Author: Andy Dalziel

Business insurance covers any type of insurance taken out by a business to protect against operational losses. The type of loss that an insurance policy might cover depends on the insurance company, the wording of the policy and any local legal or financial limitation. It may also depend on the industry of the type of business for which the insuree wants coverage.

There are several broad types of business insurance. General Liability insurance protects a business against a variety of claims, which might include personal or bodily injury, damage to property, negligence, or a broad variety of other operational mishaps and accidents. Product liability insurance protects against consumer claims in the event that they suffer injury, illness or even death as a result of using products made or supplied by a business which turn out to be faulty or defective in some way. Key Person insurance – also known as Keyman Insurance – is a form of life insurance, and covers a business for financial losses that occur due to the death or incapacity for any length of time of an important member of the business. The CEO, for example, or a key research scientist.

Beyond these general categories, there are other types of specific insurance available which a business might consider taking out to insure itself against risk. There is commercial auto insurance, for example, that protects vehicles which carry a company’s personnel, products or equipment, and even employees who drive their own cars on company business. Professional Liability Insurance – also known as Errors and Omissions Insurance – protects a business which either fails to provide a proper professional service, or whose clients suffer loss as a result of professional advice that turns out to be wrong. This type of protection is not covered by general liability insurance policies so this is something that definitely needs to be considered if you are an accounting firm, lawyer, consultant, real estate agent or even hair salon.

Directors and Officers Insurance protects the directors and senior officers of a company against any actions they take which affect the operations or profitability of a business. Should the director of a company find themselves facing a lawsuit, for example, this type of insurance would protect the business against the resulting damages and legal costs. Then there is Data Breach insurance. Any business that stores sensitive or non-public information about clients or employees on computers, servers or in physical paper files is responsible for protecting that information. A Data Breach policy will provide protection against financial losses or legal action result from this information being released inappropriately.

Some types of insurance are compulsory. If your business, for example, relies on commercial vehicles for the transport of goods, or the provision of services, then you must have auto insurance to cover bodily injury to drivers, passengers and third parties, as well as any resulting damage, in the event of an accident. And, if you employ  staff of any kind, no matter how big or small your company is, then you must have some form of Employers’ Liability Insurance – or Workers’ Compensation – to provide cover in the event that one of your employees is injured or becomes ill as a result of working for you.

Beyond this, there are no mandated types of business insurance, despite the unscrupulous claims of some insurance providers and service providers which suggest otherwise. UK banks, for example, have been fined and had to pay billions of pounds in compensation for the mis-selling of Payment Protection Insurance (PPI) to their customers.

Choosing the right business insurer for you can be difficult, because few service providers excel in every type of business insurance. One might be a top provider of commercial auto insurance, for example, but offer relatively inflexible product liability coverage. Others might be geared to particular types of industry, or positioned to service large companies and multi-nationals primarily.

Faced with such a choice, your first step should be to review your business carefully and determine what type of insurance you actually need. Then you need to find an insurer that meets those needs. There are literally thousands of insurers and brokers to choose from, so do your research and compare them.

If you are a small or medium-sized firm make sure that your potential insurer really caters to this sector of the market, have sales staff that understand your business, are prepared to give you insurance that meets your needs, and are not trying to sell you unnecessary or excessive cover. Business insurance of some form or other is both a necessity and an investment. Make sure you are getting a good return on that investment.

Few people start a new business so that can do paperwork or fill in forms. For many keeping up to date financial records falls into this category of seemingly unnecessary bureaucracy, a waste of time which detracts from the main job of running the business. However, this is not the case. Whilst it may be regarded by some as a necessary evil, the wiser will realise that being on top of your business’s finance is vital if you are to understand trends and identify problems before they occur. Ignoring the need to keep your business records up to date can have serious consequences for both you and the business. So, whether you tackle it yourself or choose to delegate it to a qualified professional, make sure your book-keeping is up to date.

Apart from the fact that any small business will have regular statutory reporting requirements – ranging from VAT and tax declarations, to social security returns and annual accounts and audit requirements – being on top of your book-keeping is important so can manage your business properly. It enables you to identify trends in your business early, and ensure that you have a good handle on your cash flow. Thousands of new businesses are started each year, and thousands fail, not because of flaws in the business concept or idea, but because the owners could not manage their cash flow or company’s finances. Don’t be one of them.

Book-keeping should be a regular task so make sure time is set aside for it. Leaving it too long to update your books or trying to squeeze this in at night when you are tired invites mistakes. Either you will be tired or not remember the details of important transactions after the fact.

Use a spreadsheet or consider investing in an appropriate accounting software package for your business. There are a lot available on the market, but you may want to take advice from an accountant or financial adviser as to the best solution for your business.

