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Johnny Martin - Switching on your financial side


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Johnny is an experienced finance director who has raised some £25m for a variety of companies and seen through three trade sales for Baring Venture Partners, JO Hambro and Monument Trust. His passion now is explaining finance and he runs finance at the British Library and has helped 100s of people to understand finance

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Johnny Martin - Switching on your financial side

  1. 2. <ul><li>Johnny is an experienced finance director who has raised some £25m for a variety of companies and seen through three trade sales for Baring Venture Partners, JO Hambro and Monument Trust. His passion now is explaining finance and he runs finance at the British Library and has helped 100s of people to understand finance. </li></ul>
  2. 3. Debunking Math! <ul><li>1-1=? </li></ul><ul><li>4-1=? </li></ul><ul><li>8-7=? </li></ul><ul><li>15-12=? </li></ul><ul><li>Now quickly </li></ul><ul><li>pick a number between 12 and5…. </li></ul>
  3. 4. What do you need to know to run a business? <ul><li>You are chief exec of an organisation list the operational financial information you would like to receive on a regular basis to help you run the business. </li></ul>
  4. 5. Great Idea – but how can we make it viable?….
  5. 6. The key lies in the business model <ul><li>Sales Model– the air – who, what, why, how often, price, who pays & when </li></ul><ul><li>Gross Margin Model– eg sales less bread & mayo </li></ul><ul><li>Overhead Model – office or bedroom </li></ul><ul><li>Working Capital Model - cash to run the business </li></ul><ul><li>Funding Model – mix of loan v equity </li></ul>
  6. 7. Part 2 Managing your business….
  7. 13. know the score
  8. 14. Business format <ul><li>Employed+self employed i.e. keep the day job. Your employer does the tax on your employment and you complete a self assessment form </li></ul><ul><li>TIP – do your tax online – honest its straightforward and HMRC very helpful </li></ul><ul><li>Sole trader i.e. self employed, but are you really self employed? The tests are basically do you control your destiny eg if you are working 24/7 for someone who provides your tools then you are an employee. This is important as self employed can claim more expenses </li></ul><ul><li>Partnership – similar tax to self employed. Sweet if you can combine with a “life” partner as you can pool personal allowances and income. </li></ul><ul><li>Limited partnership – similar to partnership, but with limited liability </li></ul><ul><li>Limited Company – more hassle, perceived to be less risky, some tax advantages if you are making good profits. Useful to protect your IP. </li></ul><ul><li>Limited by Guarantee – limited liability and cant distribute profits – so often required by grant making bodies. </li></ul><ul><li>Community Interest Company and Industrial Provident Society – very useful community formats for co-operatives not aiming to make profits, although profits still taxed </li></ul><ul><li>What's best – if you are starting, consider just going self employed/partnership – easier, less hassle and if you end up paying more tax – GREAT! ie don’t tempt fate! But if you do make a loss you can set it off previous paye income </li></ul>
  9. 16. “ tax vat&quot; <ul><li>How does it work – you buy marerials for £100+£20vat, turn it into sculpture and sell for £200+£40 vat to gallery. They sell it for £400+£80 vat. At each stage value is added and the net tax is paid to tax man i.e. you have to pay £40 (output tax) less £20 (input tax). </li></ul><ul><li>You have to register when sales approach £73,000 </li></ul><ul><li>Select from a variety of schemes to pay – </li></ul><ul><ul><li>standard quarterly based on accruals accounting i.e. you pay even if you haven't been paid </li></ul></ul><ul><ul><li>cash accounting – based on vat cash received less vat cash paid </li></ul></ul><ul><ul><li>annual accounting if sales less than £1.35m – based on estimate then adjusted. </li></ul></ul><ul><ul><li>flat rate scheme – provided your net sales less than about £150k, you are given a flat rate by HMRC to pay depending on industry </li></ul></ul><ul><li>Top tip – get your customers to pay for materials direct so you stay under threshold. Especially useful if selling to private people who cant get vat back </li></ul><ul><li>Vat rules apply pretty well irrespective of trading format. </li></ul>
