Business Finance


From raising funds to keeping control of your finances. This section contains tips on everything from raising finance to maintaining good financial control...

If you have a business loan, a commercial mortgage, or a permanent overdraft facility with your bank, the chances are you are paying more than you need to in interest.

Interest payments can be a significant cost, 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.


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Track record

To be in a position to negotiate, however, you will need to have an established track record - which generally means to have been trading for at least three years with a good profit history, a clean credit record, and a healthy prognosis for the future.

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

If you want to renegotiate a loan, you basically have two options:

  • Prepare a proposal for a new loan and take it to an alternative lending source
  • Use this option as leverage to negotiate a better deal with your present lending source

When there is competition in a marketplace, one of the key factors on which businesses typically try to compete is price. But when you wish to lower the price of your product, you usually need to find ways of cutting the costs involved in bringing it to market.

The traditional approach to cost reduction has always been one of trying to control costs during the production, or manufacturing, phase of a product. Unfortunately, this approach is becoming less and less effective.

This is because costs are often effectively determined at the design and development stage, and once a product reaches the factory floor there is often not a great deal you can do to reduce them. Combine this with the trend toward automation and streamlining in the workplace and it leaves very little scope for reducing costs during the manufacturing phase.

With little room to manoeuvre, manufacturers are often left fighting 'rearguard actions' to preserve market share, with reduced profit margins a frequent outcome.

Target costing

Because of these problems, many businesses are now approaching the issue of price from a very different angle. They use 'target costing' to manage costs from the outset rather than attempting to reduce costs that are effectively fixed.

When a new product is developed using this strategy, it is essentially market and profit driven. Market research determines the broad specifications for the product and the optimum selling price, and a company-wide profit strategy sets the desired profit.

The calculation is then straightforward:

Selling price – desired profit = target cost.

Different culture

By asking, 'What should the product cost?' rather than, 'What does it cost?' this approach creates a very different culture in the business and has an empowering effect throughout the whole organisation.

Right from the start, even before the designer sits at his or her desk, the cost parameters of the product are set and the challenge is for everyone involved in design, development, production, and marketing to work together to meet that target cost.

Closing the gap between estimated costs and target costs can be a very creative and stimulating exercise that keeps everyone focused on managing costs, improving products, and streamlining processes.

Profit management strategy

Target costing works best as part of broader profit management strategy in which products are grouped together, with overall profit targets set for each group and profit margins traded between individual products depending upon which stage of the product cycle they are at.

An essential component of this profit management strategy is the use of return on sales (ROS) rather than return on investment (ROI) to determine the desired profit from a new product.

This measure gives much greater flexibility in a marketplace, for example, where multiple products with short life cycles are produced at low volume. The traditional measurement of ROI is much less effective in such an environment.

With frequent ROS reports it is possible to switch emphasis from one product to another in that group, thus giving much greater flexibility in responding to changes in the marketplace.


Get in the driving seat...

Target costing as a part of an overall profit management strategy puts you in the driving seat, keeps you focused on increasing market share, raises the standard of excellence, and helps to create a culture of continuous improvement in the business. Contact a member of the AVASK team if you need any help or support with cost

Did you know that the rates set by banks and other credit card companies are negotiable?

Different companies have different charges for processing credit card transactions, so it pays to shop around for the best deal.

Credit card processing fees are determined by:

  1. The number of transactions
  2. The sterling amount of these transactions
  3. The type of equipment used (use swipe machines not imprinters)
  4. Your ability to negotiate fees with the bank

Depending on these factors and on the card used, processing fees can range from 1% to 4%. At the top end, the credit card company can be taking a large part of your bottom line away, and when margins are tight these fees can mean the difference between enjoying a profit or slipping into the red.

Trying to trim these costs by setting a minimum level for credit card transactions risks losing sales if the limit is set too high.

A better way is to negotiate a reduction in the processing fee with your credit card company.

Always negotiate credit card fees - ask AVASK how.

As a businessperson you will recognise the vital importance of financial control in sustaining and improving profitability.

Good financial control involves:

  • Deciding which areas you need to monitor and how frequently
  • Generating the numbers quickly and accurately
  • Sharing the results with everyone who needs to know them
  • Interpreting the numbers correctly
  • Taking appropriate and timely action based on your interpretations

The starting point is to set up a system that enables you to generate accurate reports as quickly as possible - certainly no later than ten days after the month closes.

To be fully in control, you need information on what is happening to your business now, not what happened weeks or months ago.

Weekly and daily updates

In key areas, such as sales, debtors, cash position, trade creditors, and employment figures, you can't afford to wait even for a month. Here you could consider setting up a system of weekly or even daily updates. These 'flash reports' will give you better control in the short term.

Make sure key managers receive the flash reports as well as the monthly reports quickly, and encourage them to share the results with the relevant employees.

Compare projections with results

One of the most valuable instruments of financial control is drawing regular comparisons between projections and results. Not only does this keep you up-to-date on how your business is doing, it also reveals how realistic your expectations are and how in touch you are with the essentials of your business.

For best results, you should draw up projections for a six-week period and then set new projections at the four-week point.

Bottom line results

The key to good financial control is to have an effective system for collecting data and generating accurate and timely reports that is tailored to your specific needs. In our experience, such a system can make a considerable difference to your bottom line results.


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While many business owners feel confident about presenting a finance proposal to a bank, a surprising number of proposals are actually turned down. Here are some essentials for raising finance:


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Spend time thinking about the most appropriate funding source for the project or objective. Long-term projects are probably not best funded by overdrafts or loans in debt. Learn about the various sources of finance and select those best suited to your purpose. If in doubt, seek our help.