Alternatively, and for many a better option, hire a book-keeper or accountant to help you with your business finances. Not only will they help get your books up to date and make sure that you are compliant with local laws and statutory requirements, but they will help save you money as well. By identifying trends, potential cost savings, and providing broader financial advice, they should certainly save you more money than they cost. Plus, employing them just on a freelance basis to look after your finances frees up your time so you can do what you do best – running the business itself.

Irrespective of whether you choose to do it yourself, or hire qualified help, there are some basics that need to be followed to get your book-keeping right.

As a general rule, get an invoice or receipt for everything you buy, and issue one for everything you sell. Statistically, the longer you are in business, the greater the chance of a VAT or tax inspection. These should be nothing to worry about if you have all the paperwork to hand and employ the services of a good accountant. If you have neither, they can be a nightmare. While the cash economy – the use of cash to avoid VAT and other taxes – remains in force in many countries and industries, successive national governments and agencies are attempting to crackdown on such practices. Don’t be tempted to make sales or purchases “off the books”. It may help you in the short-term if you get away with it, but long-term you will get found out. The consequences, both for the business, and yourself, can be severe.

Cash is king is an oft-quoted expression. The maxim is true for many small business owners because cash flow management is a vital component of business survival. Monitor all payments and receipts into and out of your bank account, and remember to take into account scheduled payments like standing orders, direct debits and subscriptions, as well as bank charges and interest. If you are still using cheques to pay suppliers, take into account any unpresented amounts when assessing your cash position at any point in time.

Don’t wait for monthly bank statements but get online banking facilities in place so you can monitor cash movements and payments in real time. By the time the statements arrive, you could find yourself in cash flow difficulties, struggling to make payments. Better to have an ongoing record of your cash position at all times.

Remember, if you run a limited company, even if you own it 100%, that the money of the business is not yours – it belongs to the company. That means that, unless you have a legitimate business expense, you cannot spend the company’s money on your own purchases. Sadly, this is where many well-meaning small business owners get into trouble. By failing to maintain accurate, up-to-date accounting records, the personal and the corporate get confused. The result can be not only higher tax bills, penalties and fines (both for the business and for the individual), but also more extended consequences such as disciplinary action for professionals such as lawyers and accountants who conflate client monies with their own.

Make sure that all the sales invoices you issue are recorded. A major cause of many small business failures is poor management of accounts receivable – the issue of sales invoices to customers, and the subsequent monitoring and collection against those invoices. With a well-maintained set of books and accounting records, it is easy to identify what has been invoiced to what customer and at what price. More importantly, it is easy to identify what invoices are outstanding, enabling you to initiate appropriate follow-up action. This could be vital for business survival.

While many small business owners may resent the need to maintain accurate accounting books and records, and regard it as a waste of their valuable time, it is a vital part of running any successful business. Not only does it help meet your statutory and other legal reporting requirements, but, more pertinently, it provides an essential guide and insight as to the health of your business. With so many new businesses failing due to poor cash flow and inability to manage their finances, the need for good accounting records should be self-evident. So whether you decide to do it yourself on a spreadsheet, invest in an accounting software package or outsource to a qualified book-keeper or accountant, don’t neglect the book-keeping. It might make the difference between going out of business and longer-term growth and prosperity.

 

Many business owners do not create a budget, either because they don’t know how or because they do not consider it worth their valuable time. This is unfortunate because a well thought-out plan can help you control spending, ensure that resources are available for those things that support business growth and development, and allows you to identify cash flow problems and other bottlenecks before they can harm your business.

There are a number of good reasons for creating a budget:

• To set targets

Every business needs targets, otherwise it has no measure of performance, and no means of distinguishing success from failure. A budget will project both revenues and expenses in order to determine both its short, and longer-term, strategy. By focusing on the essentials, and restricting time and money spent on items that are not in the plan, you can ensure appropriate resources are available to support the objectives of the business.

• Strategy requires funding

Strategy and planning are integral to one another. A budget helps achieve strategic and operational goals by ensuring that money is allocated to those things and activities that support the strategy – for example, the launch of a new product or service.

•  To set priorities

A well-structured budget helps identify business priorities and communicates them to a broader audience, both within a company, and, if shared with potential investors or lenders, externally as well. Business owners can help employees understand the company’s strategy, and how the annual budget funds these priorities. In the case of lenders and investors, a budget demonstrates that the business has defined its objectives, identified priorities and allocated resources accordingly. In other words, it helps build credibility and trust. A potential investor is much more likely to lend money to a business that has a budget, than one that does not.

• Helps control spending

The production of any budget involves discussions about spending priorities and cost control which is a healthy dialogue for any business to engage in, providing that the dialogue is constructive. When funds are allocated, spending is controlled, and a measure provided as to what is an acceptable level of cost in the business. By focusing on the implementation of the budget, unplanned spending can be reduced to a minimum.

• Identifies major capital expenditure and other large ticket items

An effective budget identifies the need for capital investment and other large one-off items, and make sure funds will be available and allocated to fund their purchase. It also reflects complementary activities – for example, if you plan on having 3 new staff you might need to buy 3 new laptops for them to use.

