Legal matters and systems have a strong link to the fi nancial elements of your busi-ness , and it is of course important that you set everything up correctly and keep them in order as time goes by. But there is another aspect to money , and that is your attitude to it. Almost every case study concerning business success stories says the same thing: businesses established purely to make cash rarely do so. Those with a strong sense of purpose and integrity fare better, and the money fl ows from those principles. Cash is not an end in its own right.
CONCENTRATE ON THE MONEY
From now on, when you discuss money , it will be not in some abstract way based on a remote budget that was agreed by someone you have never met. It will be a highly personal matter. When you are starting a business , it will be your own money . It has been said that you don ’ t really appreciate what running your own business means until you have experienced a bad debt, so it is essential that you become comfortable talking about money straight away. If you don ’ t, you will probably agree to provide unspecifi ed amounts of work or goods over unclear time periods, and in some instances you might not get paid. Alternatively, you may consistently sell products at margins so low that your business will not be viable.
Although this sounds obvious, huge numbers of business-people pursue a large volume of sales so that they can marvel at the scale of their operation. They may well be proud of their turnover, but frequently they are barely making a profi t. There is no merit in rushing around all year generating things to do and creating the impression of success when you aren ’ t actually making money .
Keep on top of what the money is doing, but don ’ t obsess over it. Companies do not simply generate money by concentrating on it. They ensure that the business is working properly, and if they are delivering excellent products and services then it is likely that the numbers will take care of themselves. Work out a rough numerical shape of what the business requires, and then get on with implementing the activity that will make it happen. It is important to have a feel for fi gures without getting bogged down in the minutiae.
This skill does of course improve with experience, but it can be acquired more quickly by sketching the overall shape from the outset and then mapping performance against that shape over time. Designing a business with certain products and prices, and then seeing what frequency of purchase will yield a certain monthly sales fi gure is one way of doing it. But it may not yield the fi gure you want, so many entrepreneurs prefer to set a fi gure as a target and shoot for that. Not surprisingly, this ‘ fi nger in the air ’ fi gure is always larger than the scientifi cally generated fi gure, but it has the virtue of giving you and your staff and col-leagues something more aspirational to aim for. This shape, albeit very loosely based on mathematics, becomes the template for all operations in the fi rst year of trading. If it is well communicated and understood by partners and colleagues, then running the business becomes signifi cantly easier because everyone knows what they are aiming for, and so pulls in the same direc-tion. If this is left to chance, or not explained at all, then the sales fi gures for the business are likely to arrive in a much more haphazard fashion.
DEALING WITH YOUR BANK
At the heart of any good fi nancial system is your relation-ship with your bank . From the beginning, it is important to explain to them what you are planning to do, and what resources you will need. Make sure that you become familiar with all the methods by which you can move money around and stay in touch with your fi nances . As well as a conventional branch relationship, have a look at telephone banking , internet banking , text alerts and all the electronic versions of possible transactions.
Automate as much as possible to save time and the pos-sibility of something being overlooked. First, consider the nature of the different bank accounts you will need. In a limited company this may be only one, accompanied by a clear bookkeeping system that shows the money coming in and going out. In a complex busi-ness , however, several may be needed to deal with differ-ent products , services , and subsidiary companies. Talk this through carefully with your bank . Second, you need to establish a very clear distinction between your per-sonal money and that of the business .
This is essential to keep everything above board, and provide a crystal clear picture of your income, the company ’ s income, any tax due on either, and the true fi nancial state at any moment. Third, you may require an account for gaining interest on cash held, for setting aside allowances for future accounts (such as a large tax bill), or as a war chest for future plans for the business . Many current accounts , for example, generate no interest. So, instead of having large amounts of cash sitting in a current account earning no interest, you can set up daily electronic transfers to an interest - bearing account when the cash amount has reached a certain level. If your proposed business has an international dimension, you may well need to send and receive money from abroad. This needn ’ t be compli-cated, and the small business adviser at your bank will be able to explain how it all works to keep your charges to a minimum.
Separating pots of money in this way is hugely benefi cial to your understanding of how your business is faring. It is important to understand the distinction between cash fl ow and profi t, and to set up the right metrics with which to determine your business health. The cash in your busi-ness may be no indication at all of likely profi t. To give a simple example, you might proudly look at a bank state-ment saying that you have £ 20,000 in the bank . At an initial glance, this appears excellent, and very healthy. However, if you need to pay a supplier or the HM Revenue & Customs £ 19,000 next week, then the picture is less
rosy. So the cash fl owing through the business must not be confused with profi t. Time lags are a signifi cant danger here.
By taking advice from your bank and your accountant , you will be able to set up proper reporting systems that give you the full picture. It is important that you become famil-iar with what these fi gures are telling you. Cash flow shows what is in the account at the moment, but gives no indica-tion of what needs to go out. All debts, bills, and other commitments need to be shown alongside the cash fi gure and offset against this cash income to give a better picture.
SECURING FINANCE
Start your business with an appropriate pot of money for what you are trying to achieve. You may need no upfront investment at all, and obviously you shouldn ’ t borrow if you don ’ t need to. But if you do, take the time to inves-tigate the implications of having an overdraft, of borrow-ing, and of securing other fi nance .
Loans can be fi xed or variable, and there are government - backed small loans guarantee schemes that could help. Securing fi nance can be challenging, and should be approached with care. All the business plan work that took place at the beginning needs to be well packaged and presented to whoever might be providing the funds.
Often they will have their own format and detailed ques-tionnaire, so your original format may need to be changed. The lender will need to be completely con-vinced of the validity of your idea and the likelihood of their being repaid, doubtless with interest. Take the time to understand the motivations of the lender. Obviously you want the money , but why are they lending it to you and what is in it for them? The time period over which they expect repayment is crucial, and so are the repayment terms. Look hard at the time periods over which the loan must be repaid, and be real-istic about the ability of your business to meet the dead-line. Punitive interest rates are another pitfall, and have caused problems for many businesses .
Even when you have secured an offer of a loan that both you and the lender are happy with, you might want to take legal advice before signing up, or to get a second opinion. Assuming all is fi ne, put safeguards in place for when the money comes through. Strong discipline is required to make sure that the funds are not spent too fast, or on things for which they were not intended. Sometimes investment is needed for highly specifi c items that are critical to your business idea . You might need premises, particular machinery, vehicles, or other hard-ware that have to be fi nanced if the business is to launch. The bank s have experienced most of this before, and usually have particular types of fi nance schemes to suit. For example, if you need to buy or lease vehicles or premises, they will most likely have products that already fi t the bill.
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