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BUSINESS
GUIDES
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| General guide Business Planning Money, finance and cashflow Growing your business Dealing with fraud Managing your business |
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| Business Plan
Basics A business plan precisely defines your business,
identifies your goals, and serves as your firm's resume. The basic
components include a current and pro forma balance sheet, an income
statement, and a cash flow analysis. It helps you allocate resources
properly, handle unforeseen complications, and make good business
decisions. Because it provides specific and organized information
about your company and how you will repay borrowed money, a good
business plan is a crucial part of any loan application. Additionally,
it informs sales personnel, suppliers, and others about your operations
and goals. "The business plan is a necessity. If the person who wants to start a small business can't put a business plan together, he or she is in trouble," says Robert Krummer, Jr., chairman of First Business Bank in Los Angeles. Despite the critical importance of a business plan, many entrepreneurs drag their feet when it comes to preparing a written document. They argue that their marketplace changes too fast for a business plan to be useful or that they just don't have enough time. But just as a builder won't begin construction without a blueprint, eager business owners shouldn't rush into new ventures without a business plan. Before you begin writing your business plan, consider four core questions: What service or product does your business provide and what needs
does it fill? What goes in a business plan? The body can be divided into four distinct sections:
Addenda should include an executive summary, supporting documents, and financial projections. Although there is no single formula for developing a business plan, some elements are common to all business plans. They are summarized in the following outline: Elements of a Business Plan
Sample Plans
A business plan is a tool with three basic purposes: communication,
management, and planning. As a management tool, the business plan helps you track, monitor and evaluate your progress. The business plan is a living document that you will modify as you gain knowledge and experience. By using your business plan to establish timelines and milestones, you can gauge your progress and compare your projections to actual accomplishments. As a planning tool, the business plan guides you through the various phases of your business. A thoughtful plan will help identify roadblocks and obstacles so that you can avoid them and establish alternatives. Many business owners share their business plans with their employees to foster a broader understanding of where the business is going. While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money. Before inquiring about financing, ask yourself the following:
Not All Money Is the Same If your firm has a high ratio of equity to debt, you should probably
seek debt financing. However, if your company has a high proportion
of debt to equity, experts advise that you should increase your
ownership capital (equity investment) for additional funds. That
way you won't be over-leveraged to the point of jeopardizing your
company's survival. Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns. Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing. Debt Financing Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity. In order to determine how much seed money you will need, you must estimate the costs of your your business for at least the first several months. Every business is different, and has its own specific cash needs at different stages of development, so there is no universal method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in stock or equipment. It is vitally important to know that you will have enough money to launch your business venture. To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, stock, insurance, etc. While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs, and insurance costs. Variable expenses include stock, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service. The most effective way to calculate your startup costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. Raising capital is the most basic of all business activities, but it may not be easy; in fact, it is often a complex and frustrating process. However, if you have studied and planned effectively, raising money for your business will go as smoothly as possible. Finding the Money You Need Personal savings: The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, there are usually better options available, even for very small loans. Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest-free or at a low interest rate, which can be beneficial when getting started. Banks: The most common sources of funding, banks will provide a loan if you can show that your business proposal is sound. Angel Investors and Venture capital firms: These individuals and firms help expanding companies grow in exchange for equity or partial ownership. Additional Sources of Capital
Borrowing Money To successfullly obtain a loan, you must be prepared and organised.
