Wednesday, February 25, 2009
By: Terry Cartwright
Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over. Urgent attention to the management of working capital can provide every business with the cash resources to exploit its potential
Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. The situation is recoverable by producing higher sales and reducing costs and expenses. A business that runs out of cash resources is dead in the water.
Debtors and sales income management
The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.
Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income.
Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Review this practise to obtain a greater proportion of payments faster to improve liquidity.
New customers should be subjected to a strict credit check. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.
The credit control function needs consideration from the first step of issuing customers with a sales invoice, producing customer statements of the debt owed and a set procedure of credit control letters and telephone follow ups that actually achieve the end result of getting the cash in. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly.
Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs.
Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not being cheap but does have the advantage of generating a regular stream of cash.
Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.
Creditors and expenditure management
The objective is to extend the time allowed for payment of expenses the business incurs.
Consider the frequency of all payments made to suppliers. Small business have alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.
Every opportunity should be considered to improve liquidity and that would include the frequency which employee salaries and wages are paid. A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity.
General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts. Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.
Stock levels are crucial to financial management of the creditor total. High stock levels use valuable working capital which is offset in part by the level of creditors. Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.
ETFs Funds And Shares What Are They And What Are Their Benefits
0 komentar Posted by Neutron at 1:08 AMBy: John McElborough
What can I invest in?
ETFs offer a wide range of opportunities for investment with varying levels of risk: as at mid-December there were 45 different markets/indices to invest in, ranging from corporate bonds to the Taiwanese market. Starting at the lower end of the risk spectrum there are several corporate bond ETFs, as well as some Gilt-based investments. Moving on to the medium risk level, you can choose from global funds to ones that are more specific to individual regions, such as the US or Asia. There's also the option of investing in individual indices: 'index trackers' are available for the UK's FTSE100 and 250 Indexes, the US S&P 500, or Europe's Euro first 100 & 80, spanning the top European companies. For those wanting a higher level of risk, there are also ETFs which will give you exposure to emerging markets, such as Turkey, Korea, Taiwan and Eastern Europe. ETFs don't offer the same wide variety as unit trusts, but for investing in the countries and sectors they do cover, their charging structure and trade ability make up for this. As such, they provide a good, low cost, easily-traded route into the market, with the flexibility to move up the risk ladder as your experience and capital grows.
Finally, if you've an appetite for an even spicier approach, the London Stock Exchange also enables you to invest in commodities, through ETCs (Exchange Traded Commodities). Although like ETFs they are traded in the same way as shares, and are eligible to be held in a PEP or ISA, they do work in a completely different way. Whereas ETFs actually buy the underlying investments, ETC managers don't buy and store tons of wheat and copper, stack-up barrels of oil, or herd livestock into pens. Rather, they buy options on these commodities. As a result, ETCs are classed as more 'complex' investments by the FSA and you'll need to complete a special 'risk notice' confirming you understand the additional risks of investing in them. So take a fresh look at ETFs - you might just find they offer you more than you thought!
Funds: take your pick of the best
Unit Trusts and Open Ended Investment Companies (OEICs) are investments that let you pool your money with lots of other 'retail' investors. This money is invested on your behalf by a wide range of specialist fund managers, investing in, for example, Government gilts and bonds, commercial property and equities. Investing in funds gives you access to a highly-diversified range of investments at a reasonable cost. You will also have easy access to asset classes and international markets that would otherwise be difficult and expensive to invest in and benefit from the Fund Manager's contacts, knowledge, experience and expertise. Funds come in many shapes and sizes from 'trackers' to specialist or 'themed' funds.
An index-tracking fund (often referred to as a 'passively managed fund') aims to match or 'track' the performance of a given market index, such as the FTSE All Share or the FTSE 100. They do this using computer programs to work out how much of each individual company they need to buy and sell to mimic the performance of the Index as a whole. But not all 'tracker funds' match the Index they are tracking that well - so be sure to check their record. An 'actively managed fund' on the other hand employs researchers to study and engage with companies in which they plan to invest, and to keep abreast of the prospects for companies in which they already invest. They'll compare their performance to a 'benchmark' index related to the investment objectives of their fund, with the expectation that the extra work they put into tracking down the 'best' investments will literally pay dividends through higher growth than that of their benchmark.
Choosing your funds
When you pick your funds, be sure to rate them against other funds that fish in the same waters. Don't expect a 'value' fund and a 'growth' fund to have similar track records. Only by comparing funds with their true peers will you make a good choice. Whilst past performance should not be seen as an indication of future performance, past performance does matter when comparing like with like. Chasing winners however, is as dangerous as day-trading. Not surprisingly, all five of the top-performing funds at the end of 1999 were technology sector funds. Sector funds have a place in many a portfolio, but for the majority of investors they belong at its edges, not at its heart. An individual fund will give you a wider spread of underlying investments: by investing across a number of funds you're better able to smooth out the ups and downs of the market overall. But that won't work if it turns out that your funds hold virtually the same investments. So have a look at each fund report to see their top holdings and make sure you've got a good spread overall.
