Archive: Feb 2013
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Author – Jerry Davison, Managing Director, SouthWestfd
- Review your budgets and set realistic and achievable targets.
- Get rid of won’t pay customers.
- Review debtors list and chase up overdue invoices.
- Offer existing debtors extended payment terms and/or discounts.
- Make sure your terms of business contain explicit payment terms.
- Assign responsibility to one individual for invoicing and collections.
- If appropriate, review banking facilities and discuss future needs. If you are going to require additional funding ask for it at least 3 months before you need it!
- Put extra effort into making sure your relationships with your better customers are solid.
- Review and flow chart the main processes in your business (e.g. sales processing, order fulfilment, shipping etc) and challenge their efficiencies.
- Encourage team members to suggest ways to streamline and simplify processes (e.g. sit down and brainstorm about productivity, outsourcing and cost reduction).
- Use ‘bottom up’ budgeting where everyone in the office gives input on areas over which they have control – target a 10% cost saving.
- Review your staffing needs over the next 12 months and make weak or unnecessary individuals redundant now.
- Get your members of staff involved in a discussion of likely trading conditions and get their input on reducing costs and maintaining revenues.
- Review your list of products and services and eliminate those that are unprofitable or not core products/services.
- Establish your key performance indicators (KPI’s) and measure them on a weekly basis e.g:
- Sales Leads generated
- Orders supplied/fulfilled
- Cash balance
- Stock Turnover
- Debtor Days
- Gross Profit
- Net Profit
- Pull everyone together and explain the business strategy and get their buy-in.
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By Andrew Northmore, Director, SouthWestfd
Different types of costs have a number of uses in a business but you have to be careful how they are applied.
For example, costing data could be used in any of the following areas:
- Stock valuation
- Variance analysis (actual costs v budget)
- Decision making – make or buy decisions or pricing decisions for example
Quite often, the stock valuation cost (e.g. in the annual accounts) is developed by the external accountants and is based on UK accounting rules and includes materials, direct labour and overheads. In many cases, the direct labour and overhead expenses are grouped together into one ‘fully absorbed’ rate, i.e. it incorporates all overheads including those that are ‘fixed’ such as rent, rates and most depreciation charges.
What tends to happen then is that companies use the fully absorbed rate when they are making decisions about whether either to make or manufacture in-house or outsource, and also when they are making pricing decisions. This can lead to companies making the wrong decision and in some cases turning away profitable business.
Let me give you an example.
Company A is asked to make a new product that is going to cost them £10, made up of £4 materials and £6 labour and overheads (they are using the fully absorbed rate given to them by their accountants at the year end). They can outsource the product for £9. Company A decides to outsource the product. Did they do the right thing?
The answer to this lies in the split of variable and fixed costs within the £6 of labour and overhead.
Closer investigation reveals that the cost of £6 is made up of £2 direct labour, £1 variable overhead (power, consumables etc) and £3 of fixed overhead.
When they outsource the product, they will pay £9 to the supplier but they will still be paying the £3 of in-house fixed overhead (it is unavoidable in the short term) – so really, the product is costing them £12.
If they had produced the product in-house, the incremental cost would have been material £4, the direct labour £2 and the variable overhead £1 i.e. £7 in total.
In this example, it would have been better to make in-house.
In these types of decisions, it is very important to compare the outsourced price with the Incremental or avoidable cost of producing in-house.
The same is true when setting your selling prices.
Company A is approached by a prospective customer to make a new product. The target price for the product is £10 per unit and they want 10,000 units per annum. Company A is running at 50% of its capacity – it could take on the extra work without adding any additional overheads. Company A costs the new product using current material prices and labour hours at a fully absorbed rate (i.e. including that fixed overhead cost). The total cost is £10. Company A decides not to take on the extra work.
If they had taken the work, they would have received £10 per unit and it would have cost them £7 in materials and other incremental costs, so they would have made a £3 contribution to fixed overheads. By rejecting the work, they have lost £3 per unit or £30,000 per annum.
To make the right decision, it is very important to know the breakdown of costs into its variable and fixed elements and to fully understand cost – volume – profit relationships.
It is also very important to make sure that all of your business does not become marginal – if it does, you might not make enough contribution to cover your fixed overheads and you could end up losing money.
If in doubt, don’t be afraid to ask for advice!
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The story so far
SEIS (the seed enterprise investment scheme) was introduced by the Chancellor last year and its aim is straightforward; it provides a substantial helping hand to start-up and early stage entrepreneurs who are raising ‘seed’ funding to get their business off the ground. The term seed funding is deliberate: it provides the finance to pay for the entrepreneur to validate a business concept, i.e. demonstrate or even prove that the idea is worth investing in further, i.e. it could potentially make a lot of money.
I think that SEIS is one of the best things this Government has done for entrepreneurs. What it does is help investors over that final hurdle of the risk hurdle race, by significantly reducing their possible losses.
Is SEIS working as an incentive for investors?
It seems to be. HMRC has given more than 1,000 advance assurances that companies are eligible for SEIS and I gather that over 200 companies so far have actually raised funding using the scheme, though not all have used it to get the maximum £150,000 investment amount which is allowable under SEIS (it may be that they’ll use the balance in a secondary equity round).
How does SEIS work then?
Basically, there are very generous tax reliefs if an investor puts money into an eligible company. If you invested say £50,000 cash for shares, you would get 50% of that as a relief against your income tax bill; in this example you would therefore save £25,000 in tax. So effectively, rather than the Government getting it, the entrepreneur gets to use it to grow their enterprise. If the investor then holds the shares for at least three years, they will not have to pay any capital gains tax on any profit they make when they finally sell those shares.
Am I eligible to use SEIS?
The company’s trade must have been started less than two years before shares are issued. Most types of business are eligible, but there are a few exceptions such as financial services, property development and agriculture. The company must have fewer than 25 staff and assets of less than £200,000 pre-investment. An individual investor can get SEIS relief on up to £100,000 per annum, and can be a director of the company but not an employee. If someone has more than 30% of the shares then they are ineligible for SEIS.
What if I need more than £150,000?
The rules have been created in the knowledge that many companies will need additional funding at the time of or following a seed investment round. The SEIS maximum of £150,000 per company does not mean you can’t raise more than that in the initial round of funding – it’s just the amount on which tax relief will be given. Say you raised £250,000 in a first round: eligible investors could get relief on the first £150,000 but none on the balance. However, the rules do allow you to raise £150,000 under SEIS but then raise further equity finance under EIS (enterprise investment scheme) once the company has spent at least 70% of that £150,000. EIS is SEIS’s older and bigger brother and it allows individuals to invest up to £1 million per year, and the eligibility rules are much the same except there is no requirement that the trade is under two years’ old.
A real life example
We helped a technology company to raise £170,000 of equity funding in November last year. Of that total, £20,000 was invested by a non-UK resident person, so the other £150,000 was all eligible for SEIS relief. We had previously obtained ‘advance assurance’ from HMRC that the company was eligible for SEIS, to reassure the investors. The deal was completed and then we applied to HMRC for SEIS certificates, and these were issued within a week. The six investors will obtain £75,000 of income tax relief between them, and in addition, there are some specific capital gains reliefs in 2012/13 that will save SEIS investors some tax on any gains they have made in that year.
As an example, one shareholder who invested £40,000 saved a total of £31,200 in tax, so his investment of £40,000 cost him £8,800 in real cash! This is a real advantage that helps entrepreneurs raise that very difficult initial funding for their business.
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