In terms of how you create your budget, there is no need to make it too complicated – what you are trying to determine, after all, is what you are likely to earn, and spend, in the next financial year.

Your starting point should be to collect information on past sales and costs. These should be as accurate and complete as possible as they will be the basis of your plan. If you have employees, ask them for input on their relevant areas of operation; not only does it help give you as full and accurate picture as possible, but involving them helps their engagement and buy-in to the budget process and objectives. They may also be able to offer ideas as to how costs could be reduced or sales boosted, which, in turn, could lead to you amending your budget to reflect their input.

The next step is to consider what changes have occurred, or are likely to occur, which will impact your future plans. For example, has the competitive landscape been changed by the entry of a new aggressive, low-cost competitor. Have their been changes in the industry more broadly, due to the introduction of new technology, or increased regulatory requirements? How have your resources changed and how has this impacted your ability to supply your products or services?

Having got this information, prepare your sales forecast, allowing for any business seasonality, or any other significant fluctuations, such as the impact of a large one-off contract.

Turning to the cost side, work out first your fixed costs – those business overheads which will be incurred regardless of your level of activity. These might include salaries, rent, utility costs, IT expenses etc. Then calculate your variable costs – those expenses which vary depending on your level of sales. These might include materials, labour (including staff overtime), the hire of special equipment to fulfil an order etc. Finally, include any non-operational costs – these might include bank charges, interest, tax and VAT payments.

Having collected all your data, everything should now be consolidated, either in a spreadsheet or, if your accounting system supports it, within an applicable budget template.

Once your budget has been prepared, sit back and review it with a critical eye. Is it as realistic as possible and is it achievable? Whilst an over-optimistic sales forecast or a predicted fall in costs may look good on paper, will they materialise in reality? A too optimistic budget can cause you to expand too quickly, or run into cash flow problems. So, if need be, build some conservatism into your estimates, or create another version of the budget which reflects more of the downside risk.

Finally, while the budget is a very good tool for planning and managing your business, it is normally created at one point in time. Events and market fluctuations may cause fundamental changes to the business assumptions on which it was based. Update your budget accordingly, or prepare a forecast which reflects the changes in assumptions, realignment of priorities or amended targets.

Budgeting is an essential element of business success, as it helps with both planning and control of an organisation’s financial and other resources. Business planning involves decisions about strategy and identifying priorities, while controlling ensures plans and objectives are achieved and managed. Managing a business without a budget is like leaving home with no idea of your destination. If you embark on a journey with no plan as to where you are going, how do you know when you’ve got there?

 

Trying to set the right price for your services can be a tricky business for many service providers. Should you use the prevailing market rates and try to match them, and should you be charging a premium for your experience and skill set? The best way to work out your prices is to calculate your overheads and billable hours, come up with an hourly rate, and then adjust, as need be, to reflect what the market can bear, and what you can expect as a reward for your efforts.

• Overheads

Work out what money you need to cover your overheads or fixed costs. As the name suggests, your fixed costs are there, whatever your level of business, and need to be paid. Such fixed costs might include rent, utility bills, server, internet and IT costs, stationery, and administration costs.

• Consumables

Depending on your type of business, you may be required to provide consumables as part of your service. A cleaning service might require a range of cleaning products, cloths, sponges and dusters, for example, an advertising agency may use quite a lot of ink and paper presenting concepts and storyboards to their potential customers, while a lawyer might incur court and registry fees on behalf of their clients. Whatever the nature of these costs, such consumables should either be built into your overheads or charged separately to clients. Don’t ignore them – to do so will impact on the profitability of your business.

• Expected Earnings

Estimate how much you would like, or need, to earn in a year – but be realistic! This could be based, at the basic level, on your personal expenses, and the bills you have to pay, or more likely the going rate, or “salary”, in your industry, for somebody with your experience, skills and ability. Compare this with other competitors and service providers in your field, remembering that their rates, in turn, do not reflect what they pocket at the end of the day, but include an amount to cover their own overheads and consumables.

• Billable Hours

Your billable hours are the amount of hours you are likely to charge out in a year, assuming a standard working day of 8 hours. Billable hours are not the same as available hours. You need to exclude weekends, public holidays, personal vacation time and possible sick leave. You also need to factor in time for administration, advertising, business development and finding new clients, especially in the early days when you are unlikely to have a steady stream of business. Most likely, you will only be able to charge for 4 or 5 hours a day, out of every working day, which means your hourly rate has to be able to cover all your downtime and non-availability, as well as the time you spend on direct client activities.

Therefore, with all the holidays, illnesses and non direct client activity factored into the equation, and assuming 40 weeks as the available time frame available per year, then your billable hours will be either 800 (40 weeks * 5 days a week * 4 hours a day) or 1,000 (40 weeks * 5 days a week * 5 hours a day) a year.

