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Small business news - this week's stories:
NEW ITEMS
Many businesses in the UK are
in the dark about new age
discrimination laws which will
be coming into effect in
October.
More...
The number of small food
stores in Wales has
significantly declined over the
last decade according to new
figures.
More...
The Mayor of London will be
leading a new skills and
employment board to drive
forward to assist business in
London.
More...
The Forum of Private Business
has called for an online holiday
booking system to be
investigated by the European
Competition Authorities.
More...
Employers could be to blame
for the rise in workers taking
more than one week off at any
one time, according to a new
survey.
More...
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OLD NEWS
Smart Money
This
week's top tip - by Anne Ashworth, Personal Finance Editor
Debt-laden consumers are feeling the pain
after the festive spending frenzy. The Consumer Credit Counselling
Service (CCCS) took 9,310 calls in the first nine working days of
the year, an increase of almost 14 per cent from the same period in
2005. If you fear that your borrowing is out of control, the
Financial Services Authority has launched an online "debt test" to
help you manage your debts:
fsa.gov.uk/consumer/debt_test.
The site was launched in conjunction with the BBC and Experian, the
credit reference agency. Advice is also given on what action you can
take to solve debt problems
Money news
By Joe
Morgan
Will the year of
the dog bark loudly?
After a cracking
2005, most investors will be hoping that
this year is not a dog. The Chinese,
however, will be taking a different view
next Sunday. On that day they celebrate new
year, when the year of the rooster gives way
to the year of the dog. Despite the
ill-omens such a characterisation might
conjure up for Westerners, Khiem Do, the
manager of Barings' China Absolute Return is
using the event to sing the praises of China
as an investment destination in 2006. Mr Do
says the Japanese, Korean and Indian markets
became more expensive in 2005, making China
look more attractive. In addition, he points
out that next Tuesday will see the opening
up of China's "A share" market to
foreigners. This will increase liquidity in
an area of the Chinese stock market covering
1,300 companies hitherto barred to Western
investors
Fund groups
still positive on Japan
Three fund management groups are singing the
praises of Japan, despite its wobbles last
week. JP Morgan Asset Management thinks the
market's dip "represents a needed period of
consolidation, which is expected to be the
prelude to a further period of expansion in
a long-term bull market." AXA Investment
Managers agrees, saying that the economic
growth story remains intact, while the stock
market is cheap or fairly valued, depending
on which valuation measure you use. There
might be some short-term profit-taking but
"looking ahead, against a positive economic
outlook, we remain convinced that further
gains are the most likely outcome." Finally,
F&C Investments adds its voice to this
chorus of approval, saying that further
evidence of inflation in Japan would be good
news for share prices there
Jupiter manager
talks up industry
Now for something completely different - a
fund manager talking up the abilities of his
own industry. John Chatfeild-Roberts, the
star Jupiter manager, has produced a book
which champions the stock-picking abilities
of fund managers against index trackers. He
makes some good points - rubbishing, for
instance, the view of the Financial Services
Authority that past performance is not a
guide to the future. He also highlights the
importance of people over processes. He
appears to be on shakier ground, though,
with his view that because "there are plenty
of investors who lose money to the market
consistently" there are managers who
consistently beat the market
Skipton launches mixed cash-equity bond
Skipton building society has launched a "50/50 FTSE Bond" which
offers savers both a stake in the stock market and a guaranteed rate
of interest. The bond is split into two parts: a five-year,
index-linked bond, which offers customers 50 per cent of any growth
in the FTSE 100 index. And a five-year bond with a fixed interest
rate of 5.65 per cent. Savers can invest between #3,000 and #250,000
in the bond, which is available at Skipton's branch network. But,
Patrick Connolly, of John Scott & Partners, says: "They are trying
to lure savers in with a high fixed rate. But half of the cash will
be linked in a stock-market linked investment where savers forsake
dividend payments and the growth which could be achieved by
investing in the stock market directly." Weigh up your savings and
investment options at price comparison websites such as
moneyfacts.co.uk
Up in smoke
If you made quitting smoking your new year's resolution, make sure
your insurance company knows about it. Research by Sainsbury's Bank
has found that only a quarter of the 6.78 million people who gave up
smoking over the past five years have told their Life Insurance
Company. The bank estimates that up to 2.2 million ex-smokers may be
wasting at least #126.72 million a year because they have not
reviewed their life insurance requirements to reflect their new
non-smoker status. Customers can sample insurance polices at online
websites such as
insurancewide.com
and
insuresupermarket.com.