You must know exactly how much money you need, why you need it,
and how you will pay it back. You must be able to convince your
lender that you are a good credit risk. Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing premises and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc. How to Write a Loan Proposal A well-written loan proposal contains: General Information Business Description Management Profile Market Information Financial Information How Your Loan Request Will Be Reviewed
Starting up a business can be a tremendous strain on your personal finances. It can take anywhere between six months and two years before your new venture is profitable and can provide financial support for you and your family. Before going into business it is always wise to get your finances in order. Write a monthly household budget that accounts for your income and your household expenses. Be as conservative as possible, because it is vital to your success that you have the resources to maintain your household expenses while your business is growing. Any strain on your personal budget will put the financial success of your business at risk. It is also a good idea to check your personal credit situation. Too often, entrepreneurs think that their business credit and personal credit are separate. A business' credit is built upon the owner's personal credit. Because you have not established a business credit history, lenders and suppliers will use your personal credit history to determine your terms of credit. Your credit report determines how you will be perceived by potential lenders and suppliers. You should know what appears on your credit report because you may find errors that you will want to have corrected. To get a copy of your credit report, refer to one of the major credit bureaus:
For Additional Information: Ever wonder how a creditor decides whether to grant you credit? For years, creditors have been using credit scoring systems to determine if you'd be a good risk for credit cards and auto loans. More recently, credit scoring has been used to help creditors evaluate your ability to repay home mortgage loans. Here's how credit scoring works in helping decide who gets credit -- and why. What is credit scoring? Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a loan application. To get copies of your report, contact the major credit reporting agencies:
These agencies may charge you for your credit report. Why is credit scoring used? How is a credit scoring model developed? Under the Equal Opportunities Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants. What can I do to improve my score? Nevertheless, scoring models generally evaluate the following types of information in your credit report:
Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home. To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly. How reliable is the credit scoring system? Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan proposal and application; you may not get a second opportunity. Always begin your proposal with a cover letter or executive summary. Clearly and briefly explain who you are, your business background, the nature of your business, the amount and purpose of your loan request, your requested terms of repayment, how the funds will benefit your business, and how you will repay the loan. Keep this cover page simple and direct. Many different loan proposal formats are possible. You may want to contact your commercial lender to determine which format is best for you. When writing your proposal, don't assume the reader is familiar with your industry or your individual business. Always include industry-specific details so your reader can understand how your particular business is run and what industry trends affect it. Description of Business:
Management Experience: Resumes of each owner and key management members. Personal Financial Statements: Loan Repayment: Existing Business: Proposed Business: Projections: Other Items As They Apply:
Collateral: Your bank is in business to make money. Consequently, when a bank lends money it wants to ensure that it will be paid back. The bank must consider the 5 "C's" of Credit each time it makes a loan. Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment. Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful. Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, debtors, and in some cases, stock, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan. Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or stock? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business. Character is the personal impression you make on the potential lender or investor. The lender decide subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your qualifications and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered. Business analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforseen eventualities that nearly every business faces. Cash vs. Cash Flow Cash is ready money in the bank or in the business. It is not stock, it is not debtors (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees. Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time. Cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash. Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors. Positive Cash Flow Negative Cash Flow Operating Cash Flow Investing Cash Flow Financing Cash Flow
The starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to understand how they used money in the past. Learn To Project Cash Flow To Avoid Financial Trouble Sound financial management means knowing the firm’s cash flow, forecasting cash needs, planning to borrow at the appropriate time and substantiating the firm’s payback ability. Even a business with respectable sales volume is not protected against financial disaster, and it’s often due to poor financial planning. Too often small business owners feel that their knowledge of the line of business is sufficient to ensure their business is a success. However, it’s not good enough to figure that you have £15,000 in capital and a good idea for a business. You must figure cash flow over many months to construct a reasonable cash flow projection. One of the common failings of start-up companies is the lack of capital. Cash constantly flows into and out of a business. A certain amount of the owner’s investment is the business should help provide the liquid assets for cash flow. Without a floating supply of cash, almost every business will occasionally experience problems associated with the lack of liquid cash. A lack of