Category Archive: Pricing
Comments Off on Try our 15 point check list to get your business into shape for 2016
Business confidence is now generally high and we have finally climbed out of the recession. Britain’s GDP is now a few per cent above where we were in 2008 before the crash, which cut over 6% from the UK’s output. However, there is still plenty of uncertainty out there (look at China for a start) and the last thing any business should do is get complacent. Here is our checklist for helping you to review your business to ensure it’s as strong as possible going into next year, especially from a cash flow perspective:
- Review your budgets and set realistic and achievable targets.
- Get rid of won’t pay customers.
- Review your debtors list and chase up overdue invoices.
- 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 deal with weak or unnecessary individuals.
- 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 regular 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.
Comments Off on Funding to support your growthIf you are an SME with a successful business you may need support to drive the next stage of your growth. Running a thriving company can be a real challenge and is sometimes a lonely place to be. In an ideal world you’d have an experienced full-time finance professional (e.g. a Finance Director) on your team but, right now, the cost is probably prohibitive.SouthWestfd is a highly experienced group of finance professionals who have all been finance directors, managing directors and CEOs in a variety of industries. We have helped many companies across the region to set the foundations for successful expansion, putting the right building blocks into place, such as robust cash flow management.For an initial outlay of only £1,500 (+VAT) we can access government funding that would pay for £3,000 of our time (equivalent to 5-6 days support). We will work with you on a flexible basis to help improve your company’s financial performance and support your growth.We will assign one of our Finance Directors to get to know your business and to engage with you and your senior team to:
- Help to identify ways of improving profitability
- Help you keep on top of your cashflow
- Support your management of growth and avoidance of growth pitfalls
- Identify key improvements in the financial information you receive
- Challenge you to improve your financial systems and processes
- Assist you to draw out and resolve key financial issues
- Support your financial forecasting and business strategy
- Discuss your working capital needs and options for fund-raising
- Assist you to build relationships and credibility with banks, investors and other funders such as grant providers
- Prepare you for raising of finance, acquisitions and exits
- Help with resolution of difficult and confidential issues
- Act as a sounding board for you and your team
- Help you to ensure that you fulfil your statutory duties to the company
- Cover any issues that you wish to discuss and develop
To qualify, your business must:
- Be registered in the UK and based in England
- Have fewer than 250 employees
- Have turnover of less than £40m
As a follow-on, we also have access to ‘Leadership and Management’ training grants, giving match funding of up to £2,000 per eligible senior manager. These grants could pay for, e.g., general or targeted financial management training, marketing and PR training, HR training and many other topics. Much of the training can be “embedded” within your normal activities to make it very practical and totally relevant to your needs.
To register your interest and find out more, please call us on 01392 432654 or e-mail email@example.com and we will talk you through the process.
Comments Off on Budgets: A business straightjacket?
By Jerry Davison
Budgets are a useful tool in monitoring progress against the achievement of a company’s overall strategy. However, when poorly utilised, they can restrict and stifle the abilities of both managers and staff: acting like a straightjacket, demoralising staff in the constant pursuit of numbers.
To be valuable tools, financial budgets should gain buy-in rather than indifference. Staff must see how the budget relates to the overall strategy and their individual aims and objectives. It also requires financial forecasts to look at the short and long-term, if staff are to engage with the budget and find it useful in quickly and accurately understanding progress.
Unlocking potential with rolling financial forecasts
When developing financial forecasts, there’s an unhelpful tendency to focus on the 12-month block up to the year-end. This is often at odds with project timescales, seasonal sales differences and various other factors.
Equally, for day-to-day management and operations, it’s important that staff have a clear and accurate picture of their current progress and financial flexibility. Fluid financial forecasts, that take account of monitored figures and adapt forecasted figures, provide more accurate and achievable figures – often tuneable to different timeframes.
For rolling financial forecasts to be effective, an accurate and up-to-date monitoring process is needed. This not only needs to include regular (daily or weekly) sales data, but also qualitative information such as feedback from staff on how forecasts might be effected by internal or external factors.