• Calculate your hourly rate

To calculate your hourly rate, add your overheads and expected earnings and divide by your billable hours (overheads+ earning earnings/billable hours). For example, if your overheads are €45,000 and expected earnings €55,000, and your billable hours are 1,000 a year, then your hourly rate is €100 an hour (€45,000 +  €55,000/1,000).

• Calculate your rate of service

Depending on the industry and sector in which you work, you may simply charge your hourly rate, or an increment of it – 15 minutes, for example – for your service. However, there may be some instances where a client wants to know, in advance, what they can expect to pay for a particular service.

In such instances, work out a service rate for the job based on the hourly rate and the amount of time you expect a particular job to take. For example, a business trainer might charge 4 hours for a morning’s presentation, with travel time factored in as well. So, in the example above, assuming an hourly rate of €100, they would charge the client €400 for the service.

• Adjusting to market rates and premium pricing

If the hourly rate you have calculated is out of kilter with the prevailing market rates, then you may need to adjust your calculations. Find a way of reducing your overheads, lower your income expectations, or increase your billable hours. On the other hand, make sure that you are not under pricing yourself and are making a fair comparison to those market rates. You would expect to pay more for an accountant with 30 years of experience and knowledge than for somebody who has just qualified, for example, whilst a highly qualified web designer will command a premium over somebody who just offers tech support. Make sure prospective clients appreciate this and the understand the added value you offer.

• Discounts

Depending on your industry you may want to discount your rates for large volumes of wok or regular work from the same client. This will need to be determined on a case by case basis. You could also discount your rates in return for a non-monetary return, such as a client providing links to your websites on theirs, or giving client testimonials for you.

•  Charging Multiple Rates

Again depending on your industry and sector, you could offer different rates for different markets or services. Copy editors and proof readers, for instance, may charge different hourly rates depending on the type, complexity and degree of specialist knowledge required of the text they are editing, whilst an accountant may charge a lower rate for compliance work such as preparing a VAT return or making supplier payments, and a higher rate for offering detailed tax or financial advice.

Setting the right price for your services is not easy and a number of factors need to be taken into account in your calculations – your overheads, consumables, expected earnings, billable hours and prevailing market and industry rates. Remember that you may need to adjust your rates if they are out of line with the market, but don’t under sell yourself, especially if you are offering professional, skilled services. Above all, bear in mind that your rates can be changed and, hopefully, increased, as you gain more clients, experience and standing.

The Cyprus government is under intense pressure from the EU to introduce 19% VAT on the sale of building and housing plots. Although the matter is currently under discussion in the House of Representatives, there seems to be no way Cyprus can evade the issues, with EU fines in the millions of euros mooted if this is not implemented very soon.

MPs and vested interest groups have argued that the new measure would upset a real estate market that has just started to recover after the financial and banking crisis, and that it will affect not only the property market but also banks, and other credit institutions, that hold land as collateral.

Currently, consumers do not pay any VAT when they buy a plot of land, but, if they then erect a house on that plot they pay 5% VAT. If they buy a house from a developer, by contrast, they pay only the 5% VAT. If the EU directive were to be enacted into national law, consumers would pay 19% VAT on the land purchase, plus an additional 5% VAT if they then built a house.

Arguably, Cyprus has been living on borrowed time as far as imposition of VAT on commercial property sales is concerned. The EU VAT Directive was enacted in 2006 but, when Cyprus acceded to the EU in 2004, it was granted a temporary exemption from the directive, allowing the island to continue to exempt the supply of building land until December 31st, 2007. As a consequence, the country has been acting in contravention of the directive for nearly a decade now, and a hefty fine awaits, comprising a lump sum for the 9 year period of non-compliance, as well as an amount estimated between €100,000 and €300,000 per day of non-compliance after that.

The government has already attempted to mitigate some of the effects of the additional VAT levy by abolishing last year the Immovable Property Tax, and by reducing land transfer fees by 50%. However, those affected by the new legislation argue that the impact on the property market could still be severe, reducing demand from buyers, and impacting on the ability of banks and other credit institutions, who hold property under “asset for debt” swap deals with debtors, to sell their property holdings. There is also a potential issue where banks hold land as a collateral for a loan, because, were VAT to be levied, the market value of the collateral might, effectively be devalued, because that value would effectively now be inclusive, not exclusive of VAT. As a consequence, the banks might demand further collateral for their loans, potentially causing additional hardship for borrowers.

Whilst the proposed tax will not affect those buyers who are VAT payers – they can offset this against their VAT payments – most commercial property buyers are not, especially in cases where they are buying the property for their own use.

