Money might not equal to success
Yes money is important and we are in business to earn money
What success is not:
- Having large turnover
- Business losing money
- Being in debt
Bigger picture
- 99% of UK businesses is small business
- 40% is 5 year survival rate
Why businesses fail
- Grow too fast: can’t meet the demand
- Run out of cash
- Poor management
- No market demand
- Risk not managed: 2 directors not getting on?
Financial basics
- Have a business model that works,
- profit or at least breakeven (people working are paid)
- Enough cash
- To pay taxes
- Support owners
- Money reserve
- Invoicing, collection, book keeping
- Sales
- Cost of sales
- Gross profit
- Gross profit margin
- Expenses / overhead
- Net profit
- Tax
- Net profit after tax
- VAT does not belong to business
- Business are acting as agents of gov’t to collect VAT
Balance sheet
- Stuff that have value (assets)
- Cash
- Debtors – accounts receivable (outstanding invoices)
- Stock (money tied up)
- Fixed assets (PC, plant, vans)
- Liabilities
- What you owe to others
- Creditors / accounts payable (bills to pay)
- Taxes (VAT, corp tax, PAYE etc)
- Loans (incl. Directors’ loans)
- You can charge interest for personal loan to company
- Owner’s equity / capital
- What is truly yours
- Share capita
- Net profit after tax less dividends OR
- Net profit less drawings (if sole trade / partnership )
BUILD A FINANCIAL STRATEGY
- Getting dividends is more tax efficient instead of wages
- When you take on staff, your profits might decline because directors usually work very well for almost free
- Sales, reach or exceed
- Gross profit percentage, maintain and improve
- overhead , do not exceed
- Break Even point
- How much sales you need to cover your overhead?
TOP TIPS FOR IMPROVING THE PROFIT
- Increase sales – lots of resources
- Increase gross profit % , stop giving stuff away for free, increase price, reduce cost of sales, increase efficiency
- Little things, chip away
- You can not erase all costs, you can not run business with nothing
- Xero is better than Sage
- If you had a very good year, Invest in capital to reduce tax (take advice and be business driven not tax driven)
EXTRACTING MONEY FROM BUSINESS
- Limited companies
- Have some form of mng accounts, keep an eye on how your company is doing, then take dividends
- Leave a bıt of money in the company
- Wages, dividends, set aside money for self assessment tax
ROUTE TO FINANCIAL SUCCESS
- Quality Record keeping
- Raise invoices for the work
- Capture all expenses
- Reconcile your bank at least weekly
- Use a cloud accounting package
- Receipt processing
- App xero, quickbooks etc
CASH MANAGEMENT
- Cash is very different to profit
- VAT is not your money. It was never your money
- Cash mng is different than managing your business, profits etc
- It is a daily job
- Work estimated, work done, invoice issued, invoice chased, inv. Paid
- Shorten this cycle
- Get money in faster
- Consider
- Agreeing price upfront
- Use of retainers
- Invoice by instalment rather than on completion
- Invoice the moment the work is done
- Collect by direct debit
- Automatic chaser emails
- Do not give credit – your are not a bank!
BUFFER CASH
- Build resilience – don’t drain your business
- Aim for retained profit about 5%
- 3-6 months of fixed costs
CASH MANAGEMENT
- Save for tax
- Consider opening a separate account for VAT
- Or even separate account for corporation tax
MANAGEMENT OF INFORMATION
- Forecasts, quarterly, monthly accounts
- Have a financial strategy, budget
- Profit goal, sales goal, marketing plan
- Know your monthly key numbers
- Forecast monthly / quarterly and budget at the start of the year