The Language of Small Business Texts and Vocabulary Training (for students of Economics) Part 1. Учебное пособие

Staying Afloat

Diagram 1 assumes that the level of overheads stays the same no matter what the level of sales you can make. Frankly, this is difficult to achieve in practice. Once you start doing more business, you may well find that your overheads will go up too. For example, you may find you need more secretarial help, given the increased amount of sales you are making. In Diagram 2 you can see the effect of break-even point, if there is an increase in overheads for the same business as below. The break-even sales figure is now much higher.

Diagram 1: Finding the break-even point of your business

Sales

Profit

Loss

X

Total costs = direct costs +

Direct or variable costs

Fixed costs or overheads

Break-even point

Amount of sales

The Business Plan to Control the Business

When you produced your business plan before you started your business, you incorporated some forecasts: profit and loss and cash flow. These could form basis for you plan (or budget), which you need to control the business, although probably with some adjustments.

What you need for a budget that you use to control your business, but that is also to give you (and any employees) something to aim for, is a plan incorporating figures which you believe

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you may be able to achieve. Be wary of including figures that are too easy for the business, in case meeting the budget turns into the objective, rather than striving for the biggest profit possible.

As you are going to use the budget to control the business, you need to have the next year's budget prepared before the previous year has ended, otherwise there is a time gap in which the business will drift. If you employ others in the business, they should be involved in drawing up the forecasts for their particular area of the business.

Diagram 2. How an increase in fixed costs moves the break-even point upwards

Break-even point

Amount of sales

How to use the Budget

Every month, as soon as possible after the end of it and not later than a fortnight after, you should have the actual profit, cost and cash figures to compare with the budget. Your comparison should be for two reasons:

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•to identify what has gone wrong, and right, and to derive lessons for the future;

•to identify problem areas for the future, which may only emerge as your actual performance fails to keep up with budgeted performance, for example.

Keeping in touch with the Business

Once you start employing others, you will no longer be dealing with every single aspect of the business yourself. Once others have areas of responsibility, you will need to devise a system of management reporting. There is no one system which is perfect for a particular business, but it should include some of the following elements:

1.weekly reports: these could be verbal, for example, a meeting. It needs to be sufficiently detailed, so that everyone in the business knows as a result of the report:

•their objectives for the next week;

•what is on the critical path to allow sales to be made and products to be produced or made ready for sale.

2.monthly reports: these should be written by the person responsible, for example, salesperson or manager, production staff. The report should cover two aspects:

•what has been achieved in the past month, how it compares with budgeted figures and objectives set in the weekly reports and any explanation or lessons to be drawn from successes and failures;

•what the outlook is for the next month, what should be achieved and what the objectives are.

While management reports allow you to keep informed about the business, they have an important side-effect. They force your employees to concentrate on:

•the objectives of the business;

•their own performance against budgeted performance;

•their own priorities for action in the week and month ahead.

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Cash

If your cash runs out, your business will fail. It is as simple as that. Why your cash runs out is due to several possible reasons:

•you do not sell enough;

•your costs are too high for the sales you make;

•your sales and costs are rising nicely according to plan, but you do not have enough cash to fund the increased amount of debtors and stocks, which the extra business brings.

How to conserve Cash

There are three important steps in conserving cash:

•knowing how much cash you have and how much you will need;

•speeding up the cash inflow from your customers;

•slowing down the cash outflow to your suppliers.

The Cash Budget

Preparing your business plan will have taken you some way towards knowing how much cash you will need in the business; indeed, the most important purpose of preparing the business plan may have been to raise the cash your forecasts show will be required. Once the business is trading, the cash flow forecasts need to be turned into monthly cash flow budgets.

You can help to conserve cash by paying by instalments as much as possible. For example, consider leasing cars or furniture, rather than buying outright.

Your aim should be not just to match your budget, but to do better than it says. Never despise a penny or a pound which can be saved; very small savings build up over time to very large savings. This penny-pinching attitude applies just as strongly if you have raised money.

