Archive for the ‘Southampton Small Business Advisors’ Category
A Few Tips on How to Manage Your Working Capital
Working capital is the cash-on-hand available to a business for day to day operations. A retail grocery store may need cash on hand to pay vendors that require payment on delivery. A clothing boutique may need funds to pay for buyers to go to various fashion events to determine what to buy for the coming season and an auto mechanic needs money to purchase parts and supplies to complete car repairs. Manufacturers need working capital to purchase raw materials to make their products. Every type of business needs working capital. Effectively managing working capital is one of the strongest skills a small business owner should harness.
In terms of finding a few tips on how to manage your working capital, there are three objectives to consider. The objectives include having enough cash to make necessary payments when due, making sure the money does not cost more due to interest on a loan or overdraft protection policy, and planning for increase cash flow needs in the future. To meet these three objectives, you must skilfully manage how money is managed in other areas of your business such as debtors, creditors, and tangible assets.
- Debtors. Customers who buy from you on credit, even moderate credit terms like 30 days, have your company’s working capital health in their hands. If they do not pay on time, your cash flow can be seriously dented. Therefore, do not let poor paying customers go too long before taking action. Problem accounts could be moved to a cash-only basis before they put too much strain on your funds.
- Creditors. Just as you should not overload your household with more debt than your income can support, your business’s creditors should be kept to a minimum both in number and accrued balances. When possible, take advantage of early payment discounts or pay cash to avoid interest. However, there may be times when financing is a better option than using working capital. This is generally true for large purchases such as facilities, transportation, or expensive equipment.
- Inventory. Carrying high levels of inventory when it is in demand is good for business as well as revenues. However, carrying a lot of inventory when demand is low hurts your cash on hand. When cash is tied up in inventory, sales must increase in order to rebuild cash levels. Similarly, a shiny new facility may be nice, but if it leaves you cash strapped, you won’t have the working capital you need for day to day expenses.
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Managing Business Growth – The Problems With Overtrading
Accountants Southampton – Growth Management
Overtrading and the problems it can create can be quite difficult to comprehend. Surely, if a business is selling many of their products and their customer base and profit are growing rapidly, how can this be a problem? Indeed, not only can it be a problem but in some extreme cases, it can lead to a business having to cease trading.
The fundamental reason why overtrading is a problem is that it can put a huge strain on the resources of a business, particularly cash flow. If turnover is increasing too quickly, then you may need to acquire more machinery or equipment to service the increase in customer numbers. It may even be the case that you need to move to bigger premises or a larger office with more storage space. Therefore, growth in sales will likely to be matched by an increase in the need for capital investment and other working capital. If the business does not retained profit to fund this rapid expansion then they attempt to borrow it. These borrowing facilities can be very costly. However, many new businesses which experience overtrading find themselves unable to obtain additional funds due to a lack of trading history and are forced to reduce the size of their operations or possibly ‘throw in the towel’ altogether.
Other costs that can cause huge drain on working capital when growth is too rapid are staff costs. With any expansion comes the need for increased numbers of employees. This can be extremely expensive for a business to fund, especially when combined with any increases in connected payroll taxes. In addition, if your sales are increasing quickly it may mean that you need to carry larger quantities of stock and thus more of your capital will be tied up in that inventory. Again, stock is like many other asset, if you own too much of it, it can starve other areas of the business which urgently need funds.
There are a number of precautions which one can take to prevent the potentially damaging effects of overtrading. Firstly, growth should be managed properly and with a sound understanding of how it will affect the working capital of the business. By producing sound monthly budgets, cash flow projections and monthly management accounts, you will be in a far better position to control the potentially damaging effects of rapid growth. Secondly, before you grow too quickly, look to secure increased funding. In other words, it would be a prudent idea to approach your bank and get the ‘green light’ for future finance to fund expansion, should you need it. Having this contingency finance at the ready will mean that working capital can be maintained and growth can be managed properly. Lastly, to avoid the effects of overtrading, it might be a good idea to take the ‘only what I need’ standpoint. For example, rather than hold larger and larger sums of stock when you are growing, consider ordering your stock ‘just in time’ (JIT). This can reduce your stock holding costs considerably and again free up all that working capital held up in stock. Alternatively, only buy equipment which you really need or see if you can buy any second-hand equipment which will be cheaper but still do the job. Again, with everything you buy for you business, ask yourself the question: is this something I really need or just want?