Individual Company shares
When it comes to the individual shares part of the investment model, the lowest risk entry point has always been recognised as companies in the FTSE 100. However, you should always bear in mind that the Index evolves over a period of time, changing its overall make-up. Consider, for example, that over the last 6 years technology shares have fallen out of the Index, while mining companies, on the back of booming commodity prices, have dramatically increased their presence. Yet, because of the volatility and cyclical nature of the sector, individual mining groups can't be classed as low risk. Other 'big names' have gone from the Index due to take-over activity - companies like P&O, Abbey National & BAA - all of which have to be replaced.
Today, some 80% of the make-up of the overall value of the FTSE100 comes from just 5 sectors - Banking, Mining, Oil & Gas, Pharmaceuticals, and Telecoms (fixed and mobile). So, if you're looking to the Footsie to form the bedrock of your investment in individual shares, where should you start? Companies involved in essential, everyday products and services, such as the water and electricity utilities and broad-based retailers often provide a solid backbone to any share portfolio. You could argue, however, that the classic 'defensive' nature of utilities has recently been undermined by the number of take-overs within the sector. The share prices of the remaining companies have climbed to all-time highs, potentially increasing the level of risk.
There is without doubt an appetite for the assured cash flow that utilities provide, and it's fair to say that a growing number of analysts agree it's hard to justify the current prices. Despite this, get your timing right, buying at the right price, and these sectors should still provide a strong base on which to build your individual holdings. To extend your scope, whilst still staying within a lower risk profile, your next ports of call should be into the banks, pharmaceuticals, tobacco and beverages sectors.
Move on up to the intermediate, 'medium risk' level, and you've an increasing choice, including the remaining FTSE100 companies, dominated by the mining sector. The majority of shares in the FTSE250 would also fit into this 'medium risk' category. Still relatively large companies, it is these shares that have seen some of the biggest gains over the last 3 years, helping push the 250 Index to record levels in 2006. One noticeable difference between the FTSE250 compared to the FTSE100, is that companies here generally have less international exposure. When it comes to the consideration of risk, you can play this one of two ways: some argue that having the majority of profits coming from the UK provides for less risk, while others (including us) favour having fingers in as many regions as possible.
Finally, at the higher end of the risk scale you find smaller companies and AIM quoted shares. These tend to be more volatile and less liquid than their larger cousins, factors that generally lead to wider bid/offer spreads. The AIM market has seen considerable growth over the last 10 years, partly because companies don't have to comply with the same stringent requirements of the main market.
Often, private investors don't get a look-in as part of the flotation, having to wait until the shares start trading, so do pick your time and use stop-loss limits - that early flush of success isn't always carried through. One of the fastest growing sub-sectors within AIM is small mining and exploration groups, many of which are based abroad but have chosen to list in the UK. Because their prospects include a significant amount of 'hope' value, such companies will represent the very highest level of risk. Equally classified as higher-risk, though as a result of different factors, are shares in overseas companies.
Household names like Volvo, Coca Cola and Johnson & Johnson are big names and big companies. The additional risk they bring for investors comes from the fact that the majority of their earnings are from overseas. So you face the added risk of changes in exchange rates. Over recent months, for example, the fall in the US$ would have had a big impact on the sterling value of dividends from US shares And when the companies you invest in are smaller ones, it's often harder to find reliable research and analysis, harder to track and compare performance, and harder to follow the news that affects the share price. True, most big UK names also trade globally, but as 'home market' companies they are well-researched, much commented upon and regularly feature in the UK business finance pages. That's not to say you shouldn't venture outside these shores - far from it - but you need to do so with your eyes open. That's why we see overseas shares as being more appropriate for investors asthey move up the experience ladder and once they've built a balanced portfolio. And it's also why, in general, we'd advise investing in market trackers and funds before moving into individual overseas shares.
How to Successfully Navigate Your Business through an Economic Downturn
0 komentar Posted by Neutron at 1:07 AMBy: Terry H Hill
While economic downturns are admittedly difficult, and are formidable obstacles to small businesses that are trying to survive and grow, an economic downturn can open up opportunities. A well-managed company can realize the opportunity to gain market share by taking customers away from their competitors. Resourceful entrepreneurs capture the available opportunities, from an economic downturn, by developing alternate methods of doing business that were never implemented during a prior growth period.
The challenge of successfully navigating your business through an economic downturn lies in the realignment of your business with current economic realities. Specifically, you, as the business owner, need to renew a focus on your core clients/customers, reduce your operating expenses, conserve cash, and manage more proactively, rather than reactively, is paramount.
Here are best practices that will help you to successfully navigate your business through an economic downturn:
Goals:
The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation. The secondary goal is