Creative Finance & Management

Dropbox is worth a try!

2010-04-11T04:16:00.001+01:00

If you like to either backup files from your computer to an internet storage site, or need access to up to date versions of files on different computers, then Dropbox is probably worth looking into.

You can get 2Gb of free online storage / backup space by clicking on the link below:

https://www.dropbox.com/referrals/NTIyNzg0NzM5

I’ve been trying it for a while and it works better than iDisk, which is part of the MobileMe package. I found the following review, which backs up (please forgive the pun!) what I was thinking myself (can’t vouch for this blogger’s command of the English language, unfortunately, but he makes some good points!). http://tinyurl.com/yawhewk

It works on Windows or Mac or Linux. There is a small piece of inobtrusive software to download. After that the automated backing up and file synchronisation happens quickly and quietly in the background. There are other nice features, one of which is that it keeps a history of all the different versions of files that you save (and access every event that happens to your files and folders via an RSS feed – for those so technically inclined!). So if you want to go back to previous versions if you have edited a document, say, and saved it, then you can – very easily. The other thing is that you can share folders with other people very easily, although they have to be dropbox users too. This sharing feature is so much easier than Apple’s iDisk it’s like kindergarten by comparison. It’s also better than google docs, because you can share any type of file, not just office documents.

And if you sign up using the link above, then I get an extra 250 Mb of storage space!

Just thought I would share!

Internet Business Mastery Academy

2010-04-11T04:12:00.002+01:00

Time for an advert for an affiliate!... I have been getting advice from these guys for several months now, and it is really good stuff...

The Internet Business Mastery Academy helps you escape the 9-to-5 and design the lifestyle of your dreams by giving you step-by-step tutorials for turning your life’s passion into an extremely profitable Internet business.

The first step in the Academy is to help you design your ultimate Internet lifestyle. Then, through a series of online, step by step courses, you'll discover how to use social media and other proven Internet marketing strategies to maximize your business success. Plus, our innovative "multimedia Rolodex" is another breakthrough designed to help you find the best services and vendors to help you reach your business goals as quickly as possible -- and achieve your ideal lifestyle.

Click here to find out more

Cash in For Success: Lesson 5

2009-12-15T20:47:00.004Z

"Credit control" is the discipline and function of controlling the amount of credit your customers are getting from you. It exists to ensure that your customers do not take more credit from you than you want to give them.

In this short article I just want to cover the bit of credit control relating to chasing for payment. So I thought it might be helpful to outline some ideas for what you could put in your credit control procedures. The specifics may be different for every business, but some of the general themes should be helpful to all businesses that allow customers to take some amount of credit. (Because of this, when I refer to 'you' doing things, please assume I mean the royal you, including the credit controller, bookkeeper, management accountant, finance manager, financial controller!)

1. Remind the customer about invoices just before due

If you are supplying products in volume, so that you are constantly sending out invoices, then you should send your customers a statement of invoices not yet paid, every month or maybe even every week.

On a set day every week, make a list of all the customers that will have invoices due for payment within the next 3-7 days (depending what you think is best). Give them a courtesy call. Now when I say a "courtesy call", that's exactly what it should be - courteous. You are not chasing for payment in this call, nor are you raking up the fact that they didn't pay the last one on time (necessarily). So the call should be pleasant and without pressure.

The purpose of the call is to, a) ensure that the customer has received the invoice; b) check they have processed it fully and there are no problems with it; and c) find out when they expect to be able to pay the invoice. Don't expect the customer to give you a firm promise at that stage (if they do that's a bonus, and something you can hold them to). You are just trying to get a rough idea for your cashflow forecasting.

2. Politely remind the customer about unpaid invoices just after they are due

On your credit control day each week, make another list of customers whose invoices have only just gone overdue in the last week.

This call is the same in tone as the last one - very easy going and polite - but this time try to get some sort of commitment to a payment date, preferably in a matter of days.

3. Chase by phone two or three times at weekly intervals

Your other lists will be made up of customers whose invoices are further overdue, and are also past the date they promised on the last call. At least at this early stage, there is no need to call a customer who last week promised to pay in two weeks time!

The next two or three times you call the customer about overdue invoices, you will be reminding them of promises made, and asking them politely to make new promises, but without making threats or warnings.

4. Warn them when an escalation step is about to be reached

By "escalation step" I mean a point at which you turn up the heat! That means either the point at which you start charging late payment interest, the point at which you make contact higher up in the company, the point you stop supplies to the customer, or the points at which you start various steps of legal proceedings (including formal insolvency/bankruptcy proceedings). That's probably roughly the order to step up in turning up the heat, and you should give the customer adequate time to pay between each step.

You will still be asking for commitments for payment dates at this stage, but at the same time you will be telling the customer when you want to be paid, i.e. immediately. Their promised date does not have to be accepted, and you will be giving them deadlines and chasing and escalating immediately deadlines are missed.

5. Always carry out your threats

Treat customers like children (in that regard only!). If you don't do what you say you are going to do (escalate to the MD or start legal proceedings), then you will never get customers paying on time, because they will never take your threats seriously.

6. Be fair and continue to love doing business with your customer

Be absolutely fair, legal and reasonable in everything you threaten and do. Unless they are very bad payers you may reasonably want them to buy from you again. So don't be rude or aggressive. But don't wimp out on collecting your cash either.

7. Finally, get things in writing

Always keep written records of each contact with the customer, including promised payment dates and reasons for late-payment. Always record what you have threatened, so that you remember to carry out the threat if necessary. And for the more serious escalation steps (stopping supply and taking legal action) make sure that you have informed the customer in writing, even if you have informed them in some other way.

All the best!

Cash In For Success: Lesson 4

2009-12-02T20:57:00.001Z

Last time we were privileged to have Edwina Taylor, an expert in the field of credit risk, pass on some excellent advice on using credit reports, setting credit terms and credit control in general. I hope you found it useful.

We have two more lessons to go, as we look at how we can get cash in quicker. This time I want to look at two administrative issues that can trip you up, and next time I'll outline roughly what I see as a good credit control procedure. Then after that... well, I haven't thought that far ahead yet!

There is a kind of logic to the way I've been approaching this. Up to now we have majored on the issues to consider before you get to invoicing the customer/client - forecasting, credit limits, knowing your customer. This time we'll look at invoicing issues. Finally, we look at procedures once invoices have gone out.

What are the invoicing issues that can delay payments? Sometimes administrative issues can delay customers paying you. I have seen both sides of this - in other words, as both a supplier trying to get paid, and as a customer being asked to pay. And sometimes the administrative issues are genuine, and sometimes they are being used as delaying tactics. And sometimes it starts off with a genuine issue, which the customer's accounts team capitalises on to keep hold of your cash a bit longer. (Yes, it's your cash, not theirs, if the invoice is overdue. And seeing it as your cash will help you have the right mindset when chasing for payment.)

I just want to give two examples of where administrative sloppiness can cause delays in payments (actually, it may be better to call it "lack of attention to detail" or weak procedures, since "sloppiness" implies a criticism. Sloppiness is only a fair term where you know you should do something and you don't do it, or you can't be bothered, or don't see the point).

First, if the details on the invoice are incorrect then the customer is within their rights to query it and ask for a replacement invoice. An invoice is a legal document, with certain essential elements. If a customer may feel they will run into problems with tax (corporate or indirect/VAT) if they book/pay an invoice that is not legally correct. So they are entitled to an invoice that contains the right elements - whether that be a VAT registration number, the correct company name or specific wording in the description.

Some customers will be good at coming to you immediately to point the problems out and sort things out immediately. A lot of customers won't be so forthcoming, and won't tell you until you start chasing for payment. So make sure you know what an acceptable invoice would look like to the customer, and set your procedures so that you and your staff produce them like that.

Second, make sure you send the invoice to the correct person or department. Obviously this is particularly relevant to bigger companies, where the person you deliver the product or service to may not be one who processes the invoice for payment. If you don't send the invoice to the right person, address, department, email address (or you don't send it in the right format - paper or electronic) then, stating the obvious, the customer won't pay you because the right people won't know to pay you! And you potentially won't find out you made an error until you find they have not paid by the due date.

Make it a priority to make a relationship with a contact within the customer's finance and/or accounts payable team. People will normally go the extra mile for people they know and have built up a good relationship with, and they will normally be more honest too.

To sum up, if you have got all the invoice details right and are talking to the right person, then it will make chasing for payment so much easier.

And it's the chasing for payment procedures that we will come to next time.

Please let me know if any of these issues affect you, and if you have any tips of your own for getting round administrative issues with invoices.

All the best!

Getting Feedback is Both Helpful and Risky

2009-11-19T11:06:00.003Z

Hi

Just wanted to share with you a recent experience, where I learned a valuable lesson.

I have been considering whether it would be worthwhile setting up an internet-based offering to help small business owners/managers with financial management. From talking to a couple of people in business it seemed as if there may be some interest in having a site where you can get access to helpful tools, resources, templates, checklists and courses, coupled with the availability of someone like me on the phone or by email. It seemed a good way of giving access to financial management help much more cost effectively.

So I followed some advice. I thought, before I design and develop this I'm going to ask people what they want, and find out what they would find useful. So I designed a survey using my free SurveyMonkey account!

I then sent a link to the survey to CF&M subscribers. I also posted the link on three discussion forums on LinkedIn.

The feedback I got was so varied, it shocked me and depressed me for a little while at least. This is the first time I have done a survey, so I kind of expected that I wouldn't have done it perfectly. But I was still a little disappointed with my efforts when a couple of people very helpfully pointed out one or two glitches. I was still very grateful to those people for pointing them out though, as it gave me a chance to correct them straight away.

On the LinkedIn forums feedback was very direct. One person complained that the survey was "rubbish", which then led to others jumping to my defence and pointing out that that person had not read the survey correctly or gone into it with the right attitude. On another forum the survey was described as "well-conceived"! Interestingly, whilst I was quite hurt by the "direct" comments in the first, it actually generated so much discussion that it spun off lots of really helpful ideas, and was the most active of the three LinkedIn discussion threads.

So, what are my learnings?

First, it's good to get the ideas from your target market before diving in to develop something new. The survey is not closed yet, so I haven't fully analysed what it tells me, but so far it has thrown up some pleasing confirmation of the idea, and a quite different idea of what would be more or less valued.

Second, when you "put yourself out there" you are taking a risk. You have to take the rough with the smooth. Some people are going to love it, some people will hate it. You have to learn from all the feedback, not just the bits you like. It doesn't mean you have to agree with it, but just listen to it, understand it, assess it and decide what it tells you.

Third, when surveying it is best to test the survey first with a close and controlled group. Their specific remit is to give you feedback on the survey itself, as well as completing it. They should hopefully find where there are glitches, and where the questions are not clear or easy to address. Once you have listened to, and addressed this friendly feedback, you are in a much better position to collect the views of a wider group.

Finally, strangely, controversy is not necessarily a bad thing. I'm not, at this point, sure whether creating controversy deliberately would be right. That seems a bit manipulative, and lots of people would see through it. But certainly don't be put off if you make some waves. "There is no such thing as bad publicity" is a bit of exaggeration (witness Gerald Ratner!), but there is a grain of truth in it. One of the secrets of harnessing those waves would seem to be to continue to conduct yourself with integrity, and to use the engagement with people wisely to both show your professionalism, get your point really heard, and get as much useful feedback as possible.

I hope that's helpful.

If you want to take a look at my survey, and help me out if you are the owner or manager of a small business, here's the link:

Click Here to take survey

Cash In For Success: Lesson 2

2009-11-18T18:27:00.003Z

I know this looks strange posting Lesson 2 after Lesson 3, but there is a reason... I forgot to post Lesson 2! These articles have appeared in the Creative Finance & Management eZine in the right sequence. I usually post the articles on the blog a few days after the newsletter goes out, but in this case I forgot. Oops! Sorry.

Lesson two is all about doing what you can to minimise the risk of non-payment by your customers - doing credit checks and setting credit limits.

I suppose the first thing you can do is to not give credit at all! I don't see why small companies should be funding bigger companies (presuming that's who your customers are). If you have already paid for goods and services in providing your product/service to your customer, why should you have to wait any longer to recoup that spending? So, if you can, get cash up front (especially if you are providing a service) or cash on delivery.

What you are trying to do here is minimise your exposure. You are exposed if you have provided valuable products or services to your customer/client, but have not yet received payment. It's an exposure to potential loss, because if they don't pay you then you will have given away something valuable for nothing.

So what do you do if you can't get cash up front or on delivery? Well you will want your exposure to be as small as possible without restricting trading too much.

The two tools you have to help you to keep your exposure as small as possible are credit limits and credit terms. Many small businesses don't use these tools, because they either don't know how to set them, or they think they will lose business if they set them. But just think how much you would lose if you have given a big credit limit (or none at all) and generous payment terms to someone you thought would be a good customer, and then they go bust after maxing their limit. How much would the loss be? Much more than you would lose by limiting their spending power with you.

But how do you decide on credit terms and credit limits? Should you have standard terms and limits? The answer to that question is varying degrees of "no"!

Credit terms are more likely to be standard than limits. Find out what competitors and other players in your industry give. You will then have some idea of what your customers will be used to. But even then you shouldn't feel like you have to stick with those in every case. So if the standard in the industry, or for that type of product/service, seems to be 45 days or 60 days, it's perfectly fine to try for 15 or 30 days. The smaller the term, the less your exposure will be. You can, perhaps, justify this by saying, "I know that other companies will give you 60 days credit, but we're just a small company and we can't afford to be giving customers that long. And remember the reason we are better is that we are smaller and more responsive [i.e. this is another opportunity to plug your USP]."

But, having made that last point, NEVER do the reverse and use generous credit terms as a selling point. "Choose us, we let you take longer to pay!" You are obviously getting desperate if you have to do that! What you are really saying if you do this is, "I know it looks like we are selling widgets, but really we want to be your bank!" You are NOT in the business to lend your customers money, so get them used to paying you as soon as you reasonably can. And also just think about what kind of customers it will attract - the ones who are desperate for credit and therefore more likely to go bust and not pay you, or more likely to try to pay late every time as well. Not the kind of customers you want!

