Basic financial tips for the business owner

1. finance director services for entrepreneurial companies

2.  FD for 20 years working with fast growth and
entrepreneurial private companies
 Currently COO for 1st Contact and Sable
Group who offer a range of business services
to SME’s and international clients

3.  Know your current financial position
 The key drivers of your business
 How much cash you need to achieve your
goals

4.  Balance sheet, profit & loss account,
cashflow
 Understanding break even & contribution
 Forecasting do’s and don’ts
 Financial reporting basics
 Taxation

5.  Balance sheet; snapshot of a company’s
financial health. Picture taken each year end or
period end
 P&L; reflects the performance of the business
between balance sheet dates. Did you make a
profit or a loss?
 Cashflow; reflects money in and out between
the balance sheet dates. Profit is not the same
as cash!

6. Profit & Loss Account
YE
30 Sept X3
£
Turnover 6,000
Cost of sales (2,500)
Gross profit/margin 3,500 58.33%
Overheads (1,500)
Operating profit 2,000
(200)
Profit before tax 1,800
Tax @ 20% (360)
Profit after tax 1,440
Dividends (1,240)
Retained profit 200

7. Balance sheet as at 30 Sept X3
£ £ £ Notes
Fixed assets 210 Assets that will last more than 12 months
Current assets
Stock 30 The value of stock at the balance sheet date
Debtors 100 How much is owed by customers
Prepayments 10 Any expenses charged and paid for in advance e.g. rent
Cash 300 Positive bank balance
440
Current liabilities
Trade creditors (100) How much is owed to suppliers
PAYE/NI (10) What is owed to HMRC for payroll taxes
VAT (15) What is owed to HMRC for VAT
Accruals (10) Any expenses incurred not yet invoiced
Directors loan account (15) What the company owes the director
(150)
Net current assets 290 Also known as working capital
Net assets 500
Capital & reserves
Share capital 300 Nominal cost of your shares
Retained profit 200 Sum of all your P&Ls
500

8. Cashflow statement
YE
30 Sept X3
£ £ £
Cash receipts
Customer receipts 1,550
Loan drawdown 75
Share issues 100
1,725
Payments
Goods bought (800)
Admin costs (175)
Salaries (150)
VAT payments (300)
Corporation tax (30)
Interest payments (20)
(1,475)
Net cashflow 250
Opening cash 50
Closing cash 300

9. Breakeven analysis
£ £ Notes
Unit selling price 100 1,000
Unit cost price 20 950
Unit contribution 80 50
Gross Margin % 80% 5% A higher selling price doesn’t mean a high margin
Overheads per annum 1,000,000 1,000,000 The costs you must incur whether or not you sell anything
e.g. rent & salaries
No. No.
Breakeven units 12,500 20,000 No of units to sell p.a. to cover overheads
Daily breakeven rate 34 55 No of units to sell per day to cover overheads

10.  Make your assumptions realistic
 Few businesses double in size year after year
 Reflect existing business drivers correctly
 Product margins, debt collection times, VAT etc
 Test it with different ‘what if?’ scenarios

11.  Distribute to the wrong internal audience
 It may contain sensitive information
 Do it once and then forget about it
 Use to measure performance
 Pay for a model that only your accountant
understands!
 Prepare one yourself

12.  Prepare a monthly management summary
 Consistent, accurate, simple and relevant
 Key elements:
 Profit & loss for the month
 YTD including actual v budget
 Cashflow summary
 Significant changes to the balance sheet
 Tracking of Key Performance Indicators

13.  Annual return to Companies House
 Snapshot of general information about your company
 Submitted no later than 9 months after year end
 Abbreviated accounts
 If < £6.5m turnover, < £3.26m net assets, < 50
employees
 Sent to everyone necessary
 Bank manager, HMRC, other shareholders

14.  Corporation tax
 20% of taxable profit, paid 9 months after year end
 VAT
 For companies with turnover > £70,000 p.a.
 Now 20%
 May affect cashflow but consider FRV scheme
 PAYE
 Not payable if self-employed sole trader (use self
assessment)
 Can be complicated!

15.  National Insurance (NI)
 Sole traders pay Class 4 NI on profits (approx 9%)
 Class 1 NI paid by employee and employer
(approx 12%)
 Business rates
 Charged on premises
 Based on previous valuation of market rent

16.  Stamp duty
 Up to 5% tax on transfer of land
 0.5% reserve tax on share purchases
 Capital Gains Tax (CGT)
 28% for higher rate earners; still 18% for low rate
earners
 Significant asset sales can push low rate earners into
high rate band
 ‘entrepreneurs relief’: 10% rate on business disposals
up to a lifetime allowance of £5m

17.  Use someone proactive rather than reactive
 Work beside a bookkeeper or accountant
 Financial modelling & management accounts
 Budgeting and cash flow forecasts
 Try a half day financial health check!