To find out how much smoking costs you click
here
Early omens
look good for 2006. Almost
With City traders
back at their desks for barely a week, stock market historian David
Schwartz believes it may already be possible to discern the first
trend of 2006. There is an old stock market adage that if shares
rise on the first five trading days of January, the rest of the year
will be a good one. His records show 21 occasions since 1936 when
shares rose on the first five trading days by 1.3 per cent or more.
"Prices continued to rise by year-end in 17 of those years, an 81
per cent success rate," he says. With the FTSE All Share up by a
healthy 1.9 per cent in the first five days of this year, that
should mean the omens are good. However, the predictive quality of
this little statistical nugget is somewhat undermined by Mr
Schwartz's caveat, however. "The important point to keep in mind
when evaluating the five day claim is that shares rise from Day 6 to
year-end in 64 per cent of all years, regardless of what happens in
the first five days"
rks & Spencer impress market
analysts
Anyone inspired to be bullish about the
stock market this year will want to hold on to
Marks & Spencer shares, according to Numis
Securities. The stock broker says that today's trading statement
suggests that the recovering retailer is doing better than they had
been expecting. The improvement "was even more impressive given that
M&S held two 'megaday' discount days last Christmas which added
around 1.5 per cent to sales," he says. As a result, they expect to
raise their expectations of profits for this year and have put a
target price of 525p on the shares
US markets need to factor-in
interest rates
There is a word of caution from Baring Asset
Management about what is happening
across the Atlantic. As the US bull market
powers on, the fund management group warns that the peak in American
interest rates could still be years away. And it points out that
many mortgage borrowers may not feel the immediate effects of any
fall in money costs. According to BAM's Percival Stanion: "Many US
mortgages... have annual resets, sometimes with clauses that mean
the new rate is based on the borrower's credit rating, rather than
the market rate. This could mean that many marginal buyers will face
huge rate increases... the bulk of the adjustments occur at the end
of Q1 and the middle of Q2 2006. There is therefore a risk of
weakness in both housing and consumer spending as we go into the
second half." And, with the share of the economy taken by company
profits at a cyclical peak, there is likely to be a shift back
towards wages and other costs, all of which spells bad news for
investors in shares
iShares: a correction. In last week's Times
Online Investor's Bulletin, we mistakenly said that investors in
iShares do not benefit from dividend payments. In fact, they do
receive dividends because an iShare, like a tracker fund, invests in
the shares that make up a particular index and those shares will pay
dividends. We apologise for any misunderstanding
Business Tips and Advice
Thousands of solicitors face data protection
fines
29 August 2005
Thousands of small solicitors' firms are
facing fines of up to £5,000 if they continue to breach the Data
Protection Act.
The Information Commissioner's Office (ICO), which
oversees compliance with the Act, has launched a crackdown on around
3,000 legal firms which have still not registered as data controllers.
Coping in a cashflow crisis
Emergency measures for when cashflow dries up
By Jane Applegate
A common ailment afflicting small businesses is
that of managing cash flow. However, there are ways to cut costs and
boost your cash flow for a short time, to put you back on track long
enough to find a long-term solution:
Cash flow tip 1.
Go through all your accounts receivable and contact everyone who owes
you money. Offer them a discount of 5% to 10% if they pay their bill in
full within a week.
Cash flow tip 2.
Double-check every order to make sure the invoices have been sent out
for payment. Often you get so busy doing the work, you forget to bill
for it. Collecting the money people owe you may provide some of the cash
you need to survive.
Cash flow tip 3.
Contact all your vendors and suppliers. Explain that you are having some
difficulty and ask them to renegotiate your credit terms to extend the
time you have to pay them. Many suppliers will help their loyal
customers stay afloat during rough times because they don't want to lose
you forever.
Cash flow tip 4.