What about credit limits? This is more difficult. And I haven't got space to talk about it this time, so it will have to wait until next time. Sorry.

So in two weeks we will have a think about how you would go about setting credit limits.

In the meantime see if you can find a shortlist of companies, local and national, that can provide credit checking reports.

All the best!

Cash In For Success: Lesson 3

2009-11-18T16:34:00.003Z

By Edwina Taylor

Despite the UK Government's interventions and the succession of recent interest rate reductions, there seems little sign of a mellowing in the commercial banks' attitude to lending to businesses. Forecasts claim that it will be 2011 before any meaningful return of confidence in the banking system. If access to external finance remains difficult to obtain, businesses will need to be vigilant in their management of working capital during 2010. All reasonable care needs to be taken in the management of trade credit.

Sound credit management can minimise the risk of a business being landed with bad debts. Obviously that risk can never be completely eliminated, even in benign trading conditions, but in these cautious times, the aim of the exercise must be to ensure that the credit offered reflects the clients' ability to repay it.

SME's must consider taking elementary steps to protect against the risk of bad or late debts, so: -

Consider what methods of payment you are happy to accept from customers. Retail businesses in particular need to be flexible here, but credit & debit card systems offer protection to the seller, which is less affected by subsequent changes in the customer's circumstances.
For non-retail transactions, consider setting a threshold beyond which an extension of credit will be conditional upon a satisfactory credit reference check.
Decide in advance what your firm's policy is to be with regard to late payments. Many firms incorporate interest clauses in their payment terms, but regardless of whether you do this, any business in the UK is entitled to charge statutory interest, currently set at 8%.
Ensure that all invoices are sent out promptly, with the name and address of the business clearly and accurately stated along with your payment terms. Many firms believe that charging interest on late payments acts as a further incentive to customers to pay promptly.
Keep an eye on outstanding invoices and chase debtors if payments do not arrive when expected.

What if payment is not forthcoming?

Send a letter to the debtor, stating or implying the consequences of a continuing failure to pay. You can always use a solicitor to write on your behalf, but there will then be further costs incurred.
You could sell your invoices to a factoring company or approach a debt recovery firm to chase the debt for you. This will relieve you of the work of pursuing your debtors, but will have costs attributable to the collection.
Court action can recover debts. In the UK, for debts of up to £15k you will go through the County Court who will allocate the claim to one of three different streams, including the small claims stream. You may be able to recover collection costs if you win.
If all else fails, then, for debts over £750, an unpaid creditor can initiate formal insolvency action.

Chasing Payments

Most businesses have heard the old chestnuts: - "the cheque is in the post", and "may I have a copy invoice". These are generally delaying tactics, but don't let it rest, and don't be afraid to insist on immediate payment.

Be diligent with processes - follow through the system of chasing debts, perhaps using a similar pattern as follows:-

Courtesy call the customer enquiring as to whether there is a reason for payment not being made;

Deal with any disputes on the order - asking for payment of those items that are not disputed, advising that the disputed items will be sorted out;

Where there is a cash flow problem agree a payment structure;

Keep records of all conversations and correspondence, email, fax, letters;

If all else fails put the company on STOP until you have been paid.

Remember unpaid bills are a way of easing your customers' cash flow problems at the expense of yours.

Credit Where Credit Is Due

Customers are the lifeblood of any business, but it is worth remembering "a sale is not a sale until it has been paid for". Extending credit is always risky and any business is taking a chance of not being paid, ultimately resulting in loss of profit, valuable time wasted in chasing the debt, and unwanted expense in taking legal action, only to be left with the bill being left unpaid.

Extending credit is like lending customers your own money. Would you advance a cash loan to a complete stranger? I guess your answer is no, but that is exactly what you are doing when you provide goods or services on credit.

Credit checking is widely used, but is it being used correctly? How do you evaluate how safe a business is?

Do you really understand the credit report?

Do you scrutinise the figures or just merely check that there has been no recent adverse activity?

Do you have a financial expert analyse the report?

Do you take up trade references?

Do you offer every customer the same credit terms?

Do you talk to the customer's Bank?

Do you check out the Directors' personal credit ratings?

If you have answered NO to one or more of the above, your business may be at risk. Risk Assessment has become the way forward. Most businesses carry out some enquiries, but the majority are insufficient.

Remember Turnover is Vanity, Profit Is Sanity, Cash Is King

Taking the risk out of extending credit is a vitally important and prudent move to adopt. See our 10 tips to help limit the risk of advancing credit accounts: -

1) Conduct a credit report for each new customer preferably backed up with a financial analysis;

2) Ensure that you ask for 3 trade creditor references and take them up;

3) Ensure you ask for a Bank Reference and that you speak to the bank;

4) Obtain an annual credit report for all customers;

5) Review all customer credit limits annually and do not be afraid to amend the terms or limits;

6) Have clear credit control policies which are "cast in stone" irrespective of the customer;

7) Include a Retention of Title (ROT) clause in your terms and conditions. It can be worth having a Solicitor draw it up for your own protection;

8) If you are supplying a Limited Company, consider obtaining a Personal Guarantee (PG) which will afford protection and allow a claim to be made against the Directors personally if the company folds;

9) Set the credit limit YOU are comfortable with not what the customer is asking for. For orders in excess of the credit limit the balance may be paid for COD or prior to delivery;

10) Ensure customers understand your credit terms and get them to sign the terms and conditions confirming their agreement.

Before you open a credit account be absolutely certain that your company understands your customer's payment system. Some companies will not allow payments to you until you are established on their system. Some companies insist on 90 day payment terms. Be sure that you agree in writing with your customer that payment is to be on your terms, not theirs. It is worth noting the day your customer runs the "cheque run" especially larger companies, government departments, Councils etc. Many only have one "cheque run" each month. You must ensure invoices are sent at least 1 week in advance of this date.

How can Frost Risk Services Help?

With our help, you can:

Know who you are doing business with;
Find out who controls that business;
Review their financial situation;
Check their credit-worthiness.

You can check the credit status of any business online with Frost Credit Checking 24 hours a day - See www.frostcreditservices.com - It's easy to use, updated daily, and comes with a solvency assessment written by a licensed Insolvency Practitioner if required. Whatever your interest in a business, we can give you bespoke reports and solvency assessments. We'll look at your options and help protect your interests, if need be.

For further information on this or any other debt related matter please call Edwina Taylor on 0845 260 0101 or 07515 334 251. Email edwinat@frostbr.co.uk

www.frostbr.co.uk Offices in Croydon, Dorset,Manchester, London

Forthcoming Article on Credit Management

2009-11-05T13:48:00.005Z

I am very pleased to say that Edwina Taylor of Frost Credit Services has agreed to write an article for us, giving some tips on setting credit terms for customers and on how to get paid on time by your customers.

The article will be posted here late in November 2009, but if you want it hot off the press then subscribe to the Creative Finance & Management newsletter by giving us your email address in the sign up box on the right of this page.

Cheers,

Andrew

Great Marketing Website for Independent Professionals

2009-10-23T13:20:00.001+01:00

I've recently discovered a web site that I have found really useful. It's called Action Plan Marketing. It's a site for Independent Professionals who are not so good at marketing their services and want to be better at attracting clients.

The site contains a huge amount of free information and also sells some great products. I signed up on their Fast Track to More Clients Programme, and it is the most useful guide I've found for marketing my services.

It is incredible value for money - just the manual (which you get to download) and the e-course itself would be a "no-brainer" spending decision. But you also get access to a coaching conference call every month, an online discussion forum, recorded and transcribed interviews with top experts, as well as loads of samples and templates.

If you are an Independent Professional (i.e. a coach, trainer, consultant, accountant, or any other service provider) I recommend you check out the site and make sure to get the free Marketing Plan Workbook and first chapter of the manual. This link will take you there: www.actionplan.com.

Cash In For Success - Lesson 1

2009-10-22T13:43:00.003+01:00

So, cash is king. If you want good cashflow you speed up your receipts and slow down your payments. Simple! Well, perhaps simpler to say than to do. And the payments side of the equation is actually a lot easier to improve than the receipts, because you have control over payments. You have the money and you will decide when to pay it out and how much to pay. The receipts side of the equation is under someone else's control, namely your customers or clients. And just like you, they can decide when to pay and how much to pay. That makes it difficult for you trying to manage your cash.

In fact I would say that getting customers to pay reliably on time is one of the biggest headaches a small business will face, if not the biggest. But there are things that you can do to reduce the problem, even if you can't quite eradicate it. Let me encourage you. I have seen a small business, with less than £10m turnover, reduce its overdue customer invoices to a handful. It takes persistence and concentrated effort, tough credit control and good honest communication with customers. But it is possible to get good control of your customer receipts.

Over the next few editions of CF&M I am going to give several tips that will help you to do this. It's possible that you have heard these things before, but cashflow is so important that it bears repeating.

The things I'll cover will include:

Credit checks
Credit Limits
Getting details right
Invoice timing
Credit control procedures
Chasing invoices for payment
Payment methods

But first I want to re-emphasise the importance of cashflow forecasts. Cashflow forecasts do not need to be complicated. But they are invaluable when you are trying to make sure you keep enough money in the bank. They give you confidence in the payments you are making, because you know how much cash will be left for the future. It gives you a chance of building up cash reserves to make an investment in new equipment or similar things. It shows you whether there is capacity to take money out of the business in dividends or bonuses. And it gives you early warnings of any problems that you may want to seek help with from your bank or investors.

One of the barriers that small business owners sometimes come up against in doing cashflow forecasts is that they don't know how to set one up on a spreadsheet. They don't have the confidence to do it. If they had a template they might be able to have a stab at doing it.

Well, if you subscribed to the Creative Finance & Management newsletter, you will have no excuse! You will have received from me a free cashflow forecast spreadsheet template.

If you haven't yet subscribed and you want the template, then go to the top of this page and in the sidebar there is form where you can input your name and email address. This will add you to the mailing list. You will receive an email to confirm you want to join the mailing list. After you have clicked on the "opt-in" link, you will receive an email with a link to a download page. On that page are the two free full-length articles I give to all new subscribers, and the cashflow forecast template will be on there too.

Got it? OK. I won't give you too many tips here for completing it. I think it's quite self-explanatory. Just fill in the yellow boxes. Why don't you spend an hour or two giving it a try to see how you get on?

Ok, my only three tips to get you started:

Start by going through the lines that don't relate to customer receipts or supplier payments (by supplier payments I mean payments of invoices that are on your AP/purchase ledger). Those are the hardest and you will get a lot of encouragement by getting the easier ones ticked off first.
When you forecast customer receipts you will need to have your up to date debtors list handy, and first go through it and make sure that you forecast the receipt of everything currently owed to you. Then forecast your sales (including VAT) and predict when those forecast sales will be paid for. Then add them to the receipts you have already forecast.
Use exact numbers wherever you can. But don't get hung up on getting it down to the last penny. You need to be able to update this every week in less than an hour. There's a balance to be struck. If you are estimating everything just to get it done, then you need to slow down and make sure you think about where you can possibly put in something more exact. If you are spending hours sifting through purchase ledger invoices to check payment terms and exact amounts, then you should probably step back and consider whether you will actually see the big picture any more clearly for all that hard work.

If you take this seriously I guarantee that two things will happen:

a) You will learn something about the financial dynamics of your business that will help you make decisions. You may even yourself adjusting some of your actions and decisions as you go through the exercise. And,

b) You will gain confidence in the payments you have to make and the actions you need to take to get customers to pay.

I'm interested to hear how you get on. Let me know at newsletter@charisfd.com.

What are the Basics of Managing Small Business Finances?

2009-10-05T12:38:00.005+01:00

I’ve been reflecting on the articles I’ve sent out in the Creative Finance & Management newsletter. Some of them have a bigger company feel to them, and if you own a smaller company you may be feeling like I am not saying anything relevant to you.

I am also conscious that although I am trying to say things that are relevant to businesses with turnover between £1m and £25m, in reality the difference between businesses at £1m and £25m are huge. And the difference between businesses with one or two employees to those with over £1m turnover is also fairly large too.

We tend to talk about small business as if it were one category. But small business is actually more diverse than large business! (It makes me wonder how we can talk about an “SME sector” when we lump the one-man bands in with the £100m complex group.)

I have also met quite a few people running sub-£1m turnover businesses who wish there was some service like Charis FD’s to help them with their finances. Watch this space! It is on my radar and I hope to come up with something in the next few months.

But in the meantime I have been trying to think about what I could say to help small businesses of all sizes. What are the basics? The fundamentals? What are the financial management principles that will keep you on the right course from the tiny beginnings to the multi-million pound success story?

If you have read the full length article that I sent you recently – “The Essentials of Financial Management in Small Businesses” – then the points below will not be new to you. If you haven’t read that, I would commend it to you. You can download it by clicking on this link:

http://www.charisfd.com/page11/page11.html

In summary the basic principles that apply to everyone are:

1. You have to make a profit

2. Cash really is King

3. Have a plan and know what’s coming

4. Stick to the plan

5. Review your progress very regularly

6. Never spend more than you have to

First, you have to be making a profit. If you don’t make a profit in the long term you would have been better off if you stopped doing business. Ok, in the early days you may start off with losses while you are winning customers. But if you don’t make a profit quickly enough you will run out of money. Investors and lenders don’t like putting more money into businesses that are not profitable.

So don’t ever lose sight of that. Don’t ever say to yourself, “oh well, I’m still in the loss-making phase.” Instead, ask yourself, “how can I get us profitable more quickly?”

Second, if you run out of cash your business is finished. Cash is like the fuel in the car. Once it has dried up, the car is going nowhere. If you are trading at a loss, at least you are still trading! If you have no cash, you are not trading at all.

So get your customers paying on time, don’t hold too much stock, don’t pay suppliers too early (and make sure your credit limits are adequate by being a good payer), and make sure your business is properly funded by doing cashflow forecasts.

Third, planning is essential, whether you like it or not. You have to know where you want the business to go and what you want it to achieve, and then ask yourself how it is going to achieve it. And do that with detailed questions until you know exactly what you need to do.