cash to meet debts or maintain product supply can threaten a business. Bankruptcy can and does occur with otherwise profitable businesses, when there’s insufficient capital to carry the business through a cash crunch. If you don’t know how to develop a cash low plan, ask for help. As an entrepreneur, you want to minimise the risks and maximise your chances for business success. By seeking advice and assistance when it comes to financial planning, you are taking responsibility for the operational details that can make or break a business. Before you enter into contracts, have your legal advisor review the language to be sure that the contract works in your favour and that you understand how you are bound by the agreement. Consult with your accountant regarding financial and financial planning issues. Preparing Your Cash Flow Statement The cash flow statement is used to analyse the cash inflows and outflows (where the money went) during a designated time period. Recall from section on "cash management" that there are three major components of cash flow: operations, investing and financing. If you regularly do a monthly profit and loss statement, you will be aware that there are certain items which may not affect your profit and loss statement for some time, such as:
A cash flow statement will highlight these activities in a way that an income statement will not. And certainly your banker will want to see a cash flow statement showing how you have used the funds from a previous loan before they approve an extension or a new one. Without the cash flow statement, you will have an incomplete picture of your business. Preparing the Cash Flow Statement To determine operating cash flow, you start with net income and add back expenses which did not result in inflows or outflows of cash. The most common non-cash expense is depreciation. When working with historical figures, adjusting net income with depreciation and other non-cash expenses is much simpler than determining all the revenues and expenses which require or provide funds. Next, you identify all the balance sheet accounts that are associated with operations and determine the change in the account from the end of the last period to the end of the current period. What balance sheet accounts are we referring to? Operating cash flow will include all the balance sheet accounts that are a part of normal operations. Trade receivables and payables as well as accrued expenses, prepaid expenses and other current assets that are a part of day-to-day operations are included in operating cash flow as we'll show in the example. But what about the other balance sheet accounts - how do they fit in to this picture? The remaining balance sheet accounts will either be investing activities or financing activities. Once again, you determine the change in each balance sheet account from the beginning of the period to the end of the period, tally them up, and there you have it -- a complete picture of the cash flow for your company. Preparing a Breakeven Analysis. How can you tell if your business idea will be profitable? The honest answer is, you can't. But this uncertainty shouldn't keep you from researching the financial soundness of your idea. Preparing what's known as a "break-even analysis," or "break-even forecast," as well as several other financial projections, can help you determine whether or not your business will succeed. What a Break-Even Analysis Tells You Many experienced entrepreneurs use a break-even analysis as a primary screening tool for new business ventures. They won't write a complete business plan unless their break-even forecast shows that their projected sales revenue far exceeds their costs of doing business. The good news is that a break-even analysis is part of every business plan, so if you start by doing a break-even analysis now, you'll have already started work on your business plan. How to Prepare a Break-Even Analysis You'll need to make the following estimates and calculations: Fixed costs. Sales revenue. Average gross profit for each sale. Average gross profit percentage. Calculating Your Break-Even Point Understanding financial statements is critically important to the success of a small business. Financial statements can be used as a roadmap on your business journey to economic success. Using numbers as navigation aids can steer you in the right direction and help you avoid costly breakdowns. Most business owners don't realize that financial statements have a value that goes far beyond their use to prepare tax returns or loan applications. Review the following, easy to follow guide to help you better understand financial statements. Understanding Financial Statements The primary financial statements are represented in the balance sheet and income statement. BALANCE SHEET Liabilities represent a company's obligations to creditors while net worth represents the owner's investment in the company. In reality, both creditors and owners are "investors" in the company with the only difference being the degree of nervousness and the timeframe in which they expect repayment. ASSETS Current Assets. Cash Cash is the only game in town. Debtors Stock. Loans 7. Customers, Customer loan is when the customer who borrowed from the company probably borrowed because he could not meet the purchase terms. When the customer failed to pay the invoice according to the agreed upon payment terms. The customer's obligation may have been converted to a promissory note. Employee loans may be for legitimate reasons, such as a down payment on a rail card, but the company is neither a charity nor a bank. If the company wants to help the employee, it can co-sign on the loan advanced by a bank. A Director borrowing from the company is the worst form of loan. If a director takes money from the company, it should be declared as a dividend. If at the end of the financial year a Director has an overdrawn loan account with the company this has to be repaid within 9 months otherwise it incurrs tax charges. Treating it in any other way leads to possible manipulation of the company's stated net worth, and banks and other lending institutions frown greatly upon it. Other Current Assets. Fixed Assets. Land Intangibles represent the use of cash to purchase assets with an undetermined life and they may never mature into cash. For most analysis purposes, intangibles are ignored as assets and are deducted from net worth because their value is difficult to determine. Intangibles consist of assets such as: Research and Development In several