A while back I wrote a blog post about me experiences of recording and delivering a webinar on the subject of “Managing Business Money” for the Cherie Blair Foundation for Women.
This was what could best be described as an interesting experience, one involving trips to London, a live video screen the size of my lounge wall and a real-time link to the technical team in America.
Questions, questions
As part of the webinar participants could submit questions which i did my best to answer on the day.
However, there were a lot of questions and it was difficult to do them all justice in the time allowed, so I’ve written this blog post to answer a selection in more detail.
To simplify things I’ve groups the questions into categories and combined the most similar ones, so please forgive me if you can’t find the exact question that you asked.
Personal vs Business money
The questions
Is there any scenario where using my own money in relation to my business is OK? Or is it something that is never recommended?
Can I have two separate budgets for self and business?
My thoughts
One of the key themes of the webinar was the need to keep your business money separate from your personal money. there are two reason for this:
- Your business need it’s money to operate and grow. Only what’s left after that, the operating profit can be taken out of the business
- You have to pay personal taxes on money taken out of the business. In the UK this is typically 20%.
You need to make sure that you are not funding you business using money that you have paid your personal taxes. To do this you need to have separate personal and business bank accounts.
If you want to put your own savings into the business you need to include it in your accounts as “Owners Funds”. Similarly if you spend your own cash buying something for the business you need to submit the receipt as an expense.
Then, depending on how your accounts are set up you can then either draw the cash out without paying tax or have it credited to your Directors Loan Account.
Dealing with Suppliers
The questions
Lots of my sellers prefer it if I use cash instead of credit, how could I persuade them to let me start buying on credit instead?
What tips do you have regarding negotiating better terms with your suppliers and clients? And how soon is it acceptable to start doing this?
How can I manage late payments from clients? In Kenya Government procurement take 6 months before payments, as a start up how do I stay afloat?
My thoughts
A key problem for business is that of managing you cashflow. Put simply, this means making sure that you have enough money to pay your current bills while waiting for your customers to pay you.
You can help your cashflow by buying your stock and materials on credit and getting paid as quickly as possible.
The problem is that your suppliers, like you, also have to manage their cashflow and want to be paid as quickly as possible.
There is no easy answer. My advice is to consider your position as a customer. If you can buy what you need from someone else, or you buy a lot from a supplier, then you are in a strong position to negotiate credit terms. If the opposite is true then it will be more difficult.
Just remember though, it cost nothing to ask.
By contrast, when dealing with Governments you are not in a strong position. As the Government they decide what their terms are and there is little you can do to change it.
The question you need to answer is whether it is worth doing business with them at all. Perhaps you would be better off seeking new customers.
Budget Monitoring
The questions
How frequently would you recommend monitoring your budget? Weekly or monthly? Can this vary depending on the type of business you run?
In terms of record keeping, which would you say is the best method? I generally work with pen and paper but I know other entrepreneurs who very much value using a spreadsheet.
As the owner of the business is it ok to delegate the task of monitoring the budget to someone else or is it solely my responsibility?
Is it better to slightly over estimate or under estimate your future income? I tend to err on the side of caution in most financial matters, but worry that this could this be holding me back.
My thoughts
In my opinion budgets should be monitored at least weekly. After all, money is the lifeblood of your business and you need to know what’s happening to it.
For all but the very smallest businesses I recommend using a spreadsheet to track actual and expected income and expenditure.
Using a spreadsheet means that you easily make changes, such as new sales and contracts, and see the effect of those changes. This is difficult to do with hand written records.
In Europe most people use Microsoft Excel as their spreadsheet but this is quite expensive. Happily a number of free alternatives exist such as Libre Office which can happily read and write Excel compatible files.
This last point is important if you want to share your files with other organisations as they will expect Excel files.
You can delegate the task of running your budget if you wish, but personally I would want to keep and eye on it myself, even if I did this. After all, it’s your business and your money so surely you want to know what is happening to it.
What you cannot delegate, and this is a general point, is the responsibility. As the business owner you are responsible for ensuring that the business has enough money to operate and pay its bills and taxes.