Many businesses fail because they didn’t have a plan.

Fourth, stick to the plan. Obvious point, but worth making. A plan is pointless if you are not going to follow it. Make sure it is detailed enough to follow, but flexible enough to allow changing course if it’s not working as well as you thought.

Fifth, measure your success against the plan. That’s a positive and a negative. You must measure your success against the plan. But you should not waste time measuring things that don’t tell you how well you are performing against that plan. Your plan should include every important element in moving the business towards your visionary objective.

There are some things you always need to look at: Your income statement each month, your balance sheet, your debtors list and your cashflow forecast.

Other metrics you need to define and decide on for yourself, because they should relate to your unique business and your unique plan. Just ask yourself how you will know whether the business is succeeding for each key element of your plan.

Finally, following on from the point about making a profit, don’t spend more than you can afford. Easy to say. Not so easy to do.

It’s all about challenging every piece of expenditure that is proposed, whether it is in the business plan or not. Is it really necessary? Could it be deferred? Broadly speaking, if the spending does not either help to keep you in business or contribute to increasing your profit in the future, then it is not going to help your business. So don’t do it. Sometimes this is a subjective judgment, and you will not really know whether you got it right or wrong. But simply committing yourself to that frugal mindset will mean that you are probably going to get it right mostly, and you will have a more profitable and more successful business because of it.

Work within these principles and you will be more likely to succeed than 70% of small businesses out there, in my estimation. I hope you succeed!

Claiming Back Foreign VAT

2009-09-22T09:49:00.001+01:00

Do you have EU suppliers outside of the UK? Are they supplying you with goods or services on which they charge VAT?

If the answer is yes, and the scale of the supply is significant, then you should probably get advice from your tax advisor or accountant. You should be able to reclaim all that VAT, so put that in perspective if you are concerned about the amount you will pay your tax advisor to ask the question.

In fact, if you are selling or buying anything overseas (or to/by an overseas company), always consult your accountant and tax expert.

I'm tempted to leave it at that! But I want to be more helpful. The thing is I'm not a tax specialist. I've just had enough experience to know where some of the big opportunities (and danger areas) are when thinking about tax. So I will share with you some of my experiences on the condition that if any of the issues affect your business you must go straight to your accountant or tax advisor and ask for proper advice.

First, don't, whatever you do, try to reclaim foreign VAT on a UK VAT return! If you have been including Dutch, German, French, Irish or Italian (or anybody else's) VAT in the purchases section of your UK VAT return then you have made a boo-boo! UK VAT returns are for UK VAT! You must quickly get advice from your accountant, who will help you to make a voluntary disclosure to HMRC, which will help to limit the interest and penalties you may have to pay.

Second - OK, assuming that you have not reclaimed this foreign VAT on your UK VAT return, I should mention one other possibility. You may be VAT registered in other countries. It is perfectly possible to register for VAT in Germany, even if you don't have a company based in Germany, and even if you don't sell anything in Germany.

If you are registered for VAT in other countries, then I am going to assume that you have already sought advice on it. All I will say is that it is worth paying a few hundred pounds every year to have your tax advisor come in and look over your non-UK VAT returns, or even have a tax advisor engaged in the other country, just to give you confidence that you are doing it right.

You will find that you will get tax correspondence in a foreign language, and so it makes sense to have a relationship with somebody who is an expert in tax as well as a native speaker of the language.

But DON'T go and register for VAT in a foreign country just because I mentioned it was a possibility! Get advice from your tax specialist! And if you are squirming because you don't like paying for professional advisors, then all I would say is - factor it into the cost of moving into that market. It's not something you should cut corners on.

I once worked with a business that was registered for VAT in Sweden, and even had an advisor in Sweden. But when correspondence came through from the Swedish tax authorities, they didn't refer to their advisor. The result was they paid late filing fees and interest of hundreds of pounds, because they had not realised the letters were telling them of a problem with a deregistration document.

Are you getting the message yet?!

Thirdly, if you are not VAT registered in foreign countries, then how can you reclaim the VAT that has been added to invoices that you have paid?

In the EU there is a process you can follow under the EU 8th Directive. It is bureaucratic, tedious, laborious and very strict, but it is worth the effort if you have incurred foreign VAT of more than £1,000-ish. There are forms to complete, which are different in each tax jurisdiction. Some have to be submitted in the local language, whereas some tax authorities accept submissions in English. And you have to enclose with your claim the original invoices on which you have incurred VAT.

There are other processes in other countries too for similar sales taxes, like VAT in Singapore, or GST in Australia or New Zealand.

Thankfully there are specialists out there who can help you. Some of them, such as Meridian VAT, will simply charge a percentage of what they manage to reclaim for you. Others, and some of the accounting firms, may charge a fixed fee or a percentage. If I were to state a preference I would suggest speaking to your accountant about it first. They can sometimes be very helpful with this, and pretty reasonable in terms of fees.

One thing I will note on this, is that when I did this for a £250m turnover group that was operating in 30 countries, we found errors in invoices from our suppliers. They had charged VAT on some cross-border invoices that were supposed to be free from VAT. The 8th Directive claim would have been rejected, because the invoices were incorrect. But in actual fact it was easier simply to go back to the supplier and ask them to give us credit notes and reissue the invoices. But it needed a VAT expert sifting through the invoices to spot that this had happened.

In conclusion, I have only scratched the surface, but hopefully enough for you to see that trading overseas can be a minefield. And I have only talked about the VAT pitfalls.

Starting to trade with overseas partners or employ people overseas should not be done without first seeking professional advice from your accountant and tax advisor. It's simply too risky.

Smallbizpod

2009-09-15T17:10:00.003+01:00

http://www.smallbizpod.co.uk/

A site packed with advice and tips and regular podcasts for start-ups, small businesses and entrepreneurs. Worth a look.

What Information Do We Need to Ensure the Business is Successful?

2009-08-24T16:12:00.001+01:00

If you are going to be successful in managing your business, you need measurement. You need facts that tell you how well you are doing and where you need to improve. And those measures of success are much broader than just financial measures, such as profit, cash, margins, etc, however important they are.

How do you make sure that your business is heading in the right direction? How do you make sure that your strategies are working? How can you even tell if your strategies are being implemented effectively? Is profit the only measure of success? Does profit tell you anything about whether you are achieving your vision?

Let's say my vision was to become number 1 in a particular market. How would I know how close I was to achieving that? Not by looking at my profit in isolation. And just asking that question leads to other useful questions that clarify what I am aiming at. For instance, what does becoming number 1 mean? Number 1 for sales volume, turnover, profitability, customer satisfaction? Best company to work for? Most environmentally friendly company in the market? Another question would be, who are my competitors? How do I measure their position or performance? How can I get reliable information about them that will tell me whether I am number 1 or not?

And I should also have strategies to follow that will help me to achieve the vision. So, in this example, I may decide that I am going to offer the best prices in the market in order to win market share. Nothing in my financial statements will tell me whether I am offering the best prices in the market, or whether I am winning market share. And yet if I have set that strategy to achieve my vision, it will be critically important to measure whether it is succeeding.

Other things are also important to measure, things that you need to be doing well in to achieve your vision and succeed in your strategies. For example, customer satisfaction, employee engagement, risk/compliance and corporate social responsibility.

I think my point is made by now, though it may sound strange for a finance guy to say that financial performance is not everything! The point is that even if profits and cash are ultimately what you want to maximize, you have to measure other things that help you get there.

The classic way of doing this is by using a Balanced Business Scorecard. We have not got the space to go into the theory and talk about Kaplan and Norton, who invented the concept. The point I want to get across is that if you want to measure the performance and the success of your business, you have to measure a balanced range of aspects. And you have to decide what those are, depending on what your business, your vision and your strategies are.

A few things I've learned about good balanced scorecards over the years are:

The measures must consistently and explicitly link to your vision and strategy. It's no use measuring things that are not important to that, because measurement and reporting takes time and effort. So you ought to focus on the things that matter.

Keep it simple and focused. Too many measures, even if they are all relevant, will just make it too confusing to interpret, too costly and time-consuming to report on, and will cloud your decision making.

It doesn't all have to be done with numbers. Again, strange for a finance guy to say! But it's true. Sometimes, something as simple as a traffic light measure can be all you need to see if a particular factor is ok, not ok or needs some corrective action.

Use measures as both lead and lag indicators. Lag indicators tell you how you have done. Lead indicators tell you how things might work out. For example, employee engagement can be seen as how your employees were feeling when they did the survey (a lag indicator), but engagement can affect attrition and motivation in the future. So low employee engagement can be seen as a lead indicator to attrition (and therefore higher cost) and low motivation (again, higher cost and potentially higher error rates, which may affect customer service, and so on).

I once worked with a division of a big bank that had a balanced scorecard. We produced it monthly. But it had so many pages in it that it took almost four weeks to produce, only a couple of people in the management team read it all and it was impossible to review in monthly management meetings. So we revamped it, cutting it down by 50%, keeping only the measures that directly related to strategies. We also made the reporting more colourful. Sounds cosmetic, but it actually made it much quicker to read and digest. You could just look at it and focus on the red items, where attention was needed. It then also took half the time to produce every month. The effect of that was to give management more time to review the report, and more time for the Finance department to investigate some of the items further. In turn that led to more efficient and effective decision making in the monthly management meetings, and led to a more successful business.

If you don't use a balanced scorecard to manage your business, I would encourage you to think about it. It doesn't have to be huge and complex. Just think about all the different things that are important to your success, and try to find ways to regularly measure them and report on them.

Making Business Change Successful

2009-08-24T15:59:00.003+01:00

One of the things I have learnt through being involved in big projects in big companies is the value of "Change Management". When I worked as the Finance person involved with projects and programmes costing millions in a multi-billion pound group, I was initially surprised that we employed a Change Manager as well as a Project Manager.

So if Change Management is not the same as Project Management, then what is it and what are the distinguishing features? And more importantly why is it worth reading an article about? How will it help you in your small business?

The following are just my observations. I am not an expert, I haven't read any books on Change Management. I have simply seen great Change Managers at work (people like Chris Collison), and seen the value of what they do.

Project Management relates to the best practice procedures for running projects - what documentation you need to define the project's objectives, terms of reference, scope, etc; what phases it goes through and how you manage each phase; resource management; etc etc.

Change Management seems to me to involve softer skills. If Project Management is about how to implement change, Change Management is all about how you make the change successful, so that it achieves what you wanted it to. (Change Management is also broader than projects, looking at how organizations and people cope with inevitable change, turning it to their advantage.)

Three things that a Change Management focus brings to any project, from my experience:

Focus on benefits: Whereas Project Management will focus on what we are planning to change and how, Change Management will ask why. Why are we implementing this new computer system? Why are we introducing these new forms?

It doesn't even have to be a project. So you can have Change Management, even where you don't need a formal project.

If you always keep in mind why you are doing something, what it is designed to achieve, why it will be helpful or value-adding, then you will implement the change in such a way as to achieve those benefits.

Let's face it, you don't spend thousands of pounds putting a new system in just because you want a new system (well, you might, but you shouldn't if you are concerned about the value of your business!) - you implement a new system because you think it will be beneficial.

But you have to be explicit and intentional about those benefits if you really want to achieve them.

And the value of thinking in that way is that it reminds you of other things you need to do. For example, Project Management processes will (hopefully) ensure that you implement the system you intended to. But a Change Management mindset will help you understand the things you need to do (e.g. the training, communications, process change, etc) to get the benefits you want out of the new system.

Focus on the stakeholders: Who is going to be impacted by the change or the project you are proposing? If you don't think about them then you may end up adversely affecting their ability to do their jobs. Or you may not get buy-in to your change. You'll have a new system (say) that people don't want to use because it came in suddenly and they struggle to get used to it.

So you need to think about all the people and groups of people that will be affected in some way by what you are proposing. Do you need to consult with them and ask for their ideas? Do you need to inform them in advance, so they can get ready? Do you need to train them to use new procedures and systems? Do some people need to do things differently? Are you looking for cost savings in their departments, and you need them to reorganize to get the benefits you want?

Constantly communicate: Of course, this is really the other theme in the point above. All people who are affected by change need to be involved in some degree of communication. There will be some level of consultation, information, advising, training, directing with everyone who has a stake - and at all times, listening.

Listening, I have found, is an oft-neglected part of communication. But people impacted by change know their jobs better than you do, even if you are the manager of the team or the MD of the company. And they can tell you how the change will affect them, and whether you need to modify your project to cater for their concerns, so that they can continue to do their jobs properly.

In fact, change that arises from ideas generated by the people at the "sharp end" are often the ones that get the best buy-in and are the most successful in adding value.

Conclusion: When you are looking at a big change in your business, you need to take a hard look at who is going to be impacted by the change and what benefits you are trying to achieve. Then you can communicate effectively about the change and make sure that everyone who is affected contributes positively to achieving those benefits.

The Importance of Regular Review

2009-07-28T08:05:00.003+01:00

The Importance of Regularly Reviewing Your Finances

I was reminded the other day that many smaller businesses struggle
with knowing what financial information they should be looking at
on a regular basis. Some don't look at any financial information,
apart from maybe their bank statement, from one year to the next.
It's kind of a surprise once a year when the accountant takes their
plastic bag of receipts (or perhaps these days a memory stick might
go with the plastic bag!) and two weeks later they sit with their
accountant to find out how they did. Those in that position lack
confidence in whether they have enough money to spend on things for
the business, and they don't know whether they can do things better.

Other owners of smaller businesses lack confidence that they are
looking at the right things on a regular basis.

So here's a simple little checklist to allow you to healthcheck
what information you are looking at on a regular basis. Apologies
to those for whom this is stating the obvious.

First, you need to place priority on keeping the accounts up to
date on a daily basis or weekly basis at the least. If the
information in the accounting system isn't up to date, then the
reports you get out won't be up to date either. So you need your
bookkeeper, accountant, accounts clerks - whoever keeps your
accounts - to regularly post invoices (sales and purchases), bank
receipts and payments on your accounting system.