respects, intangibles are similar to prepaid expenses; the use of cash to purchase a benefit which will be expensed at a future date. Intangibles are recouped, like fixed assets, through incremental annual charges (amortisation) against income. Standard accounting procedures require most intangibles to be expensed as purchased and never capitalised (put on the balance sheet). An exception to this is purchased patents that may be amortised over the life of the patent. Other assets. LIABILITIES and Net Worth Liabilities and Net Worth are sources of cash listed in descending order from the most nervous creditors and soonest to mature obligations (current liabilities), to the least nervous and never due obligations (net worth). There are two sources of funds: lender-investor and owner-investor. Lender- investor consist of trade suppliers, employees, tax authorities and financial institutions. Owner-investor consists of shareholders and principals who loan cash to the business. Both lender-investor and owner investors have invested cash or its equivalent into the company. The only difference between the investors is the maturity date of their obligations and the degree of their nervousness. Current Liabilities Current liabilities consist of the following obligation accounts: Creditors Creditors If the company is paying its suppliers in a timely fashion, days payable will not exceed the terms of payment. Accruals Liabilities. EQUITY Equity is represented by total assets minus total liabilities. Equity or Net Worth is the most patient and last to mature source of funds. It represents the owners' share in the financing of all the assets. PROFIT AND LOSS The profit & loss statement shows all income and expense accounts over a period of time. That is, it shows how profitable the business is. This financial statement shows what how much money the company will make after all expenses are accounted for. Remember that an income statement does not reveal hidden problems like insufficient cash flow problems. Income statements are read from top to bottom and represent earnings and expenses over a period of time. To be effective as a leader, you must develop skills in strategic thinking. Strategic thinking is a process whereby you learn how to make your business vision a reality by developing your abilities in team work, problem solving, and critical thinking. It is also a tool to help you confront change, plan for and make transitions, and envision new possibilities and opportunities. Strategic thinking is like making a movie. Every movie has a context (or story) which it uses to get you to experience a certain outcome (an emotion, in this case) at the end of the movie. Strategic thinking is much the same in that it requires you to envision what you want your ideal outcome to be for your business and then works backwards by focusing on the story of HOW you will be able to reach your vision. As you develop a strategic vision for your business, there are five different criteria that you should focus on. These five criteria will help you define your ideal outcome. In addition, they will help you set up and develop the steps necessary to make your business vision a reality. The following is a list of the five criteria of the strategic thinking process: Organisation. Observation. Views. Driving Forces. Ideal Position. By working through these five areas, you will begin to get a clearer picture of exactly how your business vision can be accomplished. As your vision becomes more focused, your ideas will appear stronger and more credible. Not only will it be easier to convince others that your idea is a good one, but it will also be easier to maintain your own conviction and motivation when you reach any pitfalls or obstacles in the road. Overall, you can apply strategic thinking skills to any area of
your life. But by making a concerted effort to apply them specifically
to your business venture, you will have a much better chance of
bringing your vision to life. And isn't that what you want? You can tell whether your growth is healthy or not by looking at your profit and loss statement or at your balance sheet. From your profit and loss statement, calculate the percentage growth of sales and the percentage growth of earnings. If sales are growing faster than earnings, this is a sign of unhealthy growth. The bigger the gap, the more unhealthy the growth. Alternatively, from your balance sheet, calculate the percentage growth of key asset categories - debtors, stock, and fixed assets such as equipment. If the percentage growth of these categories combined exceeds the percentage growth of sales, this is an indicator of unhealthy growth. Again, the bigger the gap, the more unhealthy the growth. The indicators of healthy long-term growth are: Growth in sales can look impressive but if it is not matched by a corresponding increase in profitability it can conceal underlying problems such as: Sooner or later, these problems will surface as dissatisfied customers, demoralised employees, strained systems and controls, and stressed-out owners. If the root causes are not addressed, what started out simply as a problem of rate of growth can become a question of survival. Most businesses come into being because an entrepreneur has identified a niche in the marketplace - and in the early months or years there may be relatively little pressure from competitors. But your very presence in the marketplace invites competition, and before long you find yourself in a tightening market with competitors, large and small, snapping at your heels. How do you stay ahead of them? Market drivers In essence, this means keeping one eye on your customers or clients and striving to delight them, and keeping the other eye on your competitors and striving to outshine them. Customer focus Leading edge businesses strive not to meet their customers' expectations, but to exceed them. At the very least, this means excelling on quality, delivery, and price, often in that order. But many businesses these days regard these as the minimum requirements for surviving in the marketplace. To gain a competitive edge you need to continuously introduce innovative products or services customised to meet specific customer or client needs. Innovation To drive innovation, you need a constant stream of ideas: Know your competitors First make sure you know who your competitors are: Direct competitors - businesses that compete with you head to head Indirect competitors - for example, a nightclub that might tempt customers away from your restaurant