Advantages Of Factoring

Factoring is selling your sales invoices to a factoring company who will then allow you to draw down funds from them against the money which is owed to your business. Factoring companies provide finance, debt collection and ledger management services.
Advantages
- factoring can be a cost effective way to outsource your sales ledger function.
- factoring companies can provide useful information about existing and potential customers.
- cash flow forecasting and financial planning in general are helped by the fact that cash flows into the business are easier to predict.
- some factoring agreements offer bad debt protection (if this is important to you check the detail)you will have to pay extra for the bad debt protection.

Changes To National Minimum Wage Rates

New national minimum wage rates apply from October 1st
- The main rate for workers aged 21 and over will increase to £6.08.
- The 18-20 rate will increase to £4.98.
- The 16-17 rate for workers above school leaving age but under 18 will increase to £3.68.
- The apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship will increase to £2.60.

Anyone in business will tell you the importance of cash, don't assume just because your business is profitable you don't need to monitor your cash position, any expanding business can easily fall into the trap of "overtrading" (this is when a business has increased cash outflows for materials and wages but has insufficient cash to cover the outlay until the customer pays for the goods). You must devote sufficient time to know what your forecast cash position is, if your cash position is extremely tight then you may need to give it even more attention, by forecasting your expected cash position it may highlight areas of concern, this could enable you to start corrective action to avoid the situation, should you require additional funds then it is better to approach the bank manager now about a potential problem three months away rather than waiting till it has happened, if you flag it up early the bank manager will be more impressed with your management skills than simply not being aware of the problem. Cash forecasts should be done to support annual budgets, the impact of additional premises, staff, machinery needed to deliver any increased activity should be seen on the cash balance and any shortfall needs to be addressed.
Whilst the annual cash flow forecast is a very useful tool, it only provides opening and closing balances each month and a lot can happen in those four week periods. To provide the required "visibility" I usually do the first two months in week periods so that it gives more detail and provides a first class tool to manage cash movements, as each week passes I roll the eight week window one week further into the year, you still keep sight of the annual position but it gives you added focus on the next eight weeks which is particularly important if cash is tight.

Six Ways to Improve Your Cashflow

I know that I keep on about the importance of cash but you need to collect outstanding debts as quickly as possible so that you have sufficient funds in your business to pay wages, creditors etc. Consider the following points ard see if they could help you collect outstanding amounts that little bit quicker.

Do credit checks on prospective customers and if you are not happy with the results of the credit check consider asking them for cash upfront.

Send sales invoices out as quickly as possible, the sooner your customer receives them the sooner they can begin processing them and possibly speeding up payment.

Make sure everything on the invoice is correct, do not give customers the opportunity to delay processing the invoice whilst they wait for a credit note or a new invoice!!

Make sure your invoice states clearly, the terms of payment and when payment is due.

If a customer makes regular payments consider getting them to pay by direct debit.

Have a documented credit control system so that you or your credit controller knows exactly what to do and when to do it.

By getting your customers to pay on time it makes it easier to forecast the movement of cash in and out of the business, your cash flow forecast will be more meaningful and you will be able to plan with a little more certainty.

How Well Is My Investment Performing ?

One of the most important measurements of business performance is the Return on Capital Employed (ROCE),it calculates the net profit as a percentage of the total capital employed in the business. The result allows you to see how the money invested in the business is performing and you are able to compare the return alongside other investments that you could have made such as simply putting your money in a bank account. For example if the ROCE of a business was 3.5% and you could obtain a (risk free?) return of 4% by putting it in a bank account you may start to question your reasons for putting your money in the business.
Whilst net profit is a fairly well defined value the definition of capital employed does tend to vary, but we will use the following definition in our calculations

capital employed = fixed assets + current assets - current & long term
liabilities
Example
A business has a net profit of £20,000 and capital employed of £300,000
therefore the ROCE is 6.67%, this figure can now be compared to the previous years performance to see whether the figure has improved or got worse and the reasons for any movement need to be understood. The result can also be used to compare alongside other businesses in the same industry / sector and as previously outlined the investor needs to compare the 6.67% against other investment opportunites available.
From a management point of view they will put plans and strategies in place to improve the ROCE by getting more out of the resources which are available to them.

Get Your Finger On The Pulse Of Your Business

Part of the monthly management accounts will be a balance sheet, whilst the profit and loss account is a measure of trading activity over a period of time (usually a month for management accounts)the balance sheet is a snap shot of the business at one point in time (the last day of the period). Whilst the balance sheet on it's own provides important information about the business if the report also includes the budgeted balance sheet figures and the previous months figures this provides additional information as you can compare your actual balances to your budget and look to understand the causes of any meaningful variances. By also having last months figures you can look for movements in the balances and seek explanations for any concerning movements. Some of the movements may be quite easily explained as timing differences, for example if the creditors balance is much higher than normal as at June 30th a large payment run of creditors paid on July 1st would quickly explain the movement and the balance would be back to an expected level, however not all movements can be explained so easily and a greater degree of investigation may be required.

Here are a few examples of items needing to be investigated:-
Fixed asset values increase - what has been purchased?, has the correct proceedure for asset purchase been followed?, was the purchase agreed in the budget?
Stock - increases in the amount of stock held can quickly soak up cash, so any increase in stock levels needs to be monitored closely. Compare the stock level to budget and look at the stock balance over the last few months to see if there is a rising trend.
Debtors - increases in debtors could suggest customers are taking longer to pay, check the budgeted figure and the investigate the reason for the increase.
Creditors - increases in creditors could mean you are not paying suppliers on time leading to the posibility of production being held up because of supply shortages and possible loss of reputation.
Bank - increases in bank overdrafts need to be investigated, ideally you should have sufficient control over your day to day cash situation so that you are fully aware of your cash position before you see the month end balance sheet.

Previously in the blog we have looked at some balance sheet ratios which give important information about asset usage and the liquidity of the business, these ratios should also be compared to budget and the previous months position.

How Good Is Your Business At Collecting It's Debts??

In any business cash is extremely important, so you will need to know how effective your business is in collecting it's debts. The debtors turnover ratio will give you the average number of days credit taken by customers and this can be compared to previous periods to see if performance has improved or worsened.

Example
For the year to 31/12/08 a business has a turnover of £1,300,000 and it's debtors at that date were £125,000.
For the year to 31/12/09 the business has a turnover of £1,500,000 and it's debtors at that date were £190,000.

125,000
1,300,000 x 365 = 35.10 days for 2008

190,000
1,500,000 x 365 = 46.23 days for 2009

So from the example you will see that the business has become less effective in collecting it's debts, it is taking an extra 11 days to collect money from it's customers. Assuming the credit period allowed is 30 days then something needs to be done to correct the situation and bring it back into line, if the situation is allowed to deteriorate it could cause cash flow issues.