Second, you need to look at a profit and loss statement every
month, at least. A profit and loss statement (accountants tend to
call it a "P&L") shows your income/revenue and costs in the last
period. One minus the other is your profit or loss for the period.
The reason you look at it as a statement is that it can tell you
many interesting and useful things that you need to know.

For example, you may get a big surprise when you see your gross
margins (gross profit as a percentage of sales revenue) are 40% and
not 60% as you thought. So it prompts you to find out what's going
wrong there. Or you didn't know that someone had ordered a
particular thing and it's cost £1000, so you go and ask them why
they needed it and why they ordered it without telling you. You
can't leave these discoveries until the end of the year!

Just one quick note, because it's not obvious to everyone - make
sure that these monthly P&Ls are done on an "accruals basis". Say
that to your accountant or bookkeeper and they will know what you
mean. The accruals basis really just smoothes out lumpy expenditure
that you pay for in one month, but relates to a different month or
more than one month - so your audit fee that relates to last year,
or your insurance that relates to every month of next year, and so
on.

Third, you need to look also at a balance sheet every month as
well. The balance sheet is just a statement showing what you own,
what you owe and what is owed to you. Looking at it every month
will help you to see trends and start to understand how to manage
your cash better. It'll give you early warning of things going
wrong with your customer accounts, your stock management or bank
accounts.

Fourth, if you are not in a cash or retail business, and your
customers normally get invoices and pay later, then you will need
to keep a careful eye on who owes you what and when it is due. So
get yourself a detailed aged debtors list (aged just means it shows
the amounts owed in age categories depending whether they are
current, overdue, very overdue or extremely overdue). I would
advise looking at the aged debtors list on a weekly basis, and
keeping it on your desk. Know absolutely what is due in the next
week and keep asking your accounts people every day whether it has
arrived. This is the foundation of good credit control, and is
critical to making sure you keep enough cash in the business.

Lastly, for now, you need to think about what other information
would be useful on a daily, weekly and monthly basis. Perhaps you
need to track your sales, revenues, order volumes, gross profits,
production quantities or whatever - the point of getting regular
information on how the business is doing is so that you know about
problems and successes as soon as they occur (and not a year
later!).

Remember, trying to manage the performance of a business without
using regular information is like an athlete trying to improve his
performance without timing himself.

Charis FD is Your Friend in Finance. We help businesses with turnover roughly between £1m and £25m, that have not completely got to grips with the finances. Perhaps they are not making enough money, not generating enough cash, or perhaps the finances are simply disorganised and chaotic. We work with the directors and owners in a flexible and affordable way to take the pain out of managing the finances, so that the business can make more money and be even more successful than it already is.

We work mainly in Hampshire, Thames Valley and Central London at the moment.

If any of the above rings true for your business, we would like to hear from you. Either email us at enquiries@charisfd.com, telling us a bit about your business and your finance challenges, or go to our website www.charisfd.com. On our website you will find lots of information, and also a contact form to get in touch with us.

That's it for this time.

If you have something that you would like us to write about that would help you in improving the finances of your small business, please let us know...

newsletter@charisfd.com

Charis FD - Your Friend in Finance

2009-07-28T08:00:00.001+01:00

I hope that you found the New Subscriber series of articles helpful over the last two months. They were designed to cover the full range of issues that form part of our business financial management model, centred on the Business Performance Management wheel. All the areas are designed to help you take control of the business finances and manage the finances intentionally.

The purpose of doing the series, apart from giving you some helpful advice, was to do two things:

Firstly, I hoped to demonstrate that Charis FD has a rational model for business financial management, a model that makes sense and covers all the important challenges that you face in making money in your SME.

Second, I hoped to give you an insight into the role that a Finance Director can play in your business. Many small business owners have built their businesses on their own, and whilst they may have met Finance Directors they don't really know exactly what they do or why they might need one.

There is a common misconception that Finance Directors and Finance people in general are simply "bean counters". They punch the numbers into the system and tell you how much money you are making. But you will have gathered by now that there is much more that they can offer. They can help you to be clear on your strategy, to plan effectively; they can help you decide which actions are worth doing, what changes will add value; they can help you measure and monitor business performance and analyse it in order to help make effective decisions; they can help you manage stakeholders; and they can help to manage risk and put in place an internal control system to help to prevent losses and errors.

But here is the tension that you may be feeling now: You can see where your business would benefit from getting better in all the areas we've talked about. But you don't have the time or the confidence in doing it yourself. But neither do you have enough money to employ someone full-time to be a Finance Director in your business and sort it all out. And, to be honest, it may not be a full time job if your business is in the under-£20m turnover bracket.

If that's what you are feeling, then Charis FD's service may be for you. We specialise in delivering assistance to people like you in a flexible and affordable way. Our service has broadly four levels, depending on your needs and your budget. We can provide you with a programme of assistance, combining telephone and email support with a varying number of days onsite working with you. We could be with you as little as one day per month or as much as two days a week.

Our aim is to give you confidence in managing the business finances, which will lead to, amongst other things, improved profitability and better cashflow.

If you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

If you want to look back on any of the previous email newsletters we have sent, they are on the Creative Finance & Management blog.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Internal Control - 3 Fallacies that Add Risk to Your Business

2009-07-28T07:54:00.002+01:00

This is the last in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you missed any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

Here we go again: ...

Internal Control - 3 fallacies that add risk to your business

Fallacy number one - internal control is boring. Ok, so that's not a fallacy! Internal control IS boring in my opinion. Some of you may even be saying, "What is internal control anyway? Certainly sounds like something boring. Sounds like something that big companies with big auditors might be interested in. But not me!"

No! Please don't switch off, don't close this window and read no further!

Saying that internal control is boring is a bit like a train driver saying that railway tracks, signals and points are boring! He's right, they ARE boring! But if someone doesn't provide those key controls then the train's going to crash. In fact it won't even get going very far.

The same is true in business with internal control. Without controls, your business is going to crash unless it is unfeasibly lucky. So listen up, this will save you much pain.

Fallacy number two - internal control is technical and complex. It certainly can be, but for a smaller business it doesn't have to be.

Internal control is really all about safeguarding the assets of the business, including its cash. And just like safeguarding the assets of your home, mostly it's common sense.

So you could have physical controls, like locks on the premises, access control systems, putting your money in a safe at the end of the day, keeping confidential documents in a locked cupboard, etc.

Authorisation controls are another type of controls. Particularly important when you have employees, these controls just ensure that people get permission from another more senior person (maybe yourself) before they go ahead with something. It may be signing a contract, making an offer to a prospective customer, buying things, or paying for things. Like I said, common sense.

But have you considered that there are certain things that the same person should not be responsible for? These controls are referred to as "segregation of duties", and are mainly geared to avoiding the opportunity for fraud. For instance, if your bookkeeper opens the post in the morning, banks the money received in the post from customers, records the receipt in the accounting system and performs the bank reconciliation, then they have opportunity to make all the right entries in the accounting system but pocket the money themselves. It would take you months to uncover it.

Or another common example: A purchase ledger clerk who is able to set up new suppliers on the accounting system, record purchase invoices and make payments to suppliers, could easily set up a fictitious supplier, record a fictitious invoice and get them paid. Similarly with payroll - don't let someone set up new employees if they are the ones running the calculations and/or making the payments.

There are also review controls and reconciliation controls. These are very important too. Review controls just mean you, or someone senior, looks over something (like a bank statement) to see if they see anything unusual or suspicious. Then they sign it to evidence that they looked at it. Reconciliation controls are really accounting controls. They give comfort that the entries in the accounting system are grounded in facts verifiable from external evidence. Proper reconciliation and review controls make fraud very difficult.

So the simplest reconciliation control is the bank reconciliation. Any person with any experience in finance, from your bookkeeper to your FD, will tell you that this is the most fundamental. In it you are showing that the bank balance showing in your accounts reconciles to your actual bank statement balance. It probably won't agree to your statement, because you may have written a cheque that has been recorded as a payment but not presented by the payee yet. That's why we say that it "reconciles". Reconciling items are adjustments that need to be made to show that the accounts reconcile to the external evidence. If those reconciling items don't make sense, perhaps because they are too old, then something may be going wrong and further investigation is required.

You can do a reconciliation wherever you have external evidence. So the bank reconciliation relates to the bank statement. You can also do supplier statement reconciliations to give comfort that all purchase invoice entries and supplier payment entries in your accounting system are correct.

Fallacy number 3 - it's something to leave to my FD and my auditor. Your auditor may check up on internal control once a year in order to get comfort that they can sign off their audit opinion on your accounts. Your FD (if you have one) is probably the one to whom you have delegated the worry about it.

But internal control, legally, is the responsibility of all directors - with joint and several liability. So it is something to work together on, supporting each other.

The thing about internal control is that it is restrictive. It says to your employees that they have to go through certain hoops before they are allowed to do things, or they have to put a signature on something to say they've done something, or they have to do things a certain way. In a lot of cases, though, employees just want to fulfil their main objective - to make the sale, to finish the batch quickly, to stock the shelves, or whatever. They heave a huge sigh, knowing that Finance has said they have to count, sign, go and get a manager, etc. They may rebel because they can't see the purpose.

I have seen businesses lose lots of money because the directors left Finance isolated in those situations. They didn't see control as a collective responsibility, and they shunted the control issues to the bottom of the management team agenda (which they hardly ever got to).

Conclusion: Internal control is important. I would encourage you to think about what procedures you need to put in place to protect your business assets and cash, and to make sure that all your information is accurate. Listen to the advice of your auditor, accountant and bookkeeper. As the business gets bigger and you delegate more and more authority, the more structured you will need to be.

But please don't write off the issue as boring, otherwise your business will pay eventually.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Stakeholder Management - the Importance of Keeping People Happy

2009-07-28T07:49:00.002+01:00

This is number 7 in an 8-part series especially for new subscribers to Creative Finance & Management. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Stakeholder management - the importance of keeping people happy

You already know this in all probability, so I will try not to labour the point, but there are many relationships involved in running your business. A lot of them you could call stakeholders. Stakeholders are people or entities that have an interest in your business.

The term is used really to make it clear that businesses do not just exist for shareholders - those who own the business. There are other people and organisations that are affected by and/or interested in the success of the business. They can also affect the success of the business, and you need them on board to help you achieve your vision. So they should be given some attention as well.

If you want examples, stakeholders would be the likes of: customers, suppliers, shareholders, lenders, bankers, employees, local residents, landlords, insurance agents, recruitment agencies, HMRC, pensions providers, auditors, tax advisors, corporate finance advisors, company secretary, non-executive directors, other board members, (maybe the media, your competitors and industry regulators could be others).

Here is another area where you need to be intentional and analytical. Relationships need to be managed. You can't leave them to chance. If you are not managing these relationships right now, why not? Is it because you don't like others interfering in your business? If that's the reason then here's my suggestion for a mindset change - why not see these stakeholders as your teammates, with different skills, abilities, expertise, network contacts, access to funds, wanting your business to succeed and ready to help? Twenty heads are better than one?

And when I say that relationships need to be managed intentionally, I am not saying that you have to be on the phone every week to every single person you identify as a stakeholder. But you have decide intentionally whether you are going to give them any attention and if so, how much and of what sort.

So here's what I think you should do now:

First, brainstorm a list of the stakeholders in your business (and I mean each one, not each category - so each customer and each supplier). Then, for each person or organisation, make a note of:

What do they get out of your business?

Why is your business important to them?

How would you classify their relationship with you (customer, supplier, advisor, investor, etc)? There could be more than one answer.

What do you and your business get out of them?

What else could you get out of them?

How important is this relationship to the success of your business (rate 1 to 10 or High, Medium, Low)?

What is likely to happen if they didn't like you (and on a scale of 1-10 how disastrous would that be for the business)?

What could happen if they liked you more?

How good is your relationship with them (1-10)?

Given the importance of the relationship noted above, how good should your relationship be (1-10)?

What is your relationship strategy for this person or organization (actively develop, regular update on business, mine for leads, no proactive management, etc)?

Finally, there are some stakeholders that are so important that they need extra special attention. Those would be shareholders, customers, lenders, employees, (perhaps some key suppliers and contractors), landlords, bankers and auditors. If they withdrew their funds or their services, or published an adverse comment about your business, you would be stuffed! Perhaps it's worth thinking whether a little bit of extra effort on your part might keep them happy. Perhaps you could give them a little more information than they request, or phone them with an update when they haven't asked, beat deadlines, offer a tour of your facilities, etc. Some things don't cost anything, but they buy lots of goodwill. You never know when you may need them to be understanding!

The next CF&M new subscriber newsletter is the last one, and we'll be looking at internal control - 3 fallacies that add risk to your business.

See you then...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Your Finance Team - a Valued Asset

2009-07-28T07:42:00.003+01:00

This is number 6 in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Your Finance Team - a Valued Asset

If you have read all the articles that we have sent to you in this new subscriber series, you will hopefully have learnt something not only about managing business performance, but also about the skills and expertise that professional finance people can bring to your business. So I'm actually not going to labour on about the value of finance people and accountants, as the title suggests.

What I am going to do is try to get you thinking about what resources you might need in your Finance function. Perhaps there may be areas you haven't thought of. And if I can help you to get your Finance function fit for purpose then your business performance wheel will turn a lot more smoothly and you will be more successful.

I'd like to think about the Finance function as a set of resources consisting of processes, systems and people. People operate processes, and systems help to facilitate and automate processes. All the elements interact with each other.

Let's think about how Finance functions develop as a business grows, as that may indicate the priority of various elements.

The first thing you ever employ an accountant to do is to set up your company and then prepare and audit its annual accounts and tax computations. This is almost universally true of small businesses - even I have an accountant who does that for me, and I'm a qualified accountant myself!! This is what I would call the compliance requirement.

Above a certain threshold the law says you have to have an audit (if you are trading through a limited company), so you will never get away from a relationship with an external accountancy practice. But you may get to the point where you have the expertise in house to prepare the accounts and save money on their fees! Only the very very big companies have internal tax people, and even they still spend money on tax advice from the accounting firms.