If possible, decrease your outgoing cash flow by closing your office and
move your business into your home. Cutting your rent and utility bills
may provide the financial solution you need-at least for the short term.
Cash flow tip 5.
If you can afford to lay anyone off, do it. Job reductions are tough on
employers just as they are to employees. If it's a good worker, you may
have developed a loyalty to that person. Help them find a new job if you
can, but the bottom line is you've got to save your business first. You
may be able to hire the employee back at a later time. In the interim,
hire temporary workers to handle projects until your cash flow is more
positive and you are on a more solid financial footing again.
Cash flow tip 6.
You might try to sell part of your business to an "angel." Angels are
private investors, usually successful entrepreneurs, who invest in other
businesses in their industry. If you have a viable business concept,
product or technology, a sympathetic angel may be willing to bail you
out in exchange for equity.
Attracting outside capital, especially venture
capital, is not an option for an ailing business. Venture capitalists
invest in fast-growing, successful businesses that provide an attractive
rate of return on their capital.
Managing cashflow
Understanding the basics of keeping cash coming
in
Summary
A business can survive for a short time without
sales or profits, but not without cash. It is cash which pays the bills
and allows trading to continue. And if you are growing and extending
credit to more customers, the need for cash is even greater.
This briefing explains:
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• |
The main
components of cashflow. |
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How to
forecast and control cashflow. |
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Tactics
for generating more cash. |
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Tips on
using the right types of finance for your needs. |
1. Components of Cashflow
Your cashflow is the balance of all the money
which flows into and out of, your business each day. Cashflow is the
actual payments of money, as opposed to what is owed by your debtors or
to your creditors.
There are five main components of cashflow.
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1. |
The main
inflow of cash is usually the cash from sales.
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If you sell on credit, your cash inflow is delayed until
you are actually paid. Effective credit control is
essential. (See 5) |
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• |
A
business which purchases on credit and is paid in cash,
such as a retailer, is at a great advantage in cashflow
terms. |
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2. |
New
finance provides a one-off boost to your cashflow.
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• |
In the past, most businesses have relied on bank
overdraft finance and have reached their borrowing
limits quickly. Alternative methods of funding allow you
to raise more finance (see 7). |
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3. |
The main
outflow of cash is the money used for expenditure, including
paying for your overheads.
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Salaries (including National Insurance contributions)
are often the largest and most inflexible cost. |
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Other major costs might include stock, raw materials and
any capital expenditure. |
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Many businesses have to fund large amounts of
work-in-progress. For
example, a design agency might spend six months on a
project before the client is prepared to be invoiced. In
the meantime, the agency has to foot the bill for all
the materials and labour that go into the job. |
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4. |
VAT and
tax are regular cash outflows that tend to be paid out in large
lumps. You can be penalised heavily for late payments. (See
Managing your creditors)
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• |
Buying significant items just before a VAT period ends,
rather than at the start of the next one, can help your
cashflow. |
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5. |
Your
business needs to give its owners and financiers a return on
their investment.
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• |
You must pay interest - and repay capital - to lenders
such as the bank. |
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If there is spare cash, you - and other shareholders -
may want to draw back any personal loans made to the
business. |
|
2. Cashflow Forecasting
The more warning you have of cashflow peaks and
troughs, the more time you have to deal with them.
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1. |
Accounting software makes it easier to prepare budgets and
revenue and expenditure forecasts for the months and years
ahead.
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• |
You can quickly update your projections and make 'what
if' calculations. For example, what if sales are 20 per
cent below forecast for six months in a row? |
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• |
For maximum flexibility and ease of use, you can use
special forecasting software, such as Winforecast. |
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You could use graphics to make it easy to detect
patterns and step changes. |
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2. |
Prepare
budgets showing the level of sales and profits you expect to
achieve and the costs involved in doing so.
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• |
Estimate the sales and margins, based on past
experience. Overheads such as rent can be accurately
predicted. |
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3. |
Prepare
monthly (or weekly) cashflow forecasts, looking ahead one year,
updated monthly. These forecasts
show what cash you expect to come in and when (if at all) you
expect to run into problems.
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• |
Identify the major outgoings, especially those on fixed
dates, such as the monthly payroll.
