Cashflow and liquidity

Successful businesses proactively monitor cashflow and liquidity.

Most business owners understand what cashflow is but are less sure about the best way to manage it and do not understand the concept of Working Capital/Liquidity.

Working Capital/Liquidity is basically what cash you have to work with on a day-to-day basis. On the positive side you have:

• Stock
• Work In Progress (WIP)
• Money in the bank
• People who owe you money

Other the negative side you have:

• People you owe money to
• VAT and tax

To manage cashflow you really need an accounting package. To manage your Liquidity you need regular management accounts.

The accounting system we recommend in Xero because this has a Dashboard which gives you a very good snapshot. And, because Xero is online I can easily get access to the data I need to manage your VAT and work out and tax you need to allow for on profits.

So many people make the mistake of taking too much money from their business or making the wrong funding decision on buying things for their business because they forget to allow for tax.

To get a feel for the short-term cash availability/liquidity you can use two ratios called the a) Current Ratio and b) Quick Ratio. These are fairly straight forward ratios, easy to calculate, but they can tell an important story.

The Current Ratio is the total of your “Current Assets” divided by your “Current Liabilities”. These are found on the top half of your Balance Sheet. If you’ve got a number of more than 1 it means that your current assets are greater than your current liabilities. That’s good.

It makes sense to track this regularly and create a graph because if you’ve got a downward trend in your Current Ratio then that suggests that you’ve got a potential problem. Specifically it means that at some point you are not going to service all of the short-term debt.

The Quick Ratio excludes Stock and Work In Progress. This is because it takes time to turn stock and Work-in-progress into cash. This will give you the worst case short-term cash position.

Another useful ratio to monitor if you sell on credit is called Debtor Days. Debtors are people who owe you money and to work out the ratio divide your debtors today by gross sales and multiply the answer by 365.

Once again, track and graph the results because small changes can make a big difference to the cash in your bank.

Sources of finance

As Accountants North London we are always looking for what makes businesses survive and thrive.

According to a recent report “Success in challenging times”…successful businesses are likely to have more than one source of funding. This post explores the various sources of finance available to a start-up.

Interestingly, according to the report only 29% of business funding now comes from banks. The attitude towards banks by business owners ranges from disappointment to contempt.

Small businesses with relatively few employees are now likely to use Credit Cards and personal/family savings. According to the report, savings account for 39% of business funding.

Remortgaging personal property is another option along with other traditional sources including:

•  Business Angels
• Venture Capital finance
• Grant
• Leasing
• Factoring
• Invoice Discounting

However, recently other forms of funding are being considered including crowdfunding and pension funding.

Crowdfunding is where a group of people invest in your business via a Website. An example is www.KickStarter.com

Pension funding involves creating your own pension scheme so you have control over your pension fund. An entrepreneur who was turned down by the Dragon’s Den used his pension fund to get £30,000 into his company. He is now looking at £250,000 of sales of his heated Rugby Gloves.

Different business should consider different types of funding. For example, a restaurant could consider investment of £5,000 20 friends and family. Not only does this give the business £100,000 there are 20 highly motivated people who are keen that their friends, family and businesses use the restaurant.

Many Golf Courses are funded this way by offering Debentures. This gives the owner the right to play the golf course for life with paying fees.

The seven key success factors

The report “Success in challenging times” found that successful businesses:

• Are likely to use more than one source of finance to both start and sustain their business.
• Proactively monitor their cash flow and liquidity
•  Consider direct referrals and Search Engine Optimisation as central to their success
•  Are willing to find new ways of doing things and encourage their employees to think and behave innovatively
•  Believe that learning gives them competitive advantage
•  Are more willing to seek external advice
•  Have the flexibility to adapt to changing market conditions

At Sackmans we can help with all seven factors. Specifically, we can:

• Help businesses source business finance and train/coach them how to manage their cashflow and liquidity more effectively.
• Show you how to develop referral strategies based on what works well in other businesses.
• Share knowledge of best practice of SEO and introduce you to a Website company that can design/build you a SEO friendly Website.
• Work with you to implement strategies to get your employees to innovate
• Provide advice on a wide range of topics from developing a business strategy to pricing
• Help you find outsourcing partners so you have more flexibility

As Accountants North London, if you are a start-up looking for an we have our Ignition Programme for you. If you are an established business we have On-Track.

What is success?

The last year has seen the highest level of start-ups since the last recession. In 2011/12 there were over 450,000 new businesses registered.

However, the unfortunate reality is most of these ventures are unlikely to be a success; new businesses have a high failure rate. Some do not even survive their first year and only a minority will make it past five years.