In the early stages you record all the transactions yourself. After a while the business gets too big for you to cope with that, and so you employ a bookkeeper. You also have an accounting system. This is the transaction recording requirement.

In the early days your accounting system may have been a book, a file or a spreadsheet. Then you may have got a proper package like Sage or MYOB. Perhaps you've now got to the stage where you've moved onto something more flexible and with better functionality - like Microsoft AX, Great Plains or Navision.

The key things about your accounting system are that it is there to help you meet both the compliance requirements (holding proper accounting records, and doing VAT returns), and to help you measure your business performance. It becomes a key enabler of your business performance management wheel. If you want information out of it to measure your performance you have to be able to put accurate base data into it somehow. And that's where you need to have a look at the transaction recording processes and see whether you have a problem with GIGO - "Garbage In Garbage Out"!

Back to the growth story... So you're employing a bookkeeper to record transactions in a system, but you are writing the sales invoices yourself and paying your suppliers with your chequebook, your business debit card or through internet banking. At some stage that gets too onerous, so you take on an accounts clerk or two. They take care of the operational finance and control requirement.

So you may now have a Purchase Ledger Clerk recording the supplier invoices and preparing payment runs for you to authorise. You may also have an Invoice Clerk, preparing all the sales invoices to send out. On a part-time basis you may also have a Payroll Clerk or outsource the payroll to a bureau. Between them they could also take care of the bookkeeping requirements, but you may then want an accountant to make sure that all the operational finance, control and transaction recording processes are tied together.

I added the word control in with operational finance to indicate that once you delegate your invoicing, recording and payments, you need to have controls to ensure that people are doing things correctly. This is even more true when you are employing more people elsewhere in the business, since they will need procedures to follow to spend money or commit the business to contracts. I will talk more about this in my eighth article in this series. The point for now is that transactional controls are guarded by the Finance team on your behalf.

By this stage you are normally struggling to get information out of the system to measure the performance of the business if you try to do it yourself. If you are taking note of what I've been saying in previous articles then unless you are a whizz with Microsoft Excel spreadsheets, database queries and pivot tables, you will probably already have an in-house accountant doing reports for you. This is the business performance management requirement.

So you see, whilst I have been talking about business performance management constantly in these articles, I do understand that there is a lot more to the core Finance function. And these core activities need to be managed properly and grow with the business.

Conversely, these weekly articles may have opened your eyes to how much more can be built on your core Finance team in order to help you to manage the performance of the business.

At some stage of growth the business will need a Head of Finance or a Finance Director, a fully qualified accountant with a few years of business experience, to help you manage the full range of core finance (compliance, transaction recording, operational finance and control) and business performance management activities. Has your business reached that stage yet? Have these articles opened your eyes to how much more you should be doing to manage your business performance?

For many businesses there will be a stage where they have a small Finance team and know they need to do more in the realm of business performance management, but they cannot justify the cost of a senior Finance person or think there wouldn't be enough work for a full time role. The fledgling Finance team also probably needs some guidance and direction from someone more experienced.

That's where a flexible service such as the one offered by Charis FD comes in handy. We can provide advice and hands on support in all elements of business performance management, including helping you manage your Finance team, on an ongoing basis. And we can do that by being on site with you anything from one day a month to two days a week or more. Have a look at our website for further details.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Paralysis Without Analysis

2009-07-28T07:38:00.002+01:00

This is the fifth in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Paralysis without Analysis

Over the last three articles that we've sent to you as part of our new subscriber series we've covered the points around the outside of the business performance management wheel - strategy, change, and performance measurement/reporting. There is one more thing to talk about briefly before moving on to talk about the Finance function (next time) and then other key concerns such as risk, controls and stakeholders. That is performance analysis. I like to call it performance improvement analysis.

If you've read the previous articles in the series you will have picked up the philosophy underlying my advice - be intentional and analytical. Mostly, though, we've talked about being intentional - if you mean business, then you are intentional, you know where you want the business to get to and you know how you intend to get there. And you know whether you are making progress because you are intentional about measuring performance.

Now I want to talk about being analytical.

I started writing something a bit philosophical here at first, and then I heard myself yawn! So I deleted that. Do you want to get under the skin of the performance of your business? Do you see things that are happening and wonder why? Do you wonder which of your products is really the best? Is it the one that sells the most? Do you wonder which of your customers is really the most important? Is it the one that buys the most?

Analysis is all about asking "why?" And "what if?" It can be as basic as "why have we made a loss this month?" Or it could be more complex, such as, "what if we offered early payment discounts of x%?" Or even more complex, like, "what if we paid £xmillion to buy a business?"

It doesn't have to be financial data. Other numerical analysis is useful too. In fact, if you can make it numerical or financial then it is often easier to get a qualitative understanding of the issue - i.e. is it good, bad or ok. One example of numerical analysis that I dealt with in one large group was looking at absenteeism. How many days of work did we lose through sickness? And in which locations? Which teams? Was it seasonal? Was it improving or getting worse? You may be asking, "where is the why question in that?" Well, think about, "why are our staff costs so high?" There are accepted benchmarks around, so we could tell whether the sickness absence rates were better or worse than the average for those types of people. That enabled us to focus on particular areas, ask further questions and put actions in place to improve. Reducing absenteeism eventually led to lower staff costs, because we didn't need as many people to do the work. That's another example of what we saw last time - that measurement enables you to manage and therefore improve.

Analysis enables you to drill right down to cause and effect relationships. The idea is that if you can measure and manage those cause and effect relationships then you can reduce things that drag the business down and enhance things that positively influence the business.

Many big businesses suffer from what they call, "analysis paralysis", which basically means they have gone too far. They have analysed everything and now have so much information that they can't make sense of any of it. Smaller businesses very often suffer from the reverse - "paralysis from lack of analysis"! Have a think about what information you have available in your business. How well do you really understand the cause and effect relationships?

But where do you start? Here's my suggestion: Take a key performance measure, one with strategic importance, and ask, "what would I have to do to make it better?" There may be several things you could do. Get information on what the current situation is for each of them. Then for each of those things, ask, "what would I have to do to make that better?" And keep on going through that cycle until you feel you have got somewhere close to root causes. Along the way you will have analysed your business performance and got valuable insight into the things you have to do to improve.

Here's an example: Let's say that in my business, staff costs represent 70% of the cost base. What would I have to do to make that better? Reduce headcount or reduce remuneration. Let's discount the latter for now. So we should analyse how our headcount is made up - by department, by grade, by location, etc. What would we have to do to reduce headcount in each of those categories? Reduce work or become more efficient. So let's analyse what work the people are doing and how efficient are they - what do they produce and how many do they produce per day, hour, week, month, whatever is appropriate? So with that information, what do we have to do to reduce work? Stop doing certain things - so what would be the impact? And what do we have to do to become more efficient? Do things quicker. So in order to see which things we need to do quicker, we need to analyse what activities have to be done to produce the outcome and how long each activity takes. Then we can look at the main activities and ask for each of them... you've guessed it! "What would we have to do to make that better (or quicker)?"

So to conclude, in order to manage business performance you need to measure it first. But you need to do more than that. You need to understand what the figures are telling you. And in order to understand, you need to analyse - financially, numerically and logically.

But one final word of caution - only measure things that are useful and you can act upon. If you find yourself regularly looking at figures that you do nothing with, then ask yourself what they are for... and if you can't find a satisfactory answer, STOP producing them and go and find some more useful analysis to look at!

In the next newsletter for new subscribers we'll look at your Finance resources - people, systems and processes. Are you getting the best out of them?

Until then, take care...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Measurement and Management go Together

2009-07-27T16:45:00.004+01:00

This is the fourth in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Measurement and Management go Together

"What gets measured gets done!" is often quoted as a truism. The other way I would put it is, "if you don't measure it, you don't manage it". What I want to do in this article is show you the principles of how to apply that to managing the performance of your business. You do want to manage the performance of your business, don't you? You know that if you don't manage performance then your business will almost certainly underperform?

I've tried to say in the last three new subscriber newsletters that you have to be intentional in managing business performance, or in managing a business in general. If you want your business to perform well, you have to know and specify what you want it to achieve and have defined strategies for achieving those goals. You should also have given yourself targets for what each of your strategies should achieve.

But you can do all that and still not succeed. One of the main reasons that happens in smaller businesses is that they don't check regularly to see whether they are succeeding or not. They don't measure the outcome of their strategies, or at least not regularly enough. It's no use getting to the end of the year when the auditors come in, or when you sit down with your accountant, to find out that you haven't grown your business as much as you wanted to, or you spent too much. It's a bit late then. You need to measure outcomes monthly, weekly, and daily in some cases.

Getting into the nitty gritty for a minute, the basic financial performance reports you need to have on a monthly basis are the income statement (or "profit and loss account") and the balance sheet.

The income statement should not be in so much detail that you can't see the wood for the trees, but should be in enough detail to see where your money is coming from and where it is going to. For example, if you sell the same small set of products to a few regular customers, then show your income by customer or customer group. On the other hand if you have a varied product set you may want to show your income by product. This depends what your marketing and sales strategies are - segment your income in the same way you segment your sales for strategy purposes. Then you can see if your strategy is making any difference.

Similarly you will want to show your costs in the income statement in a way that makes sense. You may show them by type (e.g. premises, people, insurance, IT, etc) or by department (e.g. operations, sales, finance, IT, HR, etc) or both. It depends how complex your department structure is and how you manage your business.

The balance sheet shows the value of what the business owns, what it owes and what it is owed. It is useful to see particularly the cash balance, the debtors balance (what your customers owe you) and the creditors balance (what you owe suppliers).

But this is just the basic level. Every business should do those without question. You need more. If your strategy is targeting increasing sales, then you must also get more detailed reports on sales. If your sales cycle is less than a month, then perhaps you should be getting sales reports weekly or daily. If your strategy depends on production quantities and operational efficiency, then perhaps you need daily or weekly reports on those things.

And again, don't just look at financial performance. Performance measurement and management are much broader than that. If you are a service business, perhaps you need to measure that utilisation ratios for your consultants (time spent generating revenue divided by time available). If you have a long sales cycle, perhaps you need to get weekly or monthly reports on leads generated and sales pipeline reports. If these things are critical in your strategy to achieve your vision for the business, then you can't manage them properly without measuring how you are doing.

To sum up, what are the key things to think about in performance measurement and reporting? What, how and how often - those are the three key questions. What to measure will depend on your strategy, the things you are doing that are important to getting the business towards achieving its vision. How to measure it will have to be thought through carefully - it could be a figure, a ratio, a traffic light, a pie chart, etc. How often will depend on how often things change. You want to be able to make decisions and adjust your strategy and tactics on the basis of what the information is telling you, so the information has to be timely.

Finally, all this measurement will be worth nothing if you don't use it, if you don't make decisions based on the information. No strategy is perfectly infallible. The information you get may tell you that you are not quite getting it right. If you are learning from the reports you get, you will investigate further and tweak or change your strategy depending on what you find. This the feedback loop complete. The business performance management wheel that I talked about in the first of these articles depends on completing the whole cycle - develop your strategy, carry out your strategy, measure your performance and learn from the information to develop your strategy... and so it goes on.

I'm worried that this all sounds complicated, because I've condensed so much into a short space. If you do a healthcheck on what you actually do at the moment, I think you will find that you already do some of this, but it may be ad hoc, disjointed and disorganised. As with other areas, putting some thought into it and having a rationale for measuring things about your business will get you a long way forward. Just the act of being intentional about performance measurement is big progress.

The final thing I would say is that this is probably one of the areas that someone like a Finance Director would add the most value. They are skilled in pulling numbers together and in interpreting what they mean for the business. If you haven't got anyone like that in your business, then give it some thought. And it doesn't have to be full-time headcount. There are part-time options available, which are more affordable for smaller businesses - one of these options is Charis FD's own services. That's a gentle plug for my business, but I think it's appropriate. See our website for more details.

If you are worried about the cost of such a service or the cost of taking on a full-time FD, think of it in terms of the financial benefits it could bring. They would work alongside you, helping you to put in place the finance and performance management disciplines we have been outlining over the last few weeks. So I would be surprised if following all this advice with help could not help to improve your sales by more than 5%, or improve your gross margins by more than 5-10%, or your net profits by 10% - especially if you have not employed one before (either full-time or part-time). If you look at it that way, it doesn't seem so expensive. That's obviously not making any promises, but it's food for thought!

Why not contact us today?

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Business Change

2009-07-27T16:38:00.005+01:00

This is the third in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

Business Change

One of the areas where Finance professionals can probably add the most value is around business change. They bring control and ensure that you go into the change with your eyes open, and hopefully if you listen to their advice they can help to ensure you only implement changes that will benefit the business.

First let's start by defining "business change". Thinking back to the last new subscriber newsletter, business change is just a type of strategy for the business. Business change is simply changing the business in a big way. Strictly, I suppose, you could apply everything we are going to say to small changes (recruiting an extra person or buying a new PC) as well as big changes. But normally when we talk about business change we are talking about something that has a big impact. So it could be the acquisition of a new business, the introduction of some automation into the manufacturing process, the implementation of IVR on the phone system, buying a building, implementing a new accounting system, selling part of the business, restructuring programmes, closing a factory, opening a new shop, and the list could go on.

My point about business change is somewhat similar to my point about strategy last time - I can't stress enough the importance of being intentional and analytical. You may laugh at me at this point and say, "how can I buy a business or implement a new system without being intentional? I can't imagine ever saying, 'Oops! I accidentally just bought a business!'" Well, that's not exactly the point I'm trying to make.

The point about being intentional is because sometimes people suggest changes because they just feel like a change. It happens in both big and small companies. In big companies, the CEO might say, "I think we need an SAP ERP system, or a Siebel CRM system." In small companies, the owner may say, "I just feel that we need some really nice offices." Now in both cases there could be good reasons for wanting those things, but I've shown them bluntly to illustrate that it is perfectly possible that it's all down to vanity! The big company CEO may want to get those words on his CV, the small company owner may just want to feel more successful.