Potential competitors - companies that might move into your market in the future Assign people to monitor them constantly, and gather as much information on their activities as possible. SWOT the competition Then look at how well placed they are to respond to various threats and opportunities. These are usually factors outside their control such as developments in technology, changes in legislation, or new entrants into the marketplace. Look for ways to turn their threats into your opportunities. Never take your eye off the ball as far as your competitors are concerned - and never underestimate their potential to wrong foot you. Whether you are watching them or not, you can be sure they are watching you! Growth is not, as many believe, the only criterion of success in business. Indeed, it is perfectly possible to remain a small business and still be successful. Equally, it is possible to experience growth in your business and to fail - or at least to be so beset with problems as to have little opportunity to enjoy the fruits of your 'success'. This is especially true if you take personal as well as business matters into consideration. Cash flow problems: Increased borrowings: More people skills: More bureaucracy. No free time: Add to all of this the problems associated with personnel issues, poorly paying customers, crashing computers, etc. and it all adds up to a lot more stress. When you weigh your personal ambitions and lifestyle objectives against the added challenges of expanding your business, you might decide that the old saying, 'Small is beautiful,' has more than a grain of truth in it! Experience shows that following times of growth, a subsequent reversal in fortune can result in widespread business failures. One way of helping to avoid this is to make sure that your business is running efficiently and has good cashflow management procedures in place. Unable to pay debts Look for the signs Some of the signs of impending problems include: This list is by no means exhaustive, but it does give an idea of where to look for signs of impending trouble. You should constantly be on the look out for these signs - because your creditors certainly are! All is not lost These days, the emphasis is much more on attempting to rescue failing businesses rather than enforcing insolvency proceedings. This does not reflect a more charitable attitude on the part of creditors, rather the simple fact that they stand to reclaim more of their investment if the business is rescued rather than wound up. But rescue is not guaranteed. Whether or not a business can be rescued depends upon many factors - and the single most important is early action. The longer you leave the problem, the more difficult it will be to recover. We therefore recommend that if you detect just one of the signs mentioned above, you contact us immediately. We can then determine the seriousness of the situation and if necessary help you prepare and implement a turnaround strategy. This would include: Cash management Recovery plan Confidence building Prevention is the best cure These are all areas in which we can assist you. Why not contact us today to arrange a complete business health check? It is estimated that fraud costs UK businesses as much as £5 billion a year. Are you certain your business is not a victim? Two types of employee fraud Here are some areas in which fraud commonly occurs: Personal and company cheques For example, an employee writes a cheque payable to cash and posts the debit to an expense account. He or she then discards the cancelled cheque when it arrives with the bank statement and reconciles the statements by attributing the debit to an expense account, direct cost, or purchases account that is written off at the year-end. Another example might be an employee taking money from the petty cash and replacing it with a personal cheque. The cash box is always balanced, but the cheque is not deposited into the company bank account. To prevent these kinds of fraud: Credit control A typical scam is 'lapping'. Here an employee receives a payment from a customer and transfers the money directly into his or her own pocket. When a second customer makes a payment, the employee credits the first customer's account. This can potentially be repeated time and time again, making it very difficult to unravel the overlap. Other possibilities are an employee posting fictitious credit notes or other non-cash reductions to a customer's account and pocketing the cash, or altering the amount on a sales or work invoice and pocketing the difference. To prevent these kinds of fraud: Stock and equipment To prevent these kinds of fraud: Purchasing and payroll For example, an employee might invent a non-existent supplier and pay phoney invoices for an account that is basically his or her own. If questioned about the stock, he or she might claim that it is damaged, used up, or being stored off-site To prevent these kinds of fraud: Preventing fraud with internal controls However there are some inexpensive measures that you can take immediately: Separate key duties. Require purchase or payment authorisation. The most frequent unauthorised transactions take place via expense accounts. By comparing your budget to the actual amounts being claimed by employees, you can identify discrepancies. These may be justifiable expenses, or they may be the telltale signs of inappropriate expenditure. All these measures will help you reduce the risk of fraud to your business. If you would like more detailed advice or guidance, please contact us to arrange a comprehensive review of anti-fraud procedures. Suppose you suspect that someone in your company is stealing or involved in fraud: What should you do? - Innocent until proven guilty Remember, suspicion is not enough - you need proof before you can