Making monitoring effective
At the core of effective rolling financial forecasts is effective and accurate monitoring.
Reporting templates should work in favour of the staff, capturing the necessary information whilst taking minimal time to complete. They should allow monthly, quarterly or even continual monitoring: and link back to the financial forecast projections for relative periodic adjustments.
Effective reporting templates can be designed in parallel with training staff in their use. This approach ensures the templates benefit from everyone’s knowledge, and everyone has ownership of how their achievements are acknowledged. Whilst some businesses use proprietary or outsourced systems, effective templates can be produced in Microsoft Excel.
Different parts of an organisation will have different reporting and access requirements. Designing different input sheets, tweaked to each element of business, will help streamline the process.
The length of rolling financial forecasts varies. We’ve found that 15-month rolling forecasts are the most popular. At the end of each quarter or month, depending on how often the financial forecast is updated, a fresh 15-month forecast is produced – adjusted using the monitoring data.
Strong companies use business intelligence to underpin decision making: speeding up and honing the accuracy of decisions across an organisation, helping increase profit margins by being more reactive and in the right direction. When designing templates and the overarching financial monitoring systems, you should ensure they can provide:
- Progress reports, tweaked to suit different levels of an organisation. These could simply be a spreadsheet, or template reports dynamically linked to the monitoring database. These may include some basic gap analysis, but this is often included separately within variance reports.
- Variance reports, highlighting where and how figures have differed from forecasts. These help identify areas of strong profit and weak performance. Where weak performance is due to internal rather than external factors, managers should use their diplomacy to support and not bully staff. With care, they are a useful tool. Without, they can set in the toxic ‘us and them’ attitude.
- Ability for relevant staff to identify and incorporate business drivers; create project plans and budgetary forecasts.
- Automation with technology wherever possible, for instance with stock management systems.
Comments Off on Doing it all yourself? The financial hurdles business owners face.
Start ups don’t transform into fully-fledged professional businesses with fully-functioning finance directors overnight. There’s an awkward metamorphic stage, where a business is too small to have the skilled finance director they need – but large enough to be facing many of the problems a finance director deals with.
We’ve seen businesses suffer when they lack the understanding of what a finance director would help them with, if they had one in place. Even if a business has a revolutionary product or service, they can still run into cash-flow problems or ruin themselves through poor financial and organisational management.
The overarching role of the finance director is to implement processes to improve your business efficiency. These processes, and the skills and knowledge underpinning them, can be split into five categories.
Budgeting business spending
You shouldn’t just record what you’ve bought and sold: your business should have a budget, if it’s going to succeed. Budgets often look 12 months ahead, and are continuously updated. Progress is measured against plans, and projections are proportionally adjusted using differences between budgeted and actual spend.
A business’s budget should inform and be informed by the business plan. Like the budget, these should be continually updated. A well thought-out plan will help ensure your business balances growth and keeps up with demand. It’ll also ensure you don’t get in the messy scenario of cash-flow problems, and the destructive habit of oscillating between generating revenue and building the business. The two should be done together!
Financial planning is a continual process – and should be used in steering the company’s decisions, examined regularly at board and major meetings. Normally, a financial director would stay on top of these needs – preparing the analysis and papers needed, for founders and senior management to understand the numbers needed to underpin their decisions.
Managing Cash Flow
One of the outcomes of effective financial planning, is knowing your income is enough to pay your overheads. It’s all well and good knowing, albeit with 90% surety, your invoice will be paid in the next 30 days – but what if you’re owing others money in 15 days? Internally or through external support, you’ll need the knowledge to balance the books and communication skills to negotiate payment deadlines, to ensure you’re not up no-cash-creek without a paddle.
As well as ensuring payment timescales keep an organisation’s head above water, you need to understand how your cost of acquiring business customers compares to and effects your business’s loan to value ratio (LTV). By keeping your business acquisition costs low and your profit margins high, your business should have a strong value. This helps keep your LTV low, allowing you to borrow at preferential rates – ensuring the sustainable growth of your business. Understanding the relationship between these two factors for your business helps inform marketing decisions: whether to spend more on marketing, potentially providing a higher return, but over a longer period; or to invest less in marketing and have a faster payback period.