In one business I worked with I once heard an acquisition referred to as, "a triumph of vanity over sanity!" That was because the company paid too much to buy the business, so that it would take years to make a positive return on investment, but everyone had to admit that it looked good for the chairman/CEO, who was also the majority shareholder. If your business vision is to build your ego, rather than your business value and bottom line, then that type of acquisition is fine! That might sound sarcastic, but I'm actually being semi-serious. If you realise that a change project is not going to deliver any benefit to the business, but you want to do it anyway because you want the Kudos, then at least you are going into it with your eyes open. The people I have a problem with are those who try to fool themselves and everyone else that their project is really beneficial.

Ok, so what is the right approach?

Being intentional is about making strong links between what you are trying to achieve in your strategy and vision and the change you are proposing to make. The best way to do this is to write down benefits statements briefly in bullet points in the format, "one of our strategic issues is "; This project "; The benefit is ". If the benefit does not address a strategic issue, then why are you doing it? If your project is really addressing strategic issues in your business, then you will have no trouble writing down these benefits statements. If you do struggle then that should ring alarm bells.

Being analytical is objectively assessing whether the benefits will outweigh the costs. Sometimes this is where the frustration comes, when you discover that something you want to do is actually going to financial damage the business. The project may have so many benefits, but not enough to justify the cost and the impact on the bottom line. I admit it is frustrating. But it's better to identify this before you start, then you won't waste your time as well as your money!

As an example, I once worked with a very large company with nearly 40,000 employees. For two years the HR Services team had been managing annual bonus and pay review calculations through a suite of spreadsheets, while at the same time the business had been recruiting more and more people onto new contracts with bonuses. So their problem was only going to get worse. What the team proposed was an expensive off-the-shelf system. It would definitely save time and therefore money (not having to employ temps to do the spreadsheets), and reduce the risk of error, but when we analysed it the savings did not outweigh the costs, even over a 5-year period.

In that case I had to say no to them, but I also suggested that they talk to the IT team to see if they could write some visual basic to automate their spreadsheets. It wasn't the nice shiny built-for-purpose system they wanted, but since it was a fifth of the cost of the initial proposal it clearly then gave the benefits we needed at a cost we could afford.

Lots more could be said, but let's leave those things for future CF&M articles! In conclusion, be intentional - be really clear that the change you are proposing is addressing the biggest strategic issues you have identified. Also, be analytical and objective or realistic - set figures on the benefits and the costs and see if one outweighs the other over a period of time (say, five years).

Final word, just in case you haven't come across the term before - the benefits statements, and the analysis, are the main parts of what is normally referred to as a "business case".

All the best!

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

Strategy and Planning in Business

2009-07-27T16:30:00.003+01:00

This is the second in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we are sending you an article aimed at helping you to think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter. We are doing it to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

1. The ingredients for success in Finance
2. Strategy and Planning
3. Business Change - implementing your strategic plans
4. Measurement and Management go together
5. Paralysis without analysis
6. Your Finance team - a valued asset
7. Stakeholder management - the importance of keeping people happy
8. Internal Control - 3 fallacies that add risk to your business

So, ...

Strategy and Planning in Business
I guess the first thing you may be thinking is that you don't need fancy strategies in your business, because it's so small, so why should you bother with this article. Surely you just keep working hard and you'll make more money without going through pointless navel-gazing exercises to come up with strategies!? Well, I'd kind of agree with you that you don't need FANCY strategies, but in reality every business has strategies whether it consciously acknowledges them or not. So wouldn't it be better to choose those strategies intentionally than to drift into them?

It's all because the word "strategy" sounds a bit technical, something that generals do in wars when they have to organise lots of soldiers. It has connotations that sound big. But that need not be the case. Really a strategy is just a specified approach to overcome a problem or achieve an aspiration. And each strategy can have a number of activities within it that can be planned specifically.

So if you have a problem you want to overcome or an aspiration you want to achieve, then your approach to doing that will be your strategy. So you see that we all have strategies, even if your strategy to date has been to "wing it"!

One of my philosophies is that if you want to get anywhere with anything you have to be intentional and analytical. Being intentional is my point for now. For example, when I am trying to coach my son in how to get better at playing football I often tell him to be "intentional". In other words, don't just stand around on the pitch waiting for the ball to come your way, and when it does come your way don't just swing your foot at it and hope for the best! You must have a reason for being where you are, to gain an advantage for your team, and when you kick the ball you must know where you want it to go.

It's exactly the same with business strategy. You have to be intentional. And it doesn't have to be fancy and complex. Just have an intention. Because if you have an intention, it means you must have thought about it and have a reason for it.

Hopefully I've persuaded you that even if you have a small business you still need strategies. In the remaining space let's have a look at what you need to develop good strategies.

First, you need a "vision". A vision is simply a statement of where you want the business to get to. What's your dream for the business? How much profit? How much turnover? How big a valuation? Market share? Being number one? Even a one-man business has a dream. I know I do. But if you are going to be intentional you need to be specific about all the things you want the business to achieve.

Second, you need to know what the "strategic issues" are. Strategic issues are the barriers and challenges to be overcome or met in trying to achieve the vision. And to know what these are you have to be analytical. You have to gather facts and be honest about the market, the competition, your customers, your suppliers, the economy, and many other things. I know that small businesses often don't have the time and resources to gather all the information they would like, but mark my words, the more information you have the better equipped you will be.

Third, you need "strategies" to address the strategic issues. And to decide on strategies you may have several options to consider. Being clear about your vision and the strategic issues enables you to weigh up each option on its merits. Does this particular option address the issues completely or partially or not at all? Does it help with more than one strategic issue?

Fourth, each strategy needs a "plan". In order to successfully carry out a strategy you need to plan it, so that you know what needs to be done.

Last point - write it down and make a record of your vision and strategy. I wish I could remember where I heard this, but there was some research done on some graduates and whether they achieved their dreams. A much higher percentage of those who wrote down what they wanted to achieve did achieve their dreams. They had something to go back to and remind them what they were supposed to be focussing on, something to measure their performance against.

If you haven't ever thought of any of these things, why not have a go at jotting something down? Sure, there are coaches that can help you and courses, seminars and workshops that can give you more guidance and depth (and I would definitely recommend these things if you can afford them), but in my opinion you can get a long way by simply being intentional and analytical and ensuring that all your plans link through strategies to your vision.

All the best!

Until next time...

If at any stage you want to talk to us, we're quite happy to give you a call to talk more about your business and the challenges you face. And you may be eligible for a free Finance Strategy Review session. To set that up either email us at enquiries@charisfd.com, remembering to leave your phone number and email address; or go to our website and complete the contact form.

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

The Ingredients for Success in Finance

2009-07-27T16:18:00.005+01:00

This is the first in an 8-part series especially for new subscribers to the Creative Finance & Management email newsletter. Every week we will send you an article aimed at helping you think about a different aspect of the financial management of your business. This is in addition to the normal bi-weekly newsletter.

Why are we doing this? Well it's certainly not because we want you to be overloaded with spam! This email is NOT spam. You received it because you consciously signed up to receive our Creative Finance & Management newsletter. But, hey, we know that even some newsletters you consciously sign up to might as well be spam!

So why are we intent on sending you twelve emails in the first two months of your subscription? The answer is that I looked at the newsletters that were queued to go out and tried to think what it would be like to simply start getting them at a random point. It would feel like pretty random subject matter, without a framework or rationale. And I felt that it would probably be useful to give all new subscribers the same orientation to the way that Charis FD thinks about small business performance management. That way we can have confidence that all our subscribers have been given the benefit of foundational advice in all aspects of business performance management.

If you miss any of these articles, don't worry. They are on the Creative Finance & Management blog. Just look for the "New_Subscribers" tag.

These are the articles in the New Subscribers series:

The ingredients for success in Finance

First of all, let's recognise at the outset that there are many things that can be said about making business successful. That's why I'm confident that I am unlikely to run out of subjects for the Creative Finance & Management newsletter! But after careful reflection on all that I've learnt over my 18-year career in accounting, finance and business, I believe that the financial and performance elements boil down to seven or eight things.

Now I admit that there are academics out there, as well as big management consulting firms, who have researched and pondered and discussed and head-scratched over many years, and they have written big books on topics such as these. And they have probably come up with other ways of looking at things, perhaps even better. Who knows? I am just someone who has looked at what I have learnt over the last 18 years, in my training, courses I've attended, as well as reflections on the work I've done, and pulled it all together in a coherent way.

So "take it or leave it" is what I'm saying. I have no desire to be seen as any kind of finance and management guru. I simply want to help small businesses do things better.

So what are the ingredients for financial success? All I am going to do in this article is lay out the scenario and describe the model. In the next seven articles I will explain the important parts of the model and how applying these principles can help your business to become financial stronger and more successful.

The way I look at it is like a wheel, with a hub, and a couple of other things. I call it the Business Performance Management Wheel. If you go to the Our Services page of the Charis FD website you will see this illustrated and described. There are four points around the outside of the wheel:

Strategy and Planning

Actions and Change

Performance

Performance Reporting and Review

Those elements are linked with a directional arrow, indicating that actions and change result from strategy and planning, and contribute to business performance. Then you have to review the performance of the business through regular reporting in order to feedback into more strategy and planning.

In the middle of the wheel is "Finance", which should probably be more specifically "Finance Resources". Finance resources keep the wheel turning, providing information and control.

Around the outside of the wheel are two elements:

Stakeholder management; and

Risk management and compliance.

Those are two things that provide the environment for business performance management.

I should also say that there are other dimensions. So cash/working capital is a dimension that has different implications depending on which of the elements you are thinking about. Profit is another dimension. And Performance is a generic term that includes profit, but does not exclude any measure of success in your business.

Over the next few weeks in these introductory newsletters we will take each of the seven elements in turn and outline what the key elements are in getting the business performance management wheel turning smoothly for you.

First, next week, we will look at strategy and planning. Where does strategy come from and how do you decide what your strategy should be? If you don't have strategies for your business and plans for achieving your strategic objectives, then you are leaving too much to chance and your business will underperform.

Second, we will discuss business change. Sometimes it feels like there are so many options for useful projects you could do, or things you could change, but you can't do everything all at once. So how do you know which of the options will be best to choose?

In the third week we see that measurement and management go together. If you want to be able to manage your finances, or your business performance in general, then you have to regularly review measures of performance. This is an area many small businesses need help with.

Fourthly, we talk about the "paralysis without analysis". A lot of big companies talk about "analysis paralysis", meaning they have so many figures, so much management information, so much analysis of figures, that they don't know how to digest it all. Smaller businesses are often paralysed by the opposite problem. They don't know what to analyse and have very little management information and modelling. What things are most useful? Where should you start?

Fifth, we'll talk about finance resources. Finance resources is the term I use to encompass finance and accounting people, as well as systems, processes (and perhaps even cash!). Your finance resources are there to support you in managing your business to optimum performance, providing information and control, as well as expert advice. So that fifth article will tell you more about what you should expect from finance resources and how to get the most out of them.

Sixthly, stakeholder management gets a mention. Stakeholders are anyone who has any interest in your business. Shareholders and investors are the people we normally think of first, but the list gets longer the more you think about it. There are a host of people and entities that should get your attention as stakeholders in the business, and good relationships with them will smooth the way for growth.

Finally, we snooze through 700 words on internal control. I'm joking! It's very important! But a lot of people see internal control as something boring and tedious. So we'll consider three fallacies that add risk to your business in the realm of internal control.

Until next time...

Thanks again for subscribing to Creative Finance & Management. We hope you find it helpful.

The best way to cut overhead costs in big companies

2009-06-25T06:18:00.003+01:00

This article describes the way that the principles of Activity Based Costing were used to cut overhead costs by approximately 20% in one large group that I worked for.

Activity Based Costing is the term given to a particular way of analyzing costs in order to manage them more effectively. It arises from the premise that costs are driven by activities. In other words you don’t just decide to employ a new person or buy materials or engage a consultant for the sake of it. You do those things in order to perform activities in the business. The more complex the manufacturing process, the more things have to be done to make the product (activities), and therefore the more people and materials have to be purchased to make it.

So thinking in this way is different to the normal way of looking at costs. Normally you have a profit and loss statement that says you spent so much on employing people, so much on occupying a building, so much on raw materials, etc. Looking at things that way is not completely useless, but it only goes so far. In a sense it answers that “what?” question. What have we spent money on?

Activity Based Costing (“ABC”) goes deeper to try to answer the “why?” question. Why do we spend money? What are the things we are doing that mean we have to employ this number of people, or buy this much raw material?

Now, in my experience, ABC is usually applied to manufacturing processes and direct costs. It allows insights to be gained into the costs of products. For instance, you may find that a costly activity in the process of making a particular product is the initial set up of the equipment. Therefore, you can make that activity more efficient be lengthening production runs. ABC therefore tends to go hand in hand with process analysis, because you can’t do ABC without analyzing the process. ABC is simply putting a cost on each activity in the process. Then disciplines such as Six Sigma, Total Quality Management, etc, come in to help to identify how the process can be improved. ABC leads to product profitability analysis and customer profitability analysis. In fact, it opens up many new ways of looking at the profitability of the business.

The one thing that is normally set on one side in Activity Based Costing is overhead cost. Overhead cost is primarily fixed or long term step costs, such as business management, Finance, HR, premises, legal, insurance, and so on. Old school management accounting would have said that if I want to work out the profits of each product, then I would have to allocate some of these overheads to each product on some basis. However, when I studied ABC I was told that allocating overheads to units of product (or anything, for that matter) was pointless, since products do not drive overhead costs. So it would be misleading to say that I make £2 profit per unit of a product, because it suggests that if I double my sales of that product I can make additional profit at £2 per unit. And that’s simply never going to be true. Doubling output may not lead to doubling overheads (one would hope not normally!). Or it may lead to more than doubling overheads if the additional volume takes the business past a major step (e.g. warehouse capacity). The point was that overheads should be left out of the analysis because it distorts things by including them.