Legislators have asked ICPAC (The Certified Public Accountants of Cyprus) to suggest proposals for offsetting the VAT imposition. Meanwhile, because the EU legislation imposes VAT on the supply of building land, there is some flexibility afforded national governments as to how they interpret this. For example, a government bill, submitted last year, exempts farm land, forests and “protected areas£ from the imposition of VAT, and MPs are now trying to restrict the definition of “building land”, so that as many land transactions as possible can be excluded from the new legislation.

At the same time, ruling party Disy and socialist Edek are going to table a proposal which will allow for the non-payment of capital gains tax until the end of 2018 to offset the impact of the VAT change. Another measure being contemplated is an amendment to the legislation whereby young couples who buy land in order to build their first home would be exempt from the 19% charge and would only pay 5% instead; either by paying the lower rate in the first place, or by paying the full rate and then getting the 14% difference refunded from the state.

The 19% VAT would also apply to tax leasing/letting of immovable property for commercial purposes, although it would only apply to those already registered for VAT. Individuals or families renting an apartment will be exempt from the VAT charge.

There are, of course, many critics of commercial developers and their allies in the House of Representatives who will feel little sympathy for them, and argue that this VAT charge should have been in place for many years. There also might be little support for the banks and the impact of the new legislation on their ability to tackle the NPL (Non-Performing Loan) issue which continues to dog the Cyprus economy and its struggles to recover from the bail-in crisis of 4 years ago. People’s anger might also be stirred when it is realised that it will be the Cyprus tax payer who will effectively be forced to pay the EU fines when they are eventually meeted out.

Nevertheless, the new VAT legislation, which is expected to be enacted into law before the Houses of Parliament convenes for their summer recess will have an impact on the Cyprus economy, the impact of which it is hard to assess in advance.

Starting a new business can be very exciting but also very challenging. There are so many conflicting priorities and so many demands on your time that it can quite bewildering. However, by having a good plan in place before you start and making sure that the right building blocks are in place, then it is possible to proceed with confidence that you have done all you can to succeed.

• Choose the right structure

It is important to choose the right structure for your business. Should you start as a sole trader, a limited liability company (ltd), a partnership or some other legal format.? Take appropriate legal and financial advice, as each structure has its own legal, tax, financial and other regulatory issues.

• Make sure you register with the appropriate authorities

Having formed your company, register with the appropriate authorities before you start trading, otherwise you may find yourself in difficulties with them from the outset. Register for tax, and, if eligible, VAT. Make sure that any licensing requirements – for example if you are selling food or drink – have been met, and if employing staff, that you have registered with your local social security and/or payroll tax office.

• Don’t try and go it alone

Make sure that you have good advisers on hand to assist with the initial set-up and also perhaps to act as an independent sounding board as well. Typically these would include an accountant and a lawyer, as well as an experienced business person, perhaps in the guise of a family friend, to act as a mentor. Such people can give you quality advice in specialist areas where you may lack the requisite skills yourself – for example finance, legal, IT, or marketing.

• Create effective processes.

To run your business well, you need good processes and systems in place. These may include invoicing, shipping, production and quality control. Good systems allow you to:

Run the business efficiently;

Ensure the delivery of efficient and cost effective products and services;

Employ new staff and bring them up-to-speed more quickly knowing there are established procedures for them to follow;

Delegate the management of the business in your absence – if you go on holiday or are sick for instance;

Make your business more valuable to a potential buyer.

• Implement strong billing and client management

Many new businesses fail due to cash flow problems. One of the principal causes of this comes from poor control of accounts’ receivables. Services or products are sold on credit, and these sales invoices are not collected sufficiently early enough to cover supplier payments, and other liabilities, like taxes, which have to be paid out of the business. If you must sell on credit – and check if other options are available, such as cash on delivery, or discounts for early payment – then it is important to have an efficient credit management process in place.

Such a process might include the following:

Checks on the credit-worthiness of all new clients;

Written agreements by customers to your terms of trade before you start selling to them;

The imposition of credit limits;

Prompt invoicing and the issue of statements to customers;

Immediate follow-up of late payments, and established escalation methods for overdue amounts – email, phone calls, follow-up visits, legal threats as appropriate.

• Install a good accounting system.

To make the right decisions, you need timely and correct information. Installing a good accounting system allows you to:

See the state of your business at any point in time – how much has been sold, what cash balances are available, how much is owed to suppliers etc.

Generate immediate financial reports – profit and loss accounts, budgets, accounts’ receivable etc; and

Bill clients, track payments and flag overdue debtors for your attention.

Of course, having a good accounting system and not being able to use it is a problem. Ask your accountant to recommend one that is sufficiently easy to use for your needs, or engage their services on a consulting basis so they can help maintain it for you, and provide you with the information you need to run your business.

• Identify your KPIs – and monitor them.

Every business has key performance indicators (KPIs). Some of these KPIs are common to all businesses – for example, gross and net profit margins, average debtor days or the bad debtor percentage. Others will be unique to their business sector or industry – these might include website visitor conversion rates for an online business, production units for a manufacturer, or billable hours for a professional service firm like lawyers or accountants.

