Forthcoming Article on Credit Management

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

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

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:

1. 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.
2. 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.
3. 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?

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

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

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?

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.

© Charis Business Consulting Limited 2009