That insight was music to my ears when I first heard it! At the time my monthly management reports were divided up with a page for each product. The direct costs were easy (in my case) to put against each product. But at the bottom of each page was an overhead allocation. Guess which bit of each product profit statement drew the most attention and argument each month? Yes, the overhead allocation! How much management time and energy was being wasted over something that was, to be honest, fairly arbitrary?! Overheads should be managed differently, and product managers should not have to justify the profitability (or otherwise) or their products with overheads arbitrarily allocated to them. I came straight back from my ABC course and took the overhead allocation out of the product profitability statements! Then we really started to focus on the real issues for the products – sales, margins, operational process efficiency.

But having set aside the overheads when looking at product or customer profitability, one cannot just ignore them. Having said they should be managed separately, how should they be managed? Certainly when I studied ABC, it did not seem to provide the answer. Perhaps I missed something!

Later on in my career I worked in a large utilities group, supporting their HR function in Finance and analysis matters. Across the group we spent hundreds of millions of pounds on overheads. And when the time came to tighten the proverbial belt, we had to find a way of getting to grips with the costs of overheads in different functions across different parts of the group. For example, the costs of HR did not just consist of a central HR department. There were about 12 different central HR directorates (ranging from Talent Management and Learning and Development through to Health and Safety and Occupational Health). Then there was the group HR Service Centre. And then each business unit had its own HR functions.

At my suggestion, to tackle the challenge we used the principles of Activity Based Costing to analyse the cost base and guide the decisions over where to make cuts.

First we asked each department manager to complete an Excel template. In this they listed each activity undertaken in their department, and against each activity they put a cost and headcount. The total cost and headcount for the department had to add up to the annual budget for the department. We also asked them to complete the latest forecast.

Since that information was still a little too granular we also asked the functional heads to categorise each activity in different ways. First, the activity driver – legal/compliance requirements; services required by other parts of the business; strategic initiatives; and “other”.

Speaking for the HR function, the analysis was pulled together practically by my Management Accountant, categorised by a 3-4 person working group, consisting of a couple of BU and central HR directors and myself, and then validated by the HR Leadership Team (the Group HR Director and her direct reports, including the Group Directors and the BU HR Directors). There were more than 400 rows of information, adding up to around £75m+ if I remember correctly. But, using the activity information in the data received, my Management Accountant and I came up with reports that could show the costs summarized in a few different ways to help the rather painful discussion.

The painful discussion was, having analysed the costs and categorized the activities, going through and further marking proposed savings against each activity. This started with senior HR Directors in each business unit discussing their own straw man proposals with the BU Managing Directors and their management teams. Then more pooling of thoughts and opinions within the HR Leadership Team. Then culminating with a presentation of a proposal by the Group HR Director to the Group Executive Committee.

The target cost saving had been given at the outset – there were to be 2 or 3 different proposals – small, medium and large! In other words they wanted to know what activities would be lost or cut back if they asked for cuts of 15%, 25% and 40%. So we knew what we were aiming at, at least in terms of analysis. The unknown was what the final savings figure would have to be. Each proposal to cut activities had to be accompanied by an assessment of the impact, strategically, operationally and tactically.

So you can see that ABC can be applied to overheads very easily, and gives a valuable and effective way of examining overhead spending especially when drastic cost savings are required.

The discussions that resulted from the analysis were very focused, well-informed and pitched at the right level of detail. The decisions were made confidently, in full knowledge of the impact.

… The sting in the tail of this story is that my own department was one of those where cuts were proposed in our activities, and the process resulted in my own redundancy (amongst many others)!!

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When Finance departments need to build bridges

2009-06-16T21:14:00.004+01:00

The Marketing Director of a business I worked for once said in leading a seminar, words to the effect that, “functions like Finance, HR and IT are just overhead costs. They don’t add value. They don’t bring in new business or sell anything, and they don’t produce anything.” I didn’t respond at the time, but I remember being quite offended. I felt put down, as if he was saying that I was no value to the business. I was, at the time, I have to say, fairly naïve – this was my first job outside of public practice. What follows here are some of my reflections on the relationships between the Finance function and the other parts of a business, from working in more than ten different companies over thirteen years since then.

“Business Partner” – a misleading phrase

One thing that has mildly irritated me occasionally over the years is the use of the term “business partner” to describe aspects of functions that support and control the main activities of a business (which are providing goods or services to customers). In my experience, Finance and HR use the term a lot. I even use the phrase myself, because I know what people mean by it!

Normally, being a “business partner” simply means that the function or the individual is trusted to be involved in high level strategic decision making. This is as distinct from the mundane provision of information and operation of transaction or control processes.

I think the thing that irritates me about the term (albeit only mildly) is the misunderstanding it generates. This misunderstanding can be exposed by a few exaggerated statements:

- Some functions are not doing business, so they can only partner the business, or maybe just cost money. They don’t make or sell the product or deliver the service, so they are less important. So there are people you employ in your business that are not part of your business, but if you like them enough you may let them partner you in your business.

- Doing business is all about making the decisions, rather than the mundane processing and controlling. I, the CEO, and my board, are the business, because we make the decisions about the business. Business partners help me make decisions about my business. The other people in the functions are just recording, supporting, controlling and doing. The other people are not really part of the business. They just do jobs.

My view is: We are all the business, not a business partner. We all need each other. Not just the people making the big decisions. Not just the people making and selling and providing.

We all need to recognize the value of each other’s contribution to the success of the business. There is a passage in The Bible that speaks in this way about the church. It likens the church to a body. No one part of the body can call itself the body, but the body would not be a whole body without each part. Each part has its role and place, and importance, in the overall function of the body. The church is the body. So every member of the church has a gift and calling from God that contributes to the overall function and goal of the church. We cannot do without each other.

So it is with business I believe. We are all parts of the business, and without every part functioning properly and together the business will fail. This is my fundamental mindset when I deal with relationships in business. Each function and person must support each other in achieving the goal of the business – e.g. more customers, more sales, more profit, lower costs, a better brand, happy shareholders, stable cashflow, improved communities, etc.

So when managing a Finance team I encourage them to see themselves as helping the business to achieve its goals first, then in all their cross-functional relationships if they can help their colleagues it will ensure we are acting as one.

On the other hand when I speak with my colleagues in Ops, Customer Services, Marketing, HR, IT, and so on, I make sure they know what I am there for. Basically we are on the same side. I may have to challenge their spending or their performance against sales targets, question why they have not collected cash from customers quickly enough, set hard budgets, cut costs, and do many things they may not like. But if they know fundamentally that I do this, and Finance does this, because we are following our remit to help the business succeed – then it becomes more a question of asking for their help in achieving our objectives, whilst offering our help in achieving theirs.

Different personalities and skills suit different roles

Character differences produce a lot of friction. But it is possible to recognize that and get better at working together. Clearly Myers-Briggs, Insights, Belbin and the multitude of personality assessments demonstrate this clearly. But it is really self evident.

You get many different personalities in a team. And indeed everyone is different. But you also get certain personalities gravitating to certain roles and functions. I believe certain personality traits go with certain skills, although this is a generalisation that does not always work.

For example, an analytical person may gravitate to the Finance and IT areas, where there is a degree of set process, logic and numerical certainty. On the other hand, a sociable person may gravitate to areas that deal with people – HR, sales or marketing.

And each different business will require slightly different shades of characters within the different functions.

Recognising the strengths and weaknesses of certain character styles in different situations really helps to get people working well together. Instead of looking down on the marketing or sales person for the way they can’t understand the figures, or act unpredictably, we "analytics" can both help them with that weakness and seek their help when we need slightly more expansive and unstructured thinking. Working together creatively leads to competitive advantage.

Finance is sometimes seen as interfering

“What do Finance know about selling? So how can they give me these ridiculous targets?”

“What do Finance know about making our product? So how can they ask us to do it more efficiently?”

“Why do Finance ask us to fill in useless information on our transaction screens? They are just wasting our time.”

“Why do Finance always need an authorising signature on every bit of paper? They are the reason we are not as efficient as we could be.”

Finance people will be familiar with these and other similar accusations. How do we respond? How should we respond? Because one of the main things (though certainly not the only thing) a business is trying to do is to make money for its shareholders, Finance will always be in a central position and get its fingers into a lot of pies. And that can sometimes be seen as interfering in things we know nothing about.

The point I want to get across is that with every such complaint comes an opportunity for dialogue. That’s DIALOGUE! Not talking, not arguing our case, but constructive two-way dialogue.

But before I say something more about dialogue between Finance and other areas, I want to clear something up.

We Finance professionals are trained in Finance, normally first of all as accountants, and then analysts and financial managers. We are not (normally) trained in manufacturing, engineering, C++ programming or human resource management! So when we are accused that we don’t know these things, we should not try to make out that we do! We recognize there are things that we know and things that we don’t, things we are good at and things we are not.

But the next point is equally true – 99% of the time we don’t need to know either! For example, I may not know much about C++ or .net frameworks or web design, but when I challenge the IT department for employing contractors to develop an application, I don’t need to know all that. The thing I may need to know is what the application is for and how it will help the business (financially or non-financially). If they can’t tell me that, or their statement of benefits falls apart under scrutiny, then I have a right, as someone responsible for financial success, to ask them to stop. What we need to know is what is relevant to our remit as financial custodians.

But my main point is DIALOGUE. Every interaction with our colleagues, especially when we are challenged, is an opportunity to 1. Listen; 2. Understand; 3. Think; 4.Explain; 5. Change; and 6. Move on in working together (perhaps into a feedback loop so that the whole dialogue process continues).

1. Listen – Just ask them to tell you more, and then shut up and listen carefully. Finance does not have a monopoly on the truth. We don’t know everything. We need to learn. It also may be true that nobody understands perfectly the way the business works. Businesses are complex, they are made up of imperfect human beings, using machines made by human beings and computer programs written by imperfect human beings! Things never work 100% perfectly, and since we are not perfect we may in fact be the cause of the particular imperfection! This is your opportunity to learn about something in the business, and may turn into an opportunity to help.

2. Understand – Ask questions to get an understanding of the issue. Look for cause and effect. Ask who does what and when. Ask questions to help your colleague understand the issue they are raising. They may not fully appreciate what they are highlighting. You can help them simply by asking questions.

3. Think – Don’t just jump in with a suggested solution. Give it some thought. Go away and draw diagrams, process maps or play with spreadsheets if you have to. Ask other colleagues their opinion if you need to.

4. Explain – Ensure that your colleagues are aware of why you need information, or need things to be done in a certain way. What are the business consequences of them failing to follow procedures? Will we lose money? Will we pollute valuable information sources? Will we be less efficient? Get everyone on the same page. They may start to see how they can do things differently to achieve the desired result. There’s more likelihood of a win-win outcome if you understand each other’s perspective.

5. Change – If you need to. Being ready to modify things to ensure you can both achieve better results shows that you really believe you are both on the same side. It shows you appreciate their difficulties as well as your own requirements.

6. Move on in working together – if you have gone through this active dialogue then you will hopefully have solved a problem at the same time as making a friend and powerful ally. They will be both more ready to help you if you need something in the future, and willing to talk openly and less confrontationally about problems in the future. Keep the door open. Offer to review what you’ve agreed.

Final thoughts

Finance sometimes does not portray itself well. If you rely on Finance for anything it is to provide information on how the business is doing, and to make sure that transactions are managed and controlled efficiently and effectively. You rely on them to be able to analyse and tell you whether something will lose or make money. But sometimes we don’t do our job properly and lose respect and trust.

In those cases, in my experience, you have to be open, especially at a management team level. Explain what you are trying to achieve for the business, and how it will help. Share with your colleagues the problems you are having. Ask for help. There may be someone in another team that is good at process analysis, or good at Visual Basic macros, or good at training, or experienced in restructuring or integration. You would help them if they needed your help, wouldn’t you? And finally, keep sharing – share your successes and your problems. When you understand someone’s problems, share their successes and get involved in helping, you become more sympathetic. So get people on your side, because in reality they are already.

Finally, sometimes people in other functions don’t realize their actions have financial consequences. E.g. lack of detail in transactions leads to errors which leads to loss or time wasted. E.g. delays in dealing with Finance queries can lead to losses if it becomes too late to go back to customers to clear up errors.

Don’t just beat people up for doing the wrong thing and call them stupid behind their back. Go back to the dialogue outlined above, and educate them. I have found that if people realize the consequences of their actions, they are more likely to take care over doing things right. Point out where things are going wrong, and then start to listen to their side… then you’ve started a dialogue.

Conclusion

A business without Finance at the heart will be risking loss through errors, inefficiency or even fraud, and will risk making the wrong decisions through not understanding financial information. But Finance is not the business, and neither is it merely a business partner. We need to recognize the roles, remits, strengths, weaknesses and personalities at play across the whole business. We should value the diversity and work together to succeed in business through trust and open dialogue.

What should Finance do better to make relationships work? In short, better dialogue. You have two ears and one mouth – use them in that proportion! Be always more ready to listen than to speak. And communicate always with the assumption (whether or not there is evidence for it) that you are all on the same side, working for the success of the business.

Using Twitter for your business - Simply Business Knowledge

2009-06-11T12:55:00.001+01:00

Using Twitter for your business - Simply Business Knowledge

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Work-life balance

2009-06-08T12:35:00.003+01:00

I’ve reflected quite a bit on so-called “work-life balance” throughout my working life. Anyone who gets into key positions, especially in management or in expert roles, will face the “work-life” struggle. Work has the potential to stray outside the normal 9am to 5:30pm hours, sometimes by a long way and over a long period of time.

I’m certainly no stranger to the tension – I’ve been in roles earlier on in my career where I worked more than 60 hours a week, some days starting at 5:30am and working through until 2-3am the next morning on occasions. After my first redundancy, however, I became fairly cynical. Hard work, even the sacrifice of my own time outside the hours contracted, did not seem to produce any loyalty from The Company or increase job security. With four young children and a wife looking after them at home, I was also under pressure to give more quality time to them. So I started to rebel, in a non-dogmatic kind of way. I consciously tried to limit my working hours. But there are problems with that approach, and I have struggled, along with 50% of the working population if statistics are to be believed, with getting the right balance between putting priority on urgent work to be done and focusing on family and personal priorities.