Decide what are the key drivers for own business and create suitable KPIs based on them. Then having created your KPIs, monitor them!

• Build good relationships with key stakeholders

There are a number of stakeholders in your business – customers, suppliers, lenders, staff and consultants/advisers. Try and build good relationships with all of them, as they can help you grow your business or assist you if you hit a rough patch. If you pay suppliers on time, they will come to trust you and will be more willing to be lenient in terms of offering you credit if cash is tight one month. Lenders will trust you if all loan repayments and interest is paid on time, and may be more willing to extend the loan or renegotiate terms accordingly. Your staff are more likely to go the extra mile for you if treated well, and kept informed as to your plans and on any issues that may affect them.

Starting a business can be very challenging and there are many pitfalls that could trip the unwary. However, by planning ahead and putting the necessary building blocks in place, you can ensure that you are well placed to not only survive the first few months of trading but to grow and prosper in the long term. Choose the right legal structure, register with the relevant authorities before you start trading, create effective processes, get a good credit management and accounting system in place, and identify and monitor the KPIs that drive your business. Form a good relationship with all key stakeholders and remember don’t try and go it alone. Not only can a team of key advisers give you qualified advice in areas not covered by your core key skills, they can also act as a sounding board and give valuable support so that you can feel you are not facing all these challenges alone.

One of the major causes of failure for any small business is poor cash flow – in basic terms, more money is going out of the business than is being received. A business can be very profitable on paper but, if there is no money to pay the bills, then it will be forced to close. The personal, emotional and legal consequences for the business owner can be immense. Cash flow problems cannot always be solved but, if they can be anticipated in advance, some of the worst consequences can be mitigated and alternative plans put in place. This is why preparing a cash flow forecast is important for your business.

A cash flow forecast is an estimate of sales income and expenses, based on when that income is expected to reach your bank account and those expenses paid out. Income projections are not based on when customer invoices are due (although when accounts’ receivables are under control this might be the same thing), but on the date you actually expect those invoices to be paid. Expense forecasts similarly reflect the date supplier invoices must be paid, not when they are received.

Cash flow forecasts allow you to predict your business’s future financial position for the period ahead, be it 3,6 or 12 months. The further out you are forecasting though, the less accurate you can expect your forecast to be, because of all the future unknowns that may arise.

A cash flow forecast allows you to predict and account for any seasonality in your business and plan accordingly. For example, a typical retailer might expect to have high sales in the period before Christmas and then a slump in the early part of the following year. By comparison, a company which sells swimwear and beach accessories would expect most of their trade during the summer months. And, whilst those sales might come in one month – in the examples above, December or July and August, the stock needed to make those sales might have to be paid for in January, for instance, or September. Without forecasting this properly, you might be tempted to spend all the money earning during the peak periods, and have nothing left to pay your subsequent costs.

Cash flow forecasts can be created via Excel spreadsheets, through computerised accounting software, or from templates which can be downloaded for free. You may want to enlist the help of your accountant or financial adviser to help prepare your forecast for you but this does not abdicate you of responsibility for it. Even if somebody else prepares it for you, it is your duty to understand your cash flow forecast and takes the necessary decisions based on it.

A few basics before you start. Firstly, we recommend that the forecast is based on a monthly basis. You can do it by day, by week or by quarter, but because most supplier invoices have payment dates specified by month, and your customer invoices are likely to be issued on similar terms, monthly is the normal forecast period, with most forecasts comprising a number of months ahead. Also, if you trade in foreign currencies or have bank accounts denominated in different currencies, nominate just one currency as the main one for your business, and prepare all income and expense forecasts in that currency. Unless you are an experienced foreign currency trader, don’t try and forecast future foreign exchange rate movements! Use today’s exchange rates.

The first step in preparing your cash flow forecast is to enter the amount of cash that you have on hand now – this will include the amounts held in bank accounts and any significant cash balances held.

Then identify what money will come into your business in the months ahead. This could be money from sales you have already made in the form of outstanding customer invoices, and projections of future sales based on past performance or market research. Remember only forecast what you actually expect to receive from customers, not how much you expect to invoice. Prudence should definitely be exercised in this area, as late payment of supplier invoices is endemic in many countries, with large companies the worst when it comes to settling with their suppliers.

Now record all the expenses you expect to pay in the forthcoming period. This should include all variable and fixed costs, taxes and similar payments like VAT, bank charges and interest payments, as well as any drawings that the owner is likely to make from the business. Again remember to forecast supplier payments when they are due, not by their invoice date.

Add your income to your opening bank balance, subtract your expenses, and you have your projected bank balance at the end of the period. Repeat this each month and you will have an understanding of your business’s likely cash flow position for the period ahead. Cash flow positive at the end of the month – good. You have enough cash flowing into your business to meet your expenses with, hopefully, some surplus left over. Cash flow at the end of the month negative – bad. You will need to find additional finance to keep your business going, or will need to increase sale, decrease costs or both.