At Sackmans we have a service designed especially for start-ups and young businesses.  The service is called Ignition and the objective is to increase success rates of the businesses by sharing knowledge.

With this in mind we carry out extensive research into critical success factors. This post and others are based on what we have taken by a report “Success in challenging times” published by the University of Surrey and Top 20 accountants Kingston Smith. The report is based on over 1,000 business owners and managers to share their views. This makes it one of the biggest ever in small businesses in the UK.

It was agreed that although it was good to have dreams, the key to success for businesses was financial success; specifically maintaining cash flow. This includes not growing too fast, as this can suck cash too quickly out of the business. Many businesses which are profitable go bust because of lack of cashflow.

There were other financial definitions of success including:

• Achieve recurring revenues
• Growth
• Creating shareholder value

However, for some success was also based upon non-financial measures such as:

•  A sense of fulfilment or challenge
•  Building a lifestyle business and work-life balance
•  Enhanced reputation
•  Being seen as making a contribution to society

At the beginning of the Ignition Programme we encourage business owners to think and define for themselves how they will determine their success. Getting to breakeven is survival, that is a necessity but what is success for you?

Once you have this you can measure against in.

The 10 benefits of Cloud Computing

The growth of cloud computing is astounding. According to Gartner’s recently published research 50% of enterprises will have some form of Cloud strategy by 2015.

The reasons for this phenomenal growth are many. Here are the reasons we can think of:

1. Mobile working
There is a trend to mobile working, many of us have our main computer but also work on a laptop, iPad and/or phone. With Cloud systems your data and systems will be accessible from anywhere they have Internet access – at work, at home, or on the road.

One of the ways to be more productive is to use transition time. So, if you are in-between jobs or meetings you can be productive.

With Cloud Computing, your employees can work with your information from wherever they are and from any device. As we will see later, Xero is an accounting system and employees can enter their expenses direct.

2. Lower costs
For growing companies limited by finances, cloud computing brings some down-to-earth benefits. One of the most important is that Cloud Computing helps businesses cut costs by sharing resources.

Most businesses have a high degree of variability in their use of IT resources. Yet when you manage these resources in-house, you must allow for the highest expected requirements or fail to meet the demands of your customers and the needs of your employees. The result is that, typically, businesses use only 5% to 15% of the capacities of their servers.

But in the cloud, you don’t pay for idle capacity. So you don’t need to provide full-time resources to meet spikes in demand. This cuts costs but you’ll also be able to reduce the expense of maintaining your current in-house IT infrastructure. With Cloud Computing, the majority of this maintenance will now be done at and by your Cloud service provider.

3. Less capital tied up
Because you are, in effect, renting instead of buying technology, you convert capital investments to operating expenses.

Capital expenditures are reduced because you no longer need to buy hardware to update obsolete servers and because there are no longer large up-front expenses in the form of hefty software licenses.

4. Monthly payments
Instead you pay a smaller and more predictable monthly service fee, typically 30% to 50% less than your total cost of IT today. This allows you to spread out your costs, and eases your cash flow.

5. Scalability
Another major benefit of Cloud Computing is scalability  When needed, you can scale your capacity up or down according to your needs without having to worry about purchasing, or disposing of, servers or storage.

In the cloud, storage, and processing power are not issues as the service providers add more servers or shift load from one server to another to provide additional capacity. Thus, as your business grows, your systems will scale smoothly from a handful of people to hundreds or more.

6. Automatic data back-up
Cloud storage is very beneficial. When your systems are hosted in the Cloud, both server data and that on your desktops and laptops will be backed up automatically and securely on a consistent and timely basis. This ensures increased reliability and saves users from the threat of losing unrecoverable data on their computers.

7. Business continuity
If your business has a fire or theft it can be a real struggle to get back up. With Cloud you buy new devices and you are ready to go.

Slightly less dramatic, we’ve all seen the problems the weather can cause for people getting to work. Once again, with Cloud systems people can work from home accessing their personal and business data, just as if they’d been sitting at their desks.

8. Sustainability
Cloud Computing also uses less energy than traditional server rooms. This is important to the many companies committed to sustainability. By sharing resources in the Cloud, instead of buying more hardware, you can reduce your carbon footprint.

One less server put into service is one less server consuming electricity. The collective benefit accrued through millions of companies switching to cloud computing is immense and is considered a responsible business practice by most environmental groups.

9. Regular updates
Because Cloud systems are not hosted locally, it is easy to update the software.

The attitude of Cloud vendors is to constantly improve the software and any bugs or fixed can be corrected immediately with the minimum amount of hassle.

10. Collaboration
You can work with people using Cloud. This can be customers, suppliers, co-workers and advisers.

As accountants North London this means we can work with clients all over the UK.