Comparing the actual cash performance with the cash budget is an important tool in controlling your cash. It enables you to learn from mistakes and plan your cash requirements in the future.

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What Else Controls Cash?

When cash is tight, you will take much more stringent measures than when you are cash rich. For example, you could consider instituting the following control system:

•daily cash balance;

•weekly or daily bank statement;

•weekly forecast of each individual cash payment in (from customers) and planned cash payment out (to suppliers). This could be set up as a sheet with each named customer and supplier. Each day check what money you have received and tick off on your forecast sheet. Do not pay any cheques until you have received the money you need.

Obviously, when cash is short, you need to put your cash receipts in the bank as quickly as possible; and when you pay people, send the cheque by second-class post. You will be able to say honestly that the cheque has been sent.

Clearly, the system does not work for every business; it is a good control tool for businesses which have a number of large receipts and payments. A retail business would not be able to operate in this way. However, a control sheet for a shop could consist of a weekly forecast of daily takings plus a list of those suppliers you intend to pay that week. Again the suppliers will not be paid until the forecast cash comes in.

A cash system like this is a nuisance to operate, and so if cash is not particularly short, you could use a variant of:

•weekly cash balance;

•weekly bank statement;

•monthly payment cycle, that is, set aside one day in each month on which you pay the bills you plan for that month. This means that there is only one day in each month devoted to writing cheques. If a bill is not paid on that day, it does not get paid until a month later.

Important note: no cash control system can operate if you do not keep proper cash records, for example, a cash book.

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Making Cash Work for you

Your problem may not be shortage of cash; on the contrary, you may have extra cash sitting around. In this case, do not leave it all in the current account. Instead, have sufficient handy to keep the business ticking over and put what you can in a seven-day notice or call account which earns interest. Remember to give the required notice so that you can transfer what you need to cover your payments in your once-a- month cheque cycle. There are also a few of the high-interest cheque accounts which can be used by small businesses.

Operation your Bank Account

What your bank account will cost you as a small business used to be one of the more closely held secrets – and may still be with some banks. However, all the banks are trying to make charges clearer to customers. Some banks have readily available leaflets detailing the charges on your small business account. If your bank doesn't, ask for the information, so you can work out how to run your account as economically as possible.

Here are a few ways bank accounts should be cheaper to run:

•use direct debits rather than standing orders (if this is relevant);

•it is cheaper to withdraw small amounts of cash using an automated machine rather than a cheque book;

•use a credit or charge card for business expenses, as this is paid with a single payment, instead of lots of little ones.

However, it needs careful consideration before a card is given to an employee. Additionally, in the case of companies, use of a credit or charge card is a fringe benefit for employees, which would include you as a director; check how it would affect your individual tax bill.

If your business is on a very small scale, you should consider whether it is possible to run it using a building society account, rather than a bank account, bearing in mind there are limitations, such as no overdraft facility or business advice.

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Some banks offer free banking for the first year if a small business opens an account. This can mean with some banks that there are not bank charges even if you have an overdraft.

Going into Overdraft

The time to ask for an overdraft is not the day you realize that you will not be able to cover the bills of suppliers who are really pressing you for payment. The bank manager simply will not like it. It is much better for you to present a well-argued case one or two months before you think you will need the facility. This means planning ahead, by using your forecasts or budgets as a proper control tool.

Other Ways of Raising Cash

Consider:

•using your pension scheme, if applicable, for a loan from a bank or from the insurance company;

•factoring or invoice discounting.

Your Customers

Selling is not the end of the story. Any old customer will not do. Making a sale to someone who does not pay their bill at all is worse than no sale at all. The ideal customer is one who pays their bill as soon as your product or service is handed over. Very few businesses are lucky enough to have that type of client. But there are steps you can take to try to ensure that you do get the cash in. First, you can check them out before you hand over the goods to them. Second, you can do everything you can to make them pay up as quickly as possible.