Make sure you will have sufficient
cash on the day, to cover each payment. |
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• |
The key is to be realistic. For your regular sales, use
the established figures for sales volumes, debtor
periods and bad debts. For
any new products or customers, be pessimistic - expect
problems and delays and do not book a sale until the
customer has paid the invoice. |
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• |
Be aware that monthly forecasts do not take into account
weekly fluctuations. |
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4. |
Include
key indicators that give a picture of the health (and prospects)
of your business. (See
Key performance indicators)
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For example, the volume and status of sales leads and
the volume of orders. |
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5. |
Include
the budgets and forecasts in the management accounts which you
regularly send to the bank.
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• |
A
bank which trusts your forecasts will be more prepared
to extend your borrowing facility when you need extra
finance. (See
Managing your creditors) |
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3. Using the Forecasts
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1. |
Monitor
your actual performance against the budget and the cashflow
forecast regularly - at least once a month. Identify any
problems and take immediate action.
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• |
For example, if you know you will be short of cash in
three months' time, you might reduce stocks, slow down
sales growth, or agree extended credit from a major
supplier for that period. |
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• |
The only way to generate cash over the long term is
through retained profits. By
comparing your performance with the budget, you can
quickly judge whether sales and profits are going to
plan. |
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2. |
Before
taking on any large financial commitment, including major new
orders, check that you will have sufficient cashflow (or other
finance) to pay the costs involved.
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• |
Create a useful yardstick by working out how much extra
working capital is required to fund each 10 per cent
increase in monthly sales. |
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• |
Restrict the growth of your business to whatever you can
comfortably afford to finance. Always keep a financial
reserve available for contingencies. |
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3. |
Develop
red light systems to warn you automatically if something needs
querying.
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• |
Your sales manager must let you know as early as
possible if leads, orders, or sales, fall below a
certain threshold, or if planned sales will be later
than forecast. Or if a substantial customer stops buying
from you. |
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Your financial controller should warn you if key
indicators such as profit margins, liquidity ratios and
stock ratios deteriorate beyond an agreed limit.
You also need to know about any
substantial invoices which are in dispute, particularly
late debts and customers exceeding their credit limits. |
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4. Sales and Marketing
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1. |
Today's
sales are tomorrow's cashflow, so your overall aim is to keep
increasing sales and profitability.
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• |
Increasing prices may reduce sales (and therefore
cashflow) in the short term.
But this is often outweighed by its
major positive impact on profitability and cash
generation over the longer term. |
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2. |
Even
profitable companies can - and do - become insolvent through
overtrading. This happens when you
have to pay the costs you incurred fulfilling an order before
you receive payment from your customer.
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• |
To avoid this risk, you may need to delay some orders
and decline others. (See 3.2) |
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3. |
When
negotiating contracts with customers, make generating cashflow
one of your primary objectives.
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• |
You may be suprised at how easy it is to obtain
deposits. For example, to pay for any materials which
you need to buy in. |
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• |
Negotiate stage payments for contracts which will take
time to complete. Include a
timetable for the customer to pay invoices as part of
this agreement. |
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• |
Agree a clear specification for the work to be
completed, to minimise the chance of the customer
disputing any invoices. |
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4. |
Improve
your sales and profit margins by making sure all your work is
invoiced for as soon as possible.
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• |
Suppliers are often asked to perform beyond their
original remit. It is
reasonable to negotiate additional payments in these
circumstances. |
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5. |
If you
need to improve your cashflow temporarily, adjust your sales and
marketing plans to suit.
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• |
Bring forward sales by offering customers incentives to
purchase quickly. |
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• |
Bring forward payments by offering customers incentives
(eg discounts). |
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• |
Focus your marketing on short-term lead generation,
rather than longer term objectives like brand
recognition. |
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6. |
If you
pay sales commission, link it to receipt of payment rather than
receipt of order. (See
Incentive pay) There is a double
cashflow benefit:
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• |
You delay payment of the commission. |
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• |
Your sales people will persuade your customers to pay
promptly. |
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5. Credit Control
An efficient credit control system speeds up your
cash collection and reduces the number of bad debts. It also saves you
time and shows your customers you run your business professionally.