Cash flow forecasts should be updated each month based on actual business performance and changes to business conditions and projections. Your initial cash flow forecast may have been too optimistic or conservative – be prepared to adjust it accordingly.

Apart from providing a good indicator of your likely cash position at any point in time and acting as a barometer of future cash flow problems, a forecast also helps you plan for projected events.

If you plan to open a new shop or introduce a new service, you can include the upfront launch costs into your forecast, and then see what impact the additional income, and associated expenses from it, will have on your business. The more sophisticated may consider preparing worst case, a bast case and neutral version of the forecast to determine how robust the returns from the new venture are likely to be. If the projected returns from the best case scenario look very optimistic compared even to the neutral version of the forecast, probably best to defer the new launch until your cash flow position is stronger.

Your cash flow forecast gives you a future view into your business. It helps you anticipate cash flow problems before they materialise, develop alternative strategies, and help you plan for the future. In short. it allows you to make better, and more informed, business decisions.

 

 

 

 

Those who have just started a business are apt to make a few mistakes which can immediately put at risk all the hard work and inspiration that has got them to this point. Learning to avoid these mistakes and grasping a few basic accounting fundamentals can be the difference, at least in the early days of your business, between failure and longer-term survival.

• Sales are not profit.

It is easy to confuse sales with profit and to assume that because your sales are strong, that your business is profitable. This is simply not true. Sales are what you get from selling your goods or services, profit is what is left over after all your costs have been deducted from those sales. The bottom-line is this: if your costs are greater than your sales your business is operating at a loss.

There are two types of business costs, variable and fixed. As their name suggests, variable costs vary with sales levels. They include the cost of raw materials or stock, and the direct labour cost of producing a good or providing a service. The more you sell, the higher these costs, and vice versa. Fixed costs, on the other hand, also known as overheads, are there regardless of how much or how little you sell each month. Such costs include office rent, utility bills, office expenses, and, to a large extent, staff costs.

Variable costs can be reduced in the short-term, fixed costs much less so. The mistake many small business owners make is not to include all their costs when setting a price for their goods or services. Therefore, they will determine a price which appears to cover all their variable costs, without taking into account all their business overheads. This means that they leave either not enough profit to cover those overheads, or end up with a very thin margin overall. It is important, therefore, to make sure you include these business overheads, or at least part of them, in your pricing calculations.

Ask your financial adviser or accountant to check your pricing before you start selling, so that they can check for you that all relevant costs have been included. This will give you the confidence to start off knowing your prices are profitable.

• Profit margin is not the same as mark-up.

Another common confusion is between profit margin and mark-up. Your mark-up is the amount added to the cost price of goods or services to cover overheads and profit, while profit margin is the amount by which sales exceed the costs in a business. The two are not the same as the following example shows.

Assume a business owner wants to make a 25% profit on the cost price of a good or service, the unit cost of which is €100. The easy assumption to make would be that you need to add €25 to the cost price to achieve the desired profit margin of 25%.

However, using the following formula: Price-Cost/Price, it can be seen that the actual profit margin in this case is only 20%. To achieve the desired profit margin of 25%, the selling price would need to be increased to €133.33, some €8.33 higher than might initially have been assumed. By using mark-up instead of profit margin, a business can effectively give away part of that desired profit margin by setting incorrect prices from the off.

Determine in advance what your profit margin should be, and then work back to determine how much you need to mark-up your services or goods to achieve that margin. Again check with your accountant or financial adviser that you have got your sums right and your prices deliver the required margin.

• Profit is not the same as salary for business owners

Many new business owners assume that any money left over as surplus profits can be taken out of the business as their salary. But profits are needed to sustain and grow your business. Taking all these surplus funds out of the business leaves nothing for growth or to provide a buffer in case the business hits a rough patch. Therefore, their “salary” should be included as part of the business costs; the true profit of the business is calculated after deducting all costs, including taxes, plus an amount for their salary. Of course, in the early days of starting a business, many owners might not be able to draw much money from the company, so that initial salary might be quite small. However, as the business grows and becomes more profitable, that salary should be increased to a level at least in line with what they could earn as an employee, and probably more. After all, what is the point of all the risk and hard work involved in starting a business if there is no reward?

Aim to make enough profit to pay your salary and to have enough left to continue sustaining and growing your business. Again this should be reflected in your pricing.

Starting a new business is challenging enough without giving your self additional handicaps by misunderstanding some of the business fundamentals. Don’t confuse sales with profits, mark-up with profit margin, or equate your salary with surplus profits. Get your pricing right, consulting with your accountant or financial adviser where applicable, and you can avoid these common mistakes.

