outflows
and in knowing what is going to be happening in the months and weeks ahead.
Profit and Loss:
This deals (broadly) with the difference between the invoices you send out
and the sum of bills you receive and wages. Some costs are variable (those that
you only incur when you make a sale (e.g. materials and contract labour) and
others are fixed e.g. rent, rates, utilities, salaries). The more your costs
are variable and the less fixed they are the safer your business and vice
versa.
Balance Sheet:
This is the net picture of what you own and what you owe. Assets and
liabilities are divided into current (less than a year) and fixed (more
than a year). Land, buildings, equipment, mortgages, business development
loans and accrued profits are fixed assets and liabilities. Stock, work in
progress, debtors, trade creditors, overdrafts are short term (current) assets
and liabilities. The balance sheet matters because it summarises the value
of your business, so when you want to sell it or borrow money it is the
collateral you have to offer and represents the total of what you have achieved
with your business
Actions
We will undertake a financial review to get a complete understanding of
your company’s current financial position and its capability to support
your current and long term goals. We will focus on the 3 classic areas
in this order of importance:
Cash Flow:
We will look at all your monthly income (not just from sales but also VAT
and loans) and plot this against your expenses. This will allow us to
examine your monthly cash flow and help you combat any shortfalls.
Profit and Loss:
By studying your income and expenditure, we will be able to determine at
what margins your business is currently operating at and where possible
savings can be made. We will look at your gross profit [sales - cost of
sales (those costs specifically relating to the sales process)], your pre
tax profits and how much profit you typically retain at the end of the year.
This will tell us how much money (or sales) you need to cover your current
situation and by how much more you will need to grow to realise your future
plans.
Balance Sheet:
Using the information in your balance sheet, we can analyse how effectively
you are using your assets (ROI—return on investment) and also how much
additional funding you could possibly secure (gearing ratio). We will also
investigate how your major purchases are funded and planned for.
Deliverables - what you will get from this
Your Financial Action Plan will firstly define what needs to be done to deal
with acute issues such as:
- Reversing negative cashflow
- Rebuilding the bank account
- Relieving creditor pressure
Then it will deal with chronic issues such as:
- Pricing to increase gross profit
- Purchasing to increase gross profit
- Controlling overheads to increase net profit
- Spending capital to increase profits from improved productivity and accuracy
- Building wealth from retained profits
- Budgeting and forecasting to assure good cashflow, profits and wealth building
Suggestions
Decide whether your financial challenge is urgent (i.e. less than 6 months
before a cash crunch) do the HGL acute questionnaire. This will give you
fast solutions.
If your financial challenge is not urgent (i.e. annoying, or taking you
in the wrong direction) do the HGL chronic questionnaire. This will give
you structural solutions that will lead to where you wish to be in the
long run.
The Big Picture
In the end the success of a business does boil down to money and that is
never so evident as when the owner wishes to sell it. If it has been run to
be consistently profitable.
Financial planning will aid growth as well as helping to facilitate
exit/retirement planning.