Understanding HR & Legal Procedures
Large companies have dedicated legal staff or even teams. For smaller but still professional businesses, the role of understanding HR and legal procedures often falls at the finance directors feet. For many founders and senior executives, legal and HR documents read like a foreign language. However, it’s important your business gets to grips with staff and subcontractor contracts.
Businesses have hundreds of HR issues they must manage on an ongoing basis. Staff who are supported, through reviews and having the right reward mechanisms in place – such as the option to buy shares in the company – are more likely to stay loyal, acting as true ambassadors you can be proud of. You should be aware of the going rate your staff could expect in the wider market, and reflect this in reviews and rewards.
Staff retention is especially important when you’re small. Unsupported staff, or those that feel they’re behind the iron curtain and living in George Orwell’s 1984, won’t hang around for long. Similarly without having the knowhow to handle legal threats, lease conditions, copyrights and intellectual property could leave your business becoming tangled in a legal web.
Measuring Success and Failures
There’s more metrics than just profit and loss. Understanding what to monitor when, and how this information infiltrates business plans and board meetings, is essential for efficiently running and growing a business. If your business hasn’t yet got a competent finance director, consider setting different metrics for different areas of your business. Speak to the teams or team-leaders involved, to understand how they informally track their progress – and use this to inform how and when to capture metrics. Like budgets and financial plans, business metrics should be analysed and reviewed on a regular basis.
Comments Off on Painting a picture with financial budgets
More often than not, financial budgets aren’t used effectively. Instead of being a useful tool, staff see them as a bother and necessary evil. They paint a dull or even threatening picture. When this occurs, motivation is often eroded, and this can lead to the beginning of the end for some companies.
Financial budgets should paint a clear picture: a living snapshot of progress on financial components of a company’s strategic plan, rather than a list of targets that must be met. Budgets should be used in conjunction with staff reviews and other assessment procedures, to monitor the achievement of a company’s entire strategic plan.
Painting a pretty picture
There are several techniques to help staff see financial budgets as a useful tool. Firstly, budgeting should be a dynamic and open process, done in conjunction with developing and reviewing overall company strategy. The entire spectrum of staff should be included, allowing decision making to be influenced from the bottom up. This helps motivate staff and provides ownership of inputs and results.
Effective budgets allow careful resource allocation to maximise results and align with (not dictate) the strategic plan. Expenditure such as IT, marketing, capital expenditure and recruitment of staff should all be linked with the strategic goals. Senior management, supported by the finance department, can then ensure the budget works within the constraints of cash-flow and contingencies. Their goal: to balance the budget to provide sustainable growth.
The experiences and expertise of middle managers can often be missed in setting budgets. Involving them in developing your organisational strategy and objectives will provide much more useful results than if they’re only plotting progress. Allow them to think how they can help monitor its success, beyond simply filling in boxes on a spreadsheet.
Financial budgets should be seen as a monitoring tool: not a straightjacket of what must be achieved. Managers and even staff can have their initiative stifled by aiming to precisely meet budgets without any leeway. No financial forecast is perfectly accurate. Effective strategic plans, financial forecasts and staff should be prepared for this – and use variances to identify internal and market sector changes.
Developing a culture of accuracy rather than ‘beating the numbers’ helps ensure the budget holistically looks at your organisation and the processes within it – rather than individual staff members or departments. This helps avoid the culture of ‘us and them’ and silo mentality. Organisations should look outwards towards customers and competitors, rather than warring internally; and rewards should be linked to achieving financial and non-financial objectives relative to the market.
Financial budgeting and forecasting processes should be streamlined, to achieve greater speed and accuracy. Here at SouthWestfd and The Finance Department we have found companies were able to decrease their time spent on budgeting by an average of 22%, whilst increasing their profits by 11%. A win-win enabled by heightened awareness of priorities, performance, and communication throughout the whole business.