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1. |
Control
how much credit you provide and to which customers.
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• |
Avoid giving any customer more credit than you could
afford to lose if the sale turned into a bad debt. |
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2. |
Send out
invoices immediately after you have supplied what the customer
ordered.
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• |
If appropriate, make a follow-up call. Confirm that all
the invoice details were correct and that there will be
no problem paying it by the due date. |
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3. |
Monitor
late payments and chase them up methodically, largest debtors
first.
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• |
All businesses - and the public sector - have a legal
right to charge late-paying customers interest on
contracts. See
Interest on late payments for further information. |
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• |
Using a debt collection agency, or a specialist
solicitor, can be an effective method of dealing with
non-payers. |
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6. Controlling Expenditure
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1. |
Shop
around, so you know the prices and service which you should
insist on from your suppliers. (See 7.3 for other options.)
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• |
Consider whether you could make savings by purchasing
some types of capital equipment secondhand. |
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2. |
Implement
simple cost control systems across your whole business, to
identify scope for cost savings. (See
Cost control) For a start, four
types of easy savings can usually be found:
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• |
Overcharging by your suppliers, such as double billing
or missing discounts. |
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• |
Unnecessary costs, such as heating your premises at
night. |
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• |
Excessive costs, such as high priced suppliers providing
a product or service that a low price supplier could
provide. |
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• |
Inefficiency, such as laborious paper-based systems
which could be computerised (to reduce costs in the long
term). |
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3. |
If you
hold stock, good stock control can release substantial sums of
money.
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• |
Aim to maintain just enough of each type of stock to
service your customers on an on-going basis. Identify
seasonal peaks and troughs. |
|
• |
Set a target stock-turn (eg six times a year) for each
category of stock, then monitor your performance. |
|
• |
The faster your suppliers can deliver to you, the less
stock you need hold. |
|
• |
Consider selling off any old or obsolete stock to raise
extra cash. |
|
7. New Funding
You need a solid financial base to underpin the
cashflow of your business. Take full advantage of the different types of
finance available.
|
1. |
Overdraft
and loan finance may be limited by the security you can give the
bank. (See
Overdrafts and bank loans) |
|
2. |
Factoring
allows you to raise finance based on the value of outstanding
invoices. (See
Factoring and invoice discounting)
|
• |
Growing businesses in particular often find that
factoring provides a more substantial and flexible
source of working capital than overdrafts or loans. |
|
|
3. |
Consider
using asset finance to purchase computers, vehicles, plant and
machinery. (See
Financing equipment)
|
• |
For example, both hire purchase and leasing allow you to
spread the cost of the acquisition, with the asset
itself providing the main security. |
|
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4. |
A strong
financial base of equity finance (and directors' loans) is vital
when a business starts up. Subsequent injections of equity
finance can help you achieve step changes in the growth of the
business. (See
Venture capital and
Business angels)
|
• |
For example, if you need extra finance to buy another
firm or open a new factory. |
|
Positive Cashflow
Some types of business are cash-positive - as long
as they are profitable, they should generate cash as sales increase. For
example:
|
1. |
Retail
outlets are paid cash and may not pay their suppliers for 60
days. Likewise a taxi firm or a bus
company takes cash, then pays the wages later on. |
|
2. |
Some
travel agencies are paid in advance by customers, but pay the
holiday operator just before the holiday. |
|
3. |
Many
computer maintenance firms are paid a monthly or even annual
retainer in advance. |
No Profits and No Cashflow
Here is a list of the bad business practices that
cause many needless business failures.
|
• |
Taking on
financial commitments (such as new employees) before the
business can afford to pay for them. |
|
• |
Doing
large amounts of speculative work in the hope that a customer
might then purchase what you have produced. |
|
• |
Overvaluing stock, work-in-progress and fixed assets such as
machinery. |
|
• |
Making no
provision for major expenses which you know are likely to
happen. |
|
• |
Failing
to do any cashflow forecasting, particularly if your business is
struggling to grow. |
|
• |
Failing
to agree the details of an order with the customer, or the
payment terms, which leads to a dispute. |
|
• |
Failing
to implement an effective credit control system, starting with
credit checking prospective customers. |
EXIT |
