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But first, here are some basic information which will help you in your
BUSINESS ADVICE – What do you need to consider?
Most people know they need an accountant for taxation purposes and a lawyer to check through a lease on their business premises. However, an accountant and lawyer can do much more for your business.
Good accountants and lawyers are aware of the economic, legal and financial environment affection business; so use their knowledge and experience to anticipate changes and plan for survival and growth.
Often business owners can become immersed in their daily operations leaving them little time to consider the business on a more global or macro view. This is why it is so important to have an independent view of your business situation. There is no right way to choose a business advisor for your business, but the following three easy steps are a useful guide.
- Ask for recommendations from:
- Business contacts
- Your local bank manager
- Other business advisers
- Friends with relevant experience
- The adviser’s existing clients
- Arrange an initial meeting and prepare a list of questions for the meeting. Ask about:
- Your business proposal or plan, is it sound and/or viable?
- Do they have experience with businesses similar to yours? The more experience they have with businesses like yours, the better they will be able to provide expert advice.
- What they can offer – are there a range of services relevant to your needs?
- How will you be charged? Get a sense of their hourly rate and an estimate of costs.
- Who will be your main contact in their firm?
- Feel comfortable with and have confidence in the person you choose.
If you are not satisfied, get another adviser. Remember they work for you, not you for them.
Important points to remember:
- Don’t make a decision based on costs alone
- Ask for estimates of likely costs for services to be performed and satisfy yourself that these are reasonable
- Ask questions about services which can help you manage your business better
- Don’t choose someone you have difficulty communicating with
- Meet with more than one adviser before making your choice
- Don’t use the adviser of the other party involved in business negotiations. A solicitor and/or accountant can only serve the interests of one party at a time.
BUDGETING AND FINANCIAL CONTROL – Why is it important?
Financial planning and budgeting are essential management functions for any business. When starting or operating a business, many expenses arise that are not readily predictable. Financial success in business is based on a combination of both profitability and liquidity.
Most budgets are derived from an initial projection of the expected sales or income of a business (annual or longer). From this, the necessary resources such as working capital, trading stock, staff, plant and equipment requirements etc can be identified and provided for. Budgets are really just your business plans expressed in financial terms.
Profit budget and cash flow budgets
Budgeting includes projected profit budgets, cash flow budgets and an awareness of one’s breakeven point (fixed costs divided by the gross profit percentage) that helps put things into perspective.
A profit budget calculates the projected profit (or loss) for each month whereas a cash flow budget projects the available funds (or amount of overdraft) as at the end of a particular month. Even though a business is trading profitably, there may be months when overdrafts facilities will be required that have yet to be arranged. If your budgets are prepared, they will show you when to expect this. If this occurs in a month that it has not been budgeted for, then you know something is wrong and it gives you the opportunity to rectify it before things become too bad.
Positive factors effecting cash flow
- Efficient collection of your debtors, i.e. Clients with amounts owing to you fall outside normal terms.
- Achieving turnover of your stock within industry standards, i.e. No excessive levels of stock are held.
- Maintaining a gross profit percentage that does not reflect excessive discounting, i.e. There is no point discounting if you are not making money.
- Paying your creditors within the allowed credit terms provided and taking advantage of early payment discounts where available.
- Controlling your other expenses and comparing these with what has been budgeted and investigating any differences.
Financial control also incorporates a degree of internal control. What this means is that there are a series of checks and balances within your business to help safeguard your cash and other assets. In a small business, this may include an external audit. An accountant can often help you with ideas on appropriate forms of internal control.
CASH FLOW – What do you need to know and plan for?
Although profits from a business venture are a measure of success, the flow of cash in and out of a business is its lifeblood. Cash flow planning is critical to both the survival and growth of any business. Unless cash is available when it is required, the business may have to close its doors, even though profits are being earned.
Realistic forecasts will help stabilize the cash flow pattern and enable you to meet seasonal commitments and plan for expenditure on new equipment or expansion. It will also forecast when additional funds may be required; both short and long term. The existence of these forecasts will also assist you in liaising with your bank manager regarding your financial requirements.
The main method of preparing a cash flow forecast is by estimating cash receipts and payments for a projected period. This period of projection is usually for twelve months on a monthly basis.
Cash flows will enable you to determine whether you need just a bank overdraft or need to inject further capital into the business to cover the cash flow requirements.
Cash flow budgets should cover a minimum period of 12 months. If starting out in business, it may be prudent to expand this for a further 6 – 12 months. Once a budget has been finalized, it is good management practice to monitor the budgeted figures against the monthly actual, at the end of each month. The simple way to achieve this is by adding another column alongside each month’s budget amounts. Obviously, any large discrepancy should be immediately investigated and if required, adjustments made for the ensuing months.
Need more help?
Your accountant is best placed to help you prepare a cash flow budget. If you would like an example of how to prepare a budget, please contact us.