Almost every business pays more than it needs to in utility bills. Conducting a utility audit might seem like a time consuming distraction but you could be pleasantly surprised by how much it adds to your bottom line. Use the advice below to identify potential savings for your business:


Have a member of staff responsible for checking all utility bills – Make sure they know how the bills are calculated, what tariffs are available, etc.

Carry out your own readings of all energy and water meters each month – Use the information to plot patterns of use.

Check that all utility bills are accurate and that any estimates are reasonable – Even the largest utility companies make mistakes.

Annually review the tariffs you use – Not only do your usage patterns change, your suppliers also change the deals they offer.

Monitor overnight energy usage – Check if it is being used by essential equipment and if so that you have the best overnight tariff.

Make the best use of cheap rate electricity. If you can arrange usage by water heaters etc so that 15% of total electricity usage occurs during off–peak hours, you might benefit from switching to a day/night tariff.

If you are on a Maximum Demand tariff, review your supply capacity. If your declared supply capacity is more than 15% higher than your highest Maximum Demand, contact your supplier to lower it.

Find ways to reduce usage during peak hours – Try rescheduling non–essential loads.

If you are on a monthly tariff, check your power factor – Check that you are not being penalised for a poor power factor.

Shop around for a cheaper electricity and/or gas supplier – Find out more at: www.ukenergywatch.org

If your site has more than one gas meter, make sure they are aggregated for billing. This can reduce standing and unit charges that could lead to a better rate.

Make sure your water meter is the right size. Standing charges are calculated according to meter size - don't pay for an unnecessarily large one.

Have you considered purchasing second-hand furniture or equipment for your offices?

A lot of second-hand office furniture and equipment is nearly new and not as unreliable as you might think, especially when purchased from trustworthy sources. And if you are concerned not to have anything but the best in your front offices, there still might be a place for second-hand items in the back offices.

The best place to buy is at specialist auctions, or online at auction sites such as ebay.co.uk. Very often these are sales of stock from bankruptcies - and many businesses go bankrupt in the first year or two of trading so the equipment is often not that old.

Liquidators are another useful source. They generally offer larger consignments, and so you have a greater chance of acquiring matching furniture, spare parts, unspent warranties and so on, through them.

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At some time or other most businesses have to turn to external sources to finance growth, whether it is to invest in new equipment or machinery, to purchase property, to upgrade technology, or to maintain cashflow while a new product line kicks in.

The cost of external financing can be considerable and keeping it down is a key element in maximising your profitability. Here are three ways in which you can do this:

1. Plan ahead

Plan your financing requirements well in advance - if possible as much as a year before the funds will be needed.

This will give you time to prepare a robust application, shop around for the best source, and negotiate the most favourable terms. Indeed, the mere fact that you are planning your funding so far in advance will earn you brownie points with most sources.

If you leave your funding to the last minute, not only will you limit your negotiating power, you might also give the impression that your expansion plans are not very well thought-out.

Of course business owners need to be agile and respond to opportunities swiftly, but this does not alter the basic fact that quick money is almost invariably expensive money.

2. Make the loaner bid for your business

Approach a number of sources with a well-prepared funding requirement and ask them to submit a proposal.

Ask banks for an overall proposal that covers every aspect of your business. But don't just look at the costs - consider also factors such as the quality of the working relationship, depth of knowledge of your industry, etc.

Use your track record to leverage a better deal on charges or the amount of collateral required. Remember, the main concern for a lending source is the degree of risk involved, and a good track record will help mitigate this.

3. Ask for more than you need

Many business owners are overly modest in their funding applications fearing that if they ask for too much it will reduce their chances of success. But it is much worse to underestimate your requirements.

Returning a few months later to ask for a top up not only sets alarm bells ringing about the reliability of your business plan, it is also a lot more expensive to process two applications rather than one.

Many businesses have inadequate systems for tracking their equipment leases, and often fail to note maturity and renewal dates.

Leases are not cheap - especially if you are responsible for maintaining the equipment and/or paying for the insurance cover on it - so it pays to monitor them carefully.

It is not unknown for leased equipment to be returned on the expiry date without the accounts department being notified, and for payments to continue for weeks, months, and even years without anyone noticing.

A bank that eventually discovered it had paid millions in excess lease payments and associated costs reviewed all their current leases, noting the critical dates and terms of the agreements, and then developed the following tracking system.

Whenever a lease agreement was entered into, the following information was recorded and passed to everyone concerned:

  • When must the equipment be returned without an automatic renewal of the lease?
  • When can the equipment be purchased from the lessor?
  • When do payments begin to decrease?
  • Does the insurance cover all leased equipment - such as equipment that is no longer on the property?

We recommend that, if you have not already done so, you set up a similar tracking system.

Contact AVASK today to get expert help and advice from our team of chartered accountants and business advisers.

It is not unusual during times of prosperity for businesses to let their margins slip, only to pay a heavy price when conditions later worsen.

When times are good, the market is burgeoning, and your business is enjoying high growth it is easy to take your eye off the ball and to be satisfied with the overall increase in profits rather than concentrate on maintaining your relative profitability.

Suppose, for example, that your input costs slowly increase during a period of high growth. Because your overall profits are also increasing you might not bother to pass this onto the customer.

But the overall increase in profit conceals a reduction of your bottom line as a percentage of gross sales, and therefore a decrease in your relative profitability.

Suppose your sales are up from £1.5million two years ago to £2million this year, but your profits have only increased from £150,000 to £180,000. With a 20% percent increase in profits you might be tempted to ignore the erosion of your gross margin - until things take a turn for the worse that is.

It is one thing to pass increased costs onto the customer when times are good, but a very different proposition during a downturn. And if you cannot restore your margins you are going to feel the pinch.

The moral, therefore, is always to keep your eye on your margins and not to let them slip - even during times of prosperity.

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