act. Instead, consult your legal adviser. If necessary, he or she will recommend the forensic accountancy services, in which case contact us for advice on what to do next. Until you have proof of wrongdoing, exercise caution and carry on as usual. Keep any investigation discreet to avoid alerting the employee to the fact that they are under suspicion. Develop a response strategy The most important thing is to be seen to be fair and even-handed, and of course to be acting within the relevant legal and regulatory frameworks. If you were asked to list the most important assets of your business, what are the first things you would think of? Your staff? Your premises? Or perhaps your stock? One asset you should never overlook, or underestimate, is your goodwill. Goodwill is what brings you repeat orders and new business. Existing customers know your name and refer you to others. When you say, 'It has taken years to build up my business,' you probably mean, 'It has taken years to build up my goodwill.' Goodwill is generally embodied in a name, and it is vital for every business to protect their ability to use that name. Consider the consequences of having to change your business name. This might happen because another company, perhaps in another part of the country or a slightly different market, lays claim to that name, has a registration, and is able to stop you using it. Or perhaps another company starts trading under a name so similar to yours that customers are confused and you lose orders. And if the new company trades at the lower quality end of the market your reputation could suffer as a result. Protecting your name is crucial if you want to preserve your goodwill. The system allowing you to do this is Trademark Registration. Trademarks are not just logos or brand names like 'Virgin' and 'Coca Cola', but any 'sign' that indicates the source of goods or services, including a form of packaging or even a sound. Trademark rights are not merely the preserve of major corporations. A local bakery operating under the name 'Jackson's,' for example, can register that name as a trademark and it will be just as valid as Burger King or McDonald's. In the UK, about 500 trademarks are registered each week. Why register a trademark? Here are some of the benefits. What next? Outsourcing non-core 'housekeeping' activities will free up valuable time and allow you to focus on the core activities of growing your business, expanding your product or service lines, and providing the best possible service to your customers or clients. Here are some routine processes that might be outsourced: Accounts Outsourcing Furthermore, a recent survey undertaken by MORI for the Confederation of British Industry has confirmed that accounting outsourcing is on the increase. More than 50% of the study's respondents said that the pressure to outsource has increased over the past two years. There can be considerable benefits in accounts outsourcing, which include reducing costs and freeing up valuable time to concentrate on running your business. Payroll has been the traditional task to be outsourced. However, many companies, including major household names, are outsourcing large swathes of their accounting. Human resources Marketing Purchasing and maintaining information systems, hiring and evaluating
IT staff, and training users can be time-consuming tasks that take
your focus away from your core activities - and often require a
level of knowledge and familiarity that you do not possess. By outsourcing
your information systems administration to specialist firms you
can be confident of obtaining the latest technology and suitably
skilled personnel with less intrusion on your time. Depending on your products and situation, there are numerous options for outsourcing delivery. Couriers might be able to take on most of your delivery functions. Larger businesses might prefer to contract a major delivery firm rather than maintain their own fleet. Either way, you can hire the expertise to keep delivery problems and decisions off your desk. It is not only large businesses that need to apply benchmarking techniques. The expectations of the global consumer are such that businesses now have to compete on standards of service and price, regardless of their size. Research has indicated that many companies are missing out on significant profit opportunities by not implementing best practices. The Benchmark Index Benchmarking can help to improve productivity and competitiveness, and can reveal new business opportunities. If you think your business has room for improvement in performance and profitability you might start by completing the free online 'healthcheck'. This will help you gauge the performance of your business in the areas of finance (including R&D and marketing expenditure, turnover, and loans), customer service, innovation and suppliers, and employees. Visit http://www.benchmarkindex.com for more details. If you have a business loan, a commercial mortgage, or a permanent overdraft facility with your bank, the chances are that you may be paying more than you need to in interest. Interest payments can be a substantial part of your outgoings, and so any way you can reduce them will help to improve your profitability. Given the right circumstances, almost any kind of loan can be renegotiated, and it is surprising how easy it can be to lower your interest bill in this way. Track record It also helps if yours is a 'conventional' business type with which the prospective lender is already familiar. Also, the more capital and security you can provide, the better the terms you will be able to negotiate. Leverage Whichever route you take, you will need to prepare your case and support it with reliable documentation. We would be happy to assist with this, and with the eventual negotiations. Getting Money From Late Payers Do you find that despite your best efforts to charge customers up front and to plan for the worst, bad debts still cause major problems for your business? Many business owners find that continual late payments - and the ability of large customers to decide to pay as and when they want to - can contribute to negative cash flow. We look at ways to improve your debt collections and, hopefully, to ease your cash flow difficulties. 1. Choose the right customers 2. Implement a debt collection policy A typical debt collection policy If your terms state that payment must be received 30 days after invoicing, you should… 3. Hire the right staff 4. Rotate the debt collection staff 5. Make use of payment plans 6. Pursue frequently late-paying customers 7. Use a debt collection agency What would you do if one of your major customers went under, owing you a substantial sum? Would you be able to recover the outstanding debt - or reclaim goods they had not paid for? Unfortunately, experience suggests that if you are an unsecured creditor you would be fortunate to recover a few pence in the pound - and in most cases you would receive nothing at all. Your best course of action is to take precautions now to limit your exposure and minimise the impact on your business of any customer insolvency. Basic precautions One of the first signs of difficulty is that a customer's payment
period begins to lengthen. If this happens, you need to act swiftly.