Companies should measure their performance against strategic goals and objectives throughout the year, including but not restricted to financial budgets. The frequency of monitoring depends on the size and complexity of the organisation, but should be carried out at regular intervals all year. The most successful companies monitor performance on a continual basis, applying fast response times and flexibility to market changes.
Condensing progress into one-page ‘dashboard’ reports of key performance indicators can help ensure company directors and senior managers have a picture they can easily refer to. This is one way the most successful companies are able to stay ahead of the game: having a continuous and live understanding of their performance, preferably linked to a risk register.
Blog by Jerry Davison, MD, SouthWestfd
Comments Off on ‘Understanding Your Accounts’ Part 1 – As long as I’m making a profit, that’s OK – isn’t it?
Well, it could be, but profit it is only part of the story. Financial information is there to tell you about your business, so to test how much you know about your financials, could you answer yes to the following questions:
- Do you know how much cash you have in the business now?
- Do you know how much cash you will be collecting from customers in the future, and more crucially, how much you will need to pay out to your staff and suppliers, or the taxman?
- Do you know who your most profitable customers are, and which ones simply fill your time?
- Is your future business strategy properly supported by effective business plans and budgets?
‘But I just don’t have the time to look at that detail’
Many small and medium-sized business owners or managers have schedules so fully focused on developing and promoting their products and ensuring operations run smoothly, they don’t have time to be the finance manager too. An external accountant is hired to complete the tax returns (and for limited companies, the statutory accounts), and often that’s the only form of financial information the business owner will have access to.
‘Tell me about the future not the past’
You obviously need to be compliant with Government requirements, so external accountants have a very important job to do. But tax returns and annual accounts are history from the moment they are produced. You are missing out on an opportunity to understand exactly what your numbers are telling you about the state of your business now and for the future.
‘So what can my accounts tell me about the future?’
As the title question suggests, most people understand profit and loss; so long as income is greater than cost, then great, you’ve made a profit! However, by understanding the underlying details you can reveal much more about how successful you are, or not, as the case may be.
‘Give me an example’
Have a look at your total overhead costs and see what percentage they are of your turnover (total overhead costs, divided by turnover, times 100 = overhead %). Do you know if all of your products and services are producing a profit % that is greater than this? Can you improve this in the future? Could some of your sales lines actually be making a loss after taking overheads into account?
This first blog in a series on ‘understanding your accounts’ has started by raising some of the opportunities for improving your profits and cash levels, just by taking a more in depth look into the figures.
My next blogs will look at:
- The importance of your balance sheet and how to “read” it
- Getting under the skin of your numbers in order to grow your business
Blog by Richard Colling, Associate Director at SouthWestfd, firstname.lastname@example.org
Comments Off on How a 2% increase in price can yield a 20% profit increase
Blog by Peter Macklin, Finance Director, SouthWestfd
A company’s pricing strategy is one of the key elements in determining how successful and profitable that company will be. In simple terms there are three main approaches:
- Cost-based: adding a profit element to the costs of purchasing or producing that product
- Customer-based: taking a view on what the customer is prepared to pay
- Competitor-based: where competitor prices are the main influence on the price
In reality most companies will adopt a mixture of all three approaches. What must never be overlooked though is the impact that a small increase in prices can have. If we have a company which is making a 40% gross margin and a 10% net margin on a turnover of £1,000,000 then its results will be:
Gross profit £400,000
Net profit £100,000
If that company can increase its prices by just 2% then the turnover will go up by £20,000 to £1,020,000 and the net profit will go up by the same amount to £120,000. In other words a 2% increase in prices has given rise to a 20% increase in net profit!
If on the other hand that same company sells 2% more product but keep prices the same, then if you work through the figures you will see that its net profit goes up to only £108,000, an increase of 8%. In terms of its effect on net profit, you would need to sell 5% more product in order to have the same effect as a 2% price increase!
In my experience many companies focus on selling more product and don’t concentrate enough on ensuring that small price increases are put into effect wherever possible. Why not review your price list today and see if there is anything you can do?