  10. 17. “ self employed” <ul><li>Need to do a self assessment – do it online – its not too bad honest but allow plenty of time </li></ul><ul><li>Tax paid twice a year “on account” </li></ul><ul><li>Calculated using standard personal allowances and rates eg 20% up to £40k </li></ul><ul><li>Recommend you set year end to 31 March which makes calculations much easier – you might pay some tax a bit earlier but hey life’s too short. </li></ul><ul><li>You will have to pay National Insurance (NI) – Class 2 and 4…and law was written by monkeys… </li></ul><ul><li>Class 2 is £2.50 per week payable if your profits exceed approx £5k </li></ul><ul><li>If your profits are more than about £5k you will have to pay class 4 as well, at the rate of 8%. This goes up to 9% above £40k </li></ul><ul><li>Tax tip – class 2 is for your state pension, incapacity and bereavement – worth checking you are all paid up – call your local Job Centre to check </li></ul><ul><li>If you are in employment as well, there are provisions to ensure you are not double charged NI ie you and your employer will be paying NI </li></ul><ul><li>Tax Tip – are you entitled to working tax credits? check with HMRC (tax man) </li></ul><ul><li>Tax tip – keep records and bank statements for at least 5 years </li></ul>
  11. 18. Expenses
  12. 19. “ expenses” <ul><li>You can claim all expenses that have reasonably been incurred in connection with the business eg anything that goes into the work, premises, marketing, travel, delivery, specialist clothes, erecting, subsistence when away from home. </li></ul><ul><li>Tip – if in doubt claim it! But you cant claim if you haven’t a RECEIPT!! </li></ul><ul><li>A distinction is made between “revenue and capital” expenditure – broadly think of this as clay (revenue) v kiln (capital) – if you are a sculptor! Revenue expenses can be claimed in current year. </li></ul><ul><li>Capital expenses are covered by different rules – confusingly tax treatment is different from accounting treatment and is based on a system of allowances. </li></ul><ul><li>As a general principle expenses must be wholly for business purposes – if not deduct private use element. </li></ul><ul><li>Tip – while your home expenses are a grey area, you can claim for costs of a definite area, provided it is non-exclusive business use </li></ul><ul><li>Tip - you can claim tax free business mileage at 45p for first 10,000 miles. </li></ul>
  13. 20. Part 3 Funding your business….
  14. 21. Types of funding <ul><li>Debt eg bank, or relation </li></ul><ul><li>Equity eg angel investor, friends & family </li></ul><ul><li>Grants eg Government </li></ul><ul><li>Corporate Joint Ventures eg P&G </li></ul><ul><li>Bootstrapping </li></ul>
  15. 22. Uses of finance <ul><li>Start up losses – equity, banks wont fund this, except with government guarantees </li></ul><ul><li>Equipment – loans </li></ul><ul><li>Working Capital – overdraft, factoring </li></ul><ul><li>Grants – grant may require expenditure for specific objectives </li></ul>
  16. 23. investment criteria <ul><li>Enthusiasm of entrepreneur </li></ul><ul><li>Trustworthiness of entrepreneur </li></ul><ul><li>Sales potential of product </li></ul><ul><li>Expertise of entrepreneur </li></ul><ul><li>Investor liked entrepreneur </li></ul><ul><li>Growth potential of product </li></ul><ul><li>Quality of product </li></ul><ul><li>Perceived financial rewards </li></ul><ul><li>Niche market </li></ul><ul><li>Track record of entrepreneur </li></ul><ul><li>Source: Harvard Business school </li></ul>
  17. 25. [email_address]