Here are a few of my thoughts on the subject:

1. The term “work-life balance” itself is probably flawed and arises from the tension between two misconceived presuppositions. Do we live to work or work to live? Or neither?

The term “work-life balance” suggests that I have work on one side of the scales and life on the other, and the ideal would be to have them in a happy equilibrium. In other words it makes a distinction between work and life. My contention is that it is wrong to make such a sharp distinction. For me work is part of my life, but it is not the whole of my life.

The overwhelming pressure that we have found since the 1970s/80s to work harder and harder can be summed up in the phrase “I live to work”. Work is one of this generation’s great idols. Our work is what gives us meaning and purpose. It is what we do that defines our contribution to the progress of the human race. Therefore I should work as hard as I can, making sacrifices to achieve as much as possible.

We idolize entrepreneurs, sports stars and people who are at the top of their fields – people who have reached those positions by enormous effort, tenacity and sacrifice. To them the idea of balance is ridiculous. Success in their field is everything, and we admire them for achieving it and overlook the battered remains of families, marriages and friendships left behind in their wake.

On the other hand the classic “work-life balance” stance is the opposite – “I work to live”! Why should I let work consume every part of my life to the extent that I have no time and energy left to enjoy it? The purpose of life is to enjoy life. Therefore, work is a means to earn money to buy holidays and other leisure activities, including spending time with the family if I am the less selfish sort (and less and less of us are that sort, judging from the birth rate, marriage rate and divorce rate… but that’s another subject!). Just witness the explosion in the availability of leisure activities and the importance we place on music, movies, sport, entertainment, relaxation, experiences.

But we ought to realize that both those positions are presuppositions from different forms of secular humanistic worldviews. “I live to work” assumes that my purpose is to help the human race to make progress. So I should strive to have the job that helps me to do that best, using my natural gifts and abilities. “I work to live” assumes that my purpose is to enjoy the world around me because there is nothing else – “eat, drink and be merry, for tomorrow we die” – the classic hedonist catchphrase.

The phrase “work-life balance” is really a reaction against the “I live to work” mentality, assuming that work is taking up so much time and energy that I don’t have enough left to live life.

So my conclusion was that the reason the term “work-life balance” does not work for me is because it clashes with my Christian worldview. The Christian worldview would say that I neither work to live or live to work. God created human beings to glorify Him, telling them to “be fruitful and multiply and fill the earth and subdue it and have dominion over [creation].” We are called to be workers therefore, yes, but also parents, teachers, worshippers, members of the community – all in order to bring glory to Him.

The entrance of sin into the world has distorted our view of those objectives, blinded us completely in some cases, so that even my last paragraph will cause laughter for some, anger for others and complete mystery for others.

There is a lot more that could be said about Jesus Christ and his solution to the problem of sin – the Christian gospel. However, my point here is simply that our view of work and balance is based on our fundamental presuppositions about existence/life, knowledge and morality.

For me, from a Christian standpoint, everything in my life has to be done to God’s glory. That means work has an important part in my life, because God has made human beings workers. Family is important in my life, because God has given me an important role in raising a family. Community is important in my life because God said “love your neighbour as yourself”. Leisure is also an important part of life, because one of the ways we glorify God is by enjoying His creation (in a responsible way).

2. Work-life balance is sometimes portrayed as the domain of the family man or working mother.

One of my previous employers made real efforts to encourage work-life balance. And of course we have seen the UK government and EU try to legislate for it as well – parental leave to augment maternity leave, but applying both to fathers and mothers; the Working Time Directive; etc. But I well remember the mild bitterness of one female employee, a darn-good Financial Reporting Manager at the time, recently married with no kids yet. She said that really all the encouragement for work-life balance was so that people could spend more time with their families. But for someone like her, with no pressing need to get back home in the evening for kids bathtime or bedtime story, and her husband equally stretched and working long hours, she could never get a good enough excuse to limit her hours.

What she felt was that those with families were treated with sympathy if they wanted to limit their hours. But those with no kids were still expected to pick up the slack and do the long hours on their behalf! It didn’t seem fair. And to be honest, I can see that kind of discrimination being a reality.

(The Working Time Directive, I guess, was supposed to address that issue by limiting working hours for everybody, but in practice had no discernable impact on anything as far as I can see. What a waste of time! And people actually opt out from it too! Whenever you sign a new employment contract you are given a Working Time Directive opt out clause to sign. This means you waive your right to limit your working hours to 48 hours per week on average over 17 weeks. Employers are not allowed to discriminate against employees that do not opt out, and they are not allowed to compel employees to opt out. So why do employees sign this waiver of rights?! I have never signed the opt out… and at times continued to work more than 48 hours a week over a 17 week period! There have been no consequences on anybody one way or the other!)

Following on from my last point, this is a concern. From my point of view, every aspect of life has a place, and the childless person or single person must still be allowed to engage their outside-of-work interests without guilt, just as much as the parent must be allowed to fulfill their responsibilities as a parent. There should be no discrimination in favour of parents.

3. Where does the pressure to work long hours come from?

This is actually quite a big question. And there may be a different perceived cause in different situations. And there may be a cultural root cause (or causes) beneath those.

Do people work long hours because they want to? Sometimes the “I live to work” mentality comes through strongly. I have met people who so love their jobs that they spend every available hour on it. I don’t belittle them for it. It’s great to love your work. But often they are the big bosses, and they presume everyone else is the same!

Do people work long hours because they are forced to by their employers? This is really a rather simplistic way of putting it. If it means, do people get threatened with being fired if they don’t work as many hours as they are asked to, even if it is more than stated in their employment contract, then this is probably fairly rare. Similarly if it means do people sign employment contracts with specified long hours in them, because they wouldn’t be employed otherwise, then again probably fairly rare.

Perhaps emotional blackmail is more common than actual coercion. “C’mon, we’ll never fulfill this contract order on time if we don’t all put in some extra hours… yes, I know I said that last time and the time before…” And what this overlooks, of course, is that the employer has the power to employ more people to do the work and take the pressure off you. Why don’t they? Because they probably quoted the contract (in the example) assuming they could squeeze some extra hours out, or simply underestimated the work. And so, having won the contract, or priced the product, etc, they would start to lose money if they employed too many more people.

Similarly, perhaps fears over job security “force” people to work longer hours. They want to be seen to be the keenest, the people with the highest output. Then when the accountant’s red pen comes out (in my experience this is a gross caricature, so I’m not sure why I’m using it, being an accountant myself!) we will be lower down the redundancy list.

It would be too easy, I believe, to immediately point the finger of blame at the balance of power shifting towards corporations and away from employees, especially following the decline of trade unions and so on. Where do the pressures on us originate? When the big bosses set the department budgets, asking for year on year cost reductions while asking for greater output, they do it to try and achieve bottom-line growth. And why is bottom-line growth important? For public companies growth in profits allows growth in dividends, and growth and stability help to increase the share price, at least compared to competitors.

Why is share price important? Because companies want people to invest in them. If people don’t invest in them, then they have to borrow and pay interest. Investors prefer stable, growing, profitable, cash-generative companies. The riskier the business (i.e. more volatile or less tried-and-tested) the more return investors want for putting money in.

So it’s the investors who create the pressure. But who are the investors in your employer? For many it’s the government (NHS, civil service, education, etc), and therefore the ultimate stakeholder is the tax-payer – YOU! For the majority of other employees, working in public companies, it’s pension schemes, endowment funds, ISAs, etc. And who demands higher returns from pension schemes, etc? YOU!

So it turns out that when we demand better returns from our savings, pensions and investments, and when we demand greater efficiency from our public services – we are building more pressure on ourselves (as a group) to work harder!! Our own greed is driving our plight!

But again, that’s far too simplistic in one respect. The pressure from stakeholders to deliver returns or to be more efficient has always existed. What held back the long-hours culture in the past was a more balanced view of work. The working time available from the workforce was seen as a limiting factor. If someone was contracted for 40 hours a week, then they would only be asked to work 40 hours a week, and would be compensated for overtime. Nowadays it is common to see no reference to working hours specified in employment contracts (especially for management or clerical jobs), simply a clause to the effect that “I will work as many hours as it takes to get the job done”. So in the past we respected people’s time as their own, and therefore agreed to pay a reasonable salary for a slice of it. Nowadays we set the salary and say we’ll have as much time as we want in return!

In the past, the weekend was not for working. Shops closed, banks closed, not just for Sunday, but for part of Saturday as well. Nowadays 24/7/365 is almost the aim. There is now no one time of the week when communities and families can spend time together. We mocked keeping Sunday special, because of it’s Christian basis, but now feel the exhaustion and stress coming from a world of work without adequate rest.

We have given up on some of our moral principles, and have reaped the harvest of wealth, but not without human cost. My conviction is that workplace stress and long hours culture is not the result of a political or social policy (many people seem to blame capitalism and “The Thatcher legacy”). I believe it is the result of a moral and spiritual decline. It’s the result of changing views about what life is all about and the way it should be lived.

4. Conclusion

Work-life balance issues are simply more consequences of a shift in worldviews. There are no easy answers. My practical advice is to think carefully about how work fits into your life overall, and don’t assume that it has the same place for everyone. If you are a manager, respect each employee individually, recognizing quality rather than quantity of work; and see their value as holistic human beings (with families, communities and life-enriching hobbies), not just workers.

The Workthing+ blog

2009-06-08T11:22:00.001+01:00

The Workthing+ blog

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Cash is King

2009-06-01T13:58:00.006+01:00

First the basics - some would say the obvious – the fundamental requirement in keeping a business alive is cash. Not customers, and not profit – you can have both of those things and still have a business failure. Cash is like the lifeblood of a business. That’s why the maxim, “Cash in King” is so true.

Anyone in business should have heard this. But it may still seem confusing to you how you can be profitable and run out of cash and fail. If that’s the case then you can think more clearly about this by remembering one word – timing. Very simple example – I buy a car for £5,000 and sell it for £10,000. There is no question that I have a good customer and I have made a profit. But if I have to pay for the car tomorrow, and I am not going to get money from the customer until next week, then my business will fail if I don’t have £5,000 cash to pay for the car tomorrow.

The basics of cash flow management, really, are that to maintain the level of cash required to survive (zero or, perhaps, less if you have an overdraft facility) you must have more cash coming in than going out.

Sometimes the business is so consistently loss-making that it requires constant propping up by lenders and investors. Cash going out is more than sales receipts coming in, so more and more capital is required to ensure that the cash does not run out.

I worked with one such small business. The thing that amazed me at the time was that even after the last lot of capital had been used up, even though each month’s accounts showed a loss, even with no overdraft facility, the business managed to continue two months longer than anyone thought possible... and long enough to allow a rescue.

How did we do that? I think there were three key things that we did (apart from the obvious cost control actions that were necessary):

First, we produced cashflow forecasts in detail every week. The forecasts went forward 6 months - weekly for the first 3 months, then monthly after that. The base forecast detail was based on the same assumptions as the profit and loss forecast and went to quite a low level of detail. It showed very clearly when the shortage of cash would occur, how long it would last and how big the shortfall would be.

To get a feel for the level of detail, on the income side we forecasted three categories – i) receipts from debtors (i.e. cash for invoices already raised, based on payment terms and specific knowledge of each customer); ii) receipts from customers on projects not yet started, but the work has been ordered (i.e. so we know roughly when we should be invoicing for the work, how much and how long it will take to collect the cash); iii) receipts from deals in the sales pipeline and therefore may or may not come to fruition (i.e. there have to be probability judgments around which proposals will be successful, what the agreed prices will be, what invoicing timing will be agreed, and when the projects will start).

On the expenses side we forecasted different types of expenditure depending on its materiality and timing. Salaries, bonuses and commissions were monthly and fairly predictable. Rent was payable quarterly. PAYE and VAT also had a predictable pattern. Loan interest payments were fixed. Then staff expenses and other invoice payments were the variable elements. We knew from the profit and loss forecast and budget, compared to the actual P&L for the previous year, what a reasonable assumption of monthly expenditure would be. But we also knew that some of that had VAT added to it, some with foreign GST, some with no tax, and we knew we could flex the timing and size of the payment runs to a certain extent.

Second, we relentlessly monitored the bank account and the debtor list. The CFO would get copies of the bank transaction prints every day and check against what we forecasted. If customers did not pay when they were expected to, we would chase the project managers and customer account directors as soon as the invoices became overdue. As a result of that we got to the point where we had only a handful of invoices overdue for collection from customers.

Also, since our forecast of receipts went down to customer and invoice level, we were able to tick off what we had received compared to what we were expecting.

Thirdly, we knew what payments we could flex and therefore what our limitations were on payment runs. The extent to which we had cash to pay suppliers was determined by whether the inflows came in as expected. We knew we could flex PAYE payments by a few weeks, but there was a limit. And we knew that to keep the business going we had to keep paying the payroll, keep paying the loan interest, keep paying the suppliers. But we also knew that unless we started to make a profit we had to be careful with the timing of those supplier payments, and so we had a fairly tense few months when we only just stayed on the right side of some of our key suppliers.

Conclusions: Accelerate the inflow and slow down the outflow and you can make the cash go a lot further. Also, with careful, detailed monitoring and forecasting you can see a lot more accurately exactly when you need the rescuer to come in, when the investors need to increase their contribution, or (heaven forbid) you need to call the administrators. That's putting it negatively, but it applies positively as well - having surplus cash is not just a safety cushion. Surplus cash allows you to invest in the future without having to ask for extra investment from shareholders or ask for more borrowing. It also allows you to pay bigger dividends to the shareholders. Knowing how big the surplus will be and when it will occur will help to plan investments or dividends or the like.

So whether your business is loss-making or making a healthy profit, detailed, regular cashflow forecasts are essential.

Welcome!

2009-05-13T12:32:00.002+01:00

Welcome to the Creative Finance & Management blog. Over time the aim is to add articles sharing experiences and insights in the areas of business finance and management. I don't aim to portray myself as a guru, but I do have 15 years of experience in business and I have learned a lot. Sharing those learnings seems only natural. Enjoy!