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How to Manage Your Business in an Economic Downturn
The effects of the economic downturn or recession on a business can be compared to a car getting a flat tyre half way into a race. It totally slows down the whole business and completely cripples it unless some effective measures are put in place to avoid any other setbacks. The first and foremost step which any business should take during an economic downturn is to reduce their costs where they can and try to increase productivity. The second step should be to increase the sales of their products or services. Mentioned below are a few tips that can come in handy to help a business through the difficult time of an economic downturn.
- The first focus should be to put a hold on all the planned activities that involve large amounts of investment e.g. expansion plans, recruitment and new acquisitions.
- Try and cut costs wherever possible. Acquire cheaper or second hand equipment rather than buying the most expensive items. Reduce the consumption of electricity and also try to cut down on telephone bills.
- Outsourcing is another area which can prove to be very cost effective especially during the economic downturn. In the right circumstances, it can save a lot of money than what would otherwise be spent on internal staffing and training requirements.
- It would also be a good idea to try and get your customers to settle any well over due debts they may owe the business or reduce the credit periods extended to customers.
- In order to boost your sales, try looking at some online promotion methods and marketing strategies to gain more customer attention. These may be less expensive than the offline alternatives.
- Approach your bank or other lending institute and look into obtaining some funding to help you through the difficult times. Even though there will be charges and interest attached to a loan or overdraft, it may help you free up your own ‘internal working capital’ to help see you through the downturn.
- Negotiation is also a must do during a recession. Negotiate with all your suppliers and try to get the best possible deal, even if it requires buying materials in bulk.
- The last extreme step a business can opt for is to reduce the employees’ salaries, reduce working hours (e.g. four day week) or freeze all bonuses until the time the company’s situation improves.
An economic downturn can fundamentally turn a thriving business into one that has to fight hard for its own survival. This survival will depend on making some cut backs, controlling certain expenditure and looking at alternative ways to run the business.
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Business Exit Strategies – Make Them Part of Your Initial Plans
Business today involves taking risks, often significant risks. You cannot ever grow beyond a certain point, nor achieve high profits without taking some form of risk. The level of risk, which you are willing to operate under, has to be decided upon early on, so that a strategy can be determined as to how you decide to run your business. Part of your risk management plan should include looking at exit strategies. There is sometimes a point, where you feel as a business owner, you would be better served by removing yourself from a situation and cutting your losses, rather than continue to lose time, money and other valuable resources.
As a business owner, you will need to decide early on what your own personal exit strategies for your business are going to be. The statistics speak for themselves as far as how many businesses fail within the first few months or years following their start-up. You have to decide at what point you will pull out of your own business and shut it down. It is hard to make these decisions as part of your business plans, however it is incredibly important to get as much of your strategy as you can on paper. To help you do this you may need to consider a few of the following questions: What is the most capital you can afford to put into the business in the first few years? What is the cut-off point as to when the business needs to make a profit? How soon do you need to draw an income from the business? If you do not consider an exit strategy as part of your planning, you will most likely make the decision based purely on emotion if you need to let the business go. It is hard not to be emotional when you are facing having to pull out of a business into which you have put so much work. Formulating an exit strategy and ‘warning flags’ for your business will hopefully allow you to avoid this purely emotional reaction.
There is also a positive side in deciding whether to exercise an exit strategy for your business. If you are able to grow and move your business beyond the first few difficult years of trading and also turn a good recurring profit, you may wish to initiate an exit strategy for other reasons. Indeed, a successful business may be worth a considerable amount of money on the open market. You may have acquired assets along the way and most importantly you may have a customer base which has a high value in terms of ‘goodwill’ that another business may want to acquire. These positive exit strategy considerations need to be part of you initial plans as well; think of them as ‘best case scenario’ plans. Therefore, make sure you consider what you want out of your business and if you would consider selling or not at a point in time. Again, if you do not consider these points from the outset, emotions may override the situation and you could end up selling a business you really wanted to keep hold of.
Considering ‘both sides of the coin’ when planning your exit strategies will mean that you are prepared either when you may need to call it a day as far as continuing your business or when you are in a position to sell the business and its goodwill for a handsome profit.