Giving credit to customers, that is, allowing them to become debtors and pay some time after they have received your service or product, costs you money. For example, if a bank charges 18 per cent on an overdraft, an outstanding bill of £1,000 costs you £180 if it is still unpaid after one year. Or, if it is unpaid after three

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months, the cost to you is £45. the more efficient you are at reducing the amount of time before you receive your payments, the lower the costs.

Investigating Potential Customers (Credit Control)

Few businesses can confine their sales to completely 'safe' customers; there is usually an element of risk-taking with sales, which is needed to meet your business objectives. But the riskiness or otherwise of customers to be assessed, so that the risk is known and calculated. Assessment needs information, control and monitoring.

The extent of the investigation must also depend on the amount of the projected sale relative to your total sales. If it is a fairly small sale, the investigation alone may cost as much as the profit from the sale; you should establish a policy of rejecting or accepting such risks as a matter of course. But if the sale would be a significant order for you, further information is needed.

Consider the following steps:

•ask the prospective customer for a bank reference (but this will be based only on the bank's experience, so may indicate relatively little, but help in building a general picture);

•ask for a couple of trade references. Put a specific question such as “Up to what level of trade credit is the customer considered a good risk?”

•ask a credit reporting agency to report;

•ask the customer for the latest report and accounts or a balance sheet and profit and loss account. Ask your accountant to analyse them for you;

•if you have not already done so, visit the business with a view to meeting the principals or directors. Put any questions which remain unanswered and use this visit to fill in the general picture.

Using the information you have garnered from all these sources, assess how risky you think this customer is and establish a credit limit. A common system is to have five categories of risk, ranging from the top category, who would sell to only on cash

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terms. You would draw up certain credit limits to apply to each category, for example, allowed £1,000 on thirty days' credit. The actual amounts would depend on the size of debts relative to your sales and what is considered normal practice in that industry.

The Payment Termes you Offer (Credit Terms)

There is quite a variety of expressions applying to possible credit terms you could offer customers. Some of these include:

•cash with order (CWO);

•cash on deliver (COD);

•payment seven days after delivery;

•payment for goods supplied in one week by a certain day in the next week (weekly credit);

•payment for goods supplies in one month by a certain day in the next month (monthly credit);

•payment due thirty days after delivery (thirty days credit).

And so on. You have to choose the best terms you can. This means you extend credit for as short a time as possible, but obviously industry and competitive practice may to some extent put you in a strait-jacket.

There are a couple of ways you can try to encourage early payment of your bills. First, you can offer a cash discount for early payment, for example, payment within seven days of the invoice means the customer can claim a discount of 1 per cent. The problem with this sort of discount is that customers tend to take it (and, if your debtor control is a little sloppy, are allowed the discount whenever they pay.) Introducing a cash discount of this type needs to be accompanied by close monitoring to make it clear to customers that they are entitled to the discount only if they meet the conditions offered.

Second, you can make a charge for late payment. This has to be established in advance, for example, printed on the invoice. This idea does not always work, as it may imply to the customers that you do not mind if they pay late as long as they pay the extra charge levied. Hence a late payment charge may have the opposite

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effect to that desired; in other words, your bill is put to the back of the queue by the debtor, instead of leaping to the head. The only way out of this dilemma is to make the charge a fairly penal one, which might simply have the effect of deterring people from buying from you again. All in all, a policy of charging for late payments needs careful consideration and implementation.

Sending out Invoises

Be very prompt in sending out invoices. This is crucial to any policy of keeping tight credit control. Failure to do this will give the impression to debtors that you do not mind how long you wait for your money, and as we have seen, giving credit costs you money. No matter how busy you are keeping up with the work you do, sending out invoices, as soon as goods are delivered or services supplied, must take precedence.

The Records you Need for Control

There is more detail on how to set up the records you need, but the records need to provide you with the following information:

•say how much you are owed in total at any time;

•say how long you have been owed the money and by whom; this information is known as an aged analysis of debts;

•a record of sales and payments including the date made for each customer. This allows you to build up your own picture of the creditworthiness of individual debtors.

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