 

 

If you are just starting your business, or are looking to expand with a new service or product line, you may want to approach a bank for a loan, or an outside investor for finance. If that is the case, you will need to prepare a business plan to demonstrate that you have a sound business, and are worth lending money to, or providing with investment. Nobody is going to lend you any money without one. But what should a business plan include, and how detailed does it need to be?

Business plans can vary in length and format, and also in the depth of detail required, although, as a general rule, the more money you want to borrow, the more information you should be prepared to provide. There are a lot of templates available which can be downloaded, so by all means choose one of these and adapt it for your needs. However, it is strongly recommended that you use the services of an accountant when you prepare your plan. Not only do most plans require a lot of financial information – both in the form of historical data and financial projections. There is also likely to be a due diligence phase whilst the loan or investment is under consideration, during which the bank’s loan officer or investor’s financial adviser may ask a lot of technical and financial questions. A suitably qualified accountant will help deal with these enquiries and provide some level of comfort to the prospective lender that your business finances are well-managed.

It is important to remember at the outset that, however good you think your business is, or however convinced you are that you have a winning service or product, for a third party financier – bank, investor, venture capitalist – the only thing that matters is that your business or idea has the ability to generate enough cash to pay back the loan or investment. Your business plan has to convince them of this.

Broadly then, a typical business plan would include the following:

1. An Executive Summary. This is a concise summary illustrating the key points that are detailed in each section of the plan. The summary should be strong enough to stand on its own as a separate document.
2. Business Overview. This offers a description of the business including:
   • Business history;
   • Legal structure;
   • Type of business;
   • Geographical location;
   • Means of conducting business e.g. online, shopfront operation, mail order etc.
3. Operations Plan. This explains how the business will function, including the physical set-up and responsibilities for particular tasks;
4. Market Analysis. This includes an overview of the market as a whole, with specific data, definition of the target market, and plans for catering to that niche audience.
5. Products and Services. Describe the products manufactured or the services offered, and identify the characteristics and the strengths of each.
6. Sales and Marketing. Give pricing and sales information. What are the reasons why your target market will want to buy what you have to offer? What is your pricing strategy? How will you advertise and market your offerings?
7. Competitor Analysis: Describe your main and indirect competitors, and analyse their strengths and weaknesses. Demonstrate how your product or service will give you a competitive edge over those competitors.
8. Management Team. Provide concise information and biographies for the key members of the Management Team who will help implement the business plan.
9. Financials. Include as much financial information as possible. This should normally include historic data – profit and loss accounts and balance sheets – for the preceding two years, and future projections for the next 2/3 years (if you are just starting out and have no historic information, then an assessment of your current trading position and summary of assets and liabilities will suffice). A cash flow forecast may also be required.

Your future projections need to be as accurate and realistic as possible, based on your research, pricing of products, customer numbers, overheads, rent, staffing number, inflation estimates etc. If the financial forecasts are not accurate, do not balance, are not robust enough or are not supported by the rest of the business plan, then you are sending a clear message to the bank or potential investor – I am not serious about this plan, so don’t lend me any money.

Try and incorporate charts and graphs in your business plan where possible. Not only do they break up walls of text but they are usually appealing and can be an effective way of conveying information. Pay attention to layout, and basics such as spelling, grammar, and punctuation. Nothing can detract more from an otherwise well thought-out plan than misspellings or poor grammar.

Once the business plan is finished, the business owner or manager has got to understand it in detail. While they may have delegated part, or all, of the business plan writing to their accountant, they will be expected to know every detail of it if questioned by the bank or investor. Again it is a matter of convincing your audience. If you can’t demonstrate that you know your business, the market, the financial projections and the assumptions behind them, why should anybody risk their money with you?

Finally, it should be stressed that a business plan should be an essential document for any business, not something prepared as a one-off when loan financing or investment is required. A business plan provides a blueprint for your business, providing a framework and context for it. Having a plan enables you to test the feasibility of business ideas, allows you to plan for future events, the need for additional resources, staff, equipment etc., as well as forecast business peaks and troughs. Your plan should be updated on a regular basis as the business evolves, objectives are met or priorities are changed. Done properly, a business plan clarifies where you’ve been and where you are going.

If you need outside finance or investment to help grow your business, then you are going to need a business plan. No bank or rational investor is going to lend you money without one. Templates are freely available which can be adapted for your purpose, so there is no need to invent anything from scratch. However, there are a number of dos and don’ts to remember when preparing your plan:

• Do include an executive summary. This needs to be strong enough to stand on its own;
• Do check for correct spelling, grammar, punctuation;
• Do include charts and graphs where possible;
• Do make sure that your understand your own business plan in detail, including the financial projections and assumptions behind them.
• Don’t prepare your business plan without engaging the help or services of a suitably qualified account;
• Don’t skimp on detail or ignore sections of the plan. Preparing a detailed plan takes time so get used to the idea;
• Don’t just think of a business plan as something you only need when trying to attract outside funding. Instead use it as a key document for managing your business and update it regularly.