You might, for example, arrange a visit to them to discuss the matter.
Ask if you can see their accounts and projections. If you are still
concerned, you might suggest that they take smaller deliveries more
frequently until the situation improves. Another way to limit your exposure is to speed up the payment cycle. You might, for example, consider: Contractual precautions Tread carefully In general, you have much more chance of recovering monies owed if a rescue plan is put into place rather than the company going into liquidation. We can help As you can see, this is a complex area and professional advice is essential if you are to avoid taking unnecessary risks. We can advise you on: Are you looking to start a business, or in need of capital to expand? We discuss here a number of options other than bank funding. External finance However, the need for some form of security can occasionally result in even the most well-presented request for funding, accompanied by an impressive business plan, being declined. And with over 40% of business funding being provided by hire purchase, leasing, trade finance, invoice financing, partners and shareholders, less than 10% is provided by venture capital sources. Debt finance If an individual does not have a previous track record and has little or no capital, the application will focus on the entrepreneur's ability and willingness to provide some form of security against the borrowing. One possible source of guarantee for finance is the Small Firms Loan Guarantee, which provides a guarantee of 75% for loans, from a minimum of £5,000 to a maximum of £250,000. Equity alternatives Over the past five years Venture Capitalists have invested about £33 billion in up to 7,000 unquoted companies, while some estimates indicate that 'informal' investors - such as friends, family or 'business angels' - invested as much as £12.8 billion in UK small businesses between 1999 and 2000. According to 97% of respondents to the Government's 'Bridging the Finance Gap' consultation, there remains a significant lack of equity finance available, but this is a source of funding that looks set to increase in the future. Business angels and informal investors An InvestorPulse survey showed that in 2002, 75% of angel investors made investments of less than £50,000, with an overall average investment of £35,000. Enterprise capital funds How we can help Raising finance - the essentials Choose the right financier
A well-prepared proposal presented to a carefully chosen lending source will have a greater chance of success. It is worth investing enough time, preparation and effort to get it right. The economic and political debates over whether adopting the euro would be in Britain's best interest have abated. However, some commentators believe that the UK's eventual membership of the eurozone is inevitable. Whichever side you stand on, pro or anti-euro, you need to start thinking about what the practical implications for your business will be, should Britain decide to say goodbye to the pound sterling. Here are some of the issues you may need to consider: Your systems Company literature Your sales and marketing strategies Customers and suppliers Tax and legal issues We like to help your business look ahead. We would be pleased to advise you on any tax or financial implications. Be sure to call us when you need advice. Your company pays corporation tax on its profits, but you are only taxed personally on what you draw out of the company as a salary, bonus, or by other means. The dividends you receive from your company are effectively tax-free in your hands, if your total income for the tax year is less than about £37,000. Once you reach that limit you may want to think about extracting profits in different, more tax-efficient ways. Here are some alternative approaches: Maximise allowances Keep it in the family Pay attention to pensions Property concerns There are other tax-efficient ways of extracting profit, such as short-term loans, or interest, which may be appropriate. Contact us for more advice.
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