  18. 26. Key financial reports <ul><li>Profit & Loss – think income and expenses, describes how profit was created – based on activity – nothing to do with cash </li></ul><ul><li>Cash Flow – describes what has gone thru bank account </li></ul><ul><li>Balance Sheet – definitive statement of what the business owns and owes at a point in time. </li></ul>
  19. 27. Further help…. <ul><li>Accounts demistified – Anthony Rice </li></ul><ul><li>Guy Kawasaki – Art of the Start </li></ul><ul><li>Figure wizard - forecasting </li></ul><ul><li>Blue Ocean Strategy </li></ul><ul><li>British Library </li></ul><ul><li>Quick Books/Kashflow/Clear Books </li></ul><ul><li>Bootstrap advice </li></ul><ul><li>Visit </li></ul>
  20. 28. The Balance Sheet <ul><li>The business and the owner are separate entities </li></ul><ul><li>Set up a business, put in £1,000 to business bank account: </li></ul><ul><li>Cash £1,000 Owed to owner £1,000 </li></ul><ul><li>“ so what a business owns always = what it owes” </li></ul>
  21. 29. Balance Sheet at a point in time <ul><li>Assets (owns) </li></ul><ul><li>Equipment </li></ul><ul><li>Stock </li></ul><ul><li>Debtors </li></ul><ul><li>Cash </li></ul><ul><li>Liabilities (owes) </li></ul><ul><li>Creditors </li></ul><ul><li>Loans </li></ul><ul><li>Owners equity </li></ul><ul><li>Profit (owed to owner) </li></ul>=
  23. 31. 3i data <ul><li>3 rounds of finance </li></ul><ul><li>seven years to become cash positive </li></ul><ul><li>For every 8 investments: </li></ul><ul><li>1 huge return </li></ul><ul><li>2 fail </li></ul><ul><li>5 bump along </li></ul><ul><li>(10x target) </li></ul>©
  24. 32. Yield valuation method <ul><li>Financial assets can be valued by reference to their income or yield </li></ul><ul><li>Say you are going to buy a factory with a tenant paying £10,000 per annum rent. </li></ul><ul><li>At a £100,000 the yield would be 10%, at £200,000 it would be 5% </li></ul><ul><li>Depending on state of economy, the yield varies </li></ul><ul><li>A yield of 10% = 10x income valuation </li></ul>
  25. 33. Price earnings ratio valuation <ul><li>Companies can be valued by “yield” – this is called P/E ratio </li></ul><ul><li>On the Stock exchange the average is about 12. ie 12x profit (or about 8%) </li></ul><ul><li>ASOS is over 40x because investors expect fast growth. </li></ul>
  26. 34. What % for equity investor <ul><li>Company needs to raise £900,000 </li></ul><ul><li>Forecast year 3 profits are £500,000 </li></ul><ul><li>“ Value” in 3 years £6m at a p/e of 12 </li></ul><ul><li>Return required 40% </li></ul><ul><li>Discount factor 1.4x1.4x1.4=2.744 </li></ul><ul><li>Current value: £6m/2.744 = £2.2m </li></ul><ul><li>% required: £0.9m/£2.2m = 41% </li></ul>
  27. 35. Why cash and profit are different…. in the short term <ul><li>Timing differences – get paid in 60 days! </li></ul><ul><li>Accrual & Matching eg depreciation matches the cost of equipment, or provision (accrual) for unreceived invoices </li></ul><ul><li>Capital expenditure </li></ul><ul><li>VAT </li></ul><ul><li>Stock </li></ul>
  28. 36. Numbers in business plans <ul><li>They are a hurdle – not a decision maker </li></ul><ul><li>Exec summary – table of key numbers (sales, ebit, cash burn)+ metrics+ £how much/what for </li></ul><ul><li>Financial section – key assumptions, margins, outline p&l, use of money, where does a £1 go, staffing, generally more detail </li></ul><ul><li>Appendices – 3-5 years p&l, cash flow & balance sheets, notes, sensitivities, benchmarks </li></ul>
  29. 37. reasons for failure <ul><li>No Clear financials </li></ul><ul><li>Business not scaleable, i.e. lifestyle </li></ul><ul><li>No must have product or service </li></ul><ul><li>No likely exit </li></ul><ul><li>Unrealistic pre money valuation </li></ul><ul><li>Poor management team </li></ul><ul><li>Source: Investor Pulse survey 2003 </li></ul>©
  30. 38. reasons for failure <ul><li>Typos/schedules that don’t add up </li></ul><ul><li>presentation – use standard formats </li></ul><ul><li>Explain pain clearly </li></ul><ul><li>Don’t use “c” word – conservative </li></ul><ul><li>Reasonable assumptions </li></ul><ul><li>Capturing a % of the market statistics </li></ul><ul><li>Starting late </li></ul><ul><li>Being behind plan </li></ul>©