Just remember, if there is a problem the authorities will come to you for answers, not your accountant or assistant.
In my own business I an cautious when making assumptions about future sales and income. I would much rather be happily surprised if thing turn out better than expected than be disappointed is an expected sale doesn’t happen.
Does this hold me back? Not really. I probably only underestimate by about 5% on margins and never ever write expected income into my accounts until I have a contract.
This means that I can always be certain of how much I am able to spend on running and growing the business.
As a result I can then spend time deciding where best to re-invest the business’ money rather than worrying about whether or not I will have enough to do what I want to do.
Profits
The question
I’m slightly unsure regarding which amount of money coming into my business gets taxed, is it only the gross profits or is it the gross income?
In the price which is the ideal combination in percentages of operating costs, product cost and profit?
For a social business wanting to give a 10% of profit to a social cause, do I calculate the percentage based on Net profit or Gross profit?
Can I keep 10% aside for raining day after personal savings, taxes and bills?
My Thoughts
You pay business taxes on your Nett Profit. This is because you are normally allowed to set the costs of running the business, sometimes referred to as the Cost of Sales, against your income for tax purposes.
Another easy one. Operating and product costs as low as possible, profits as high as possible. It really is that simple: minimising your costs maximising your profits.
The other way of looking at it is to express your profit as a percentage of your turnover. For me a profit margin of less than 10% is the bottom limit for all but the largest businesses.
For giving to a social cause the key point you need to think about the money cycle. Your Nett Profit is subject to taxes, therefore it is not all yours. Therefore the right figure to use is the Profit After Taxes.
Keeping money aside for a rainy day is always a good policy, and 10% seems fine. Hopefully you will quickly build up a nice fund for you to spend on yourself and your family at some stage.
Building a Budget
The questions
What is the difference in a budget between a financial forecast and a financial model?
If your business is a start-up is it still possible to plan your budget despite not knowing what your gross income is going to look like?
How do you modify the finance management for a business that is already in existence? From what you have shared, I need to make a lot of corrections to my finance management, how do I start for a business that is already in existence?
How do I forecast sales on training workshops?
My thoughts
For me a financial model is the way you think about your finances and your financial forecast is the information that you put into you model.
In my case I want to know at any given point in time my actual and forecast Sales, my actual and forecast Cost Of Sales and my likely tax liabilities. The structure of the spreadsheet I use to track this is my financial model.
When I populate the spreadsheet with actual date and my best estimates of future income I am creating my financial forecast
Creating realistic estimates is an important skill for business owners but sadly there is no magic answer. It’s too big a topic to discuss in detail here but these are two broad approaches:
Top down, where you look at the costs of running your business, then work out the value of goods and services that you need to sell in order to make a profit that is acceptable to you. This level of sales then becomes your Sales Target.
Bottom up, where you look at the potential market and make you best estimate of how much of that you can get.
When you know the value of the goods and services that you expect to sell you can work out how much you can afford to spend running your business while leaving yourself an acceptable profit.
One of the questions is on forecasting sales for training workshops. Any forecasting comes back to your market research.
As I noted in the webinar, one of the costs of running your business is the research you need to do to understand your potential market and customers.
In this case i would hope that the person asking the question has seen that there is a demand for training workshops, and can say how big that demand is likely to be.
The problem comes when the person simply decides to run training workshops because that is what the like doing or are good at doing.
If you already have a financial system in place and, having attended or viewed the webinar, want to make significant changes I suggest that you do it in stages.
Stage 1: create the new system, incorporating what you learned from the webinar
Stage 2: run both systems alongside each other for, say a couple of months
Stage 3: if all is well, stop using the old system.
If you are going to change systems it makes sense to do it at the end of your financial year so that your whole year’s accounts are done on one system.
Finally
I hope that you have enjoyed reading this post. If you have thoughts on what I have written so far please leave a comment. Also if you have an idea for another business topic let me know and I’ll be delighted to find a space for it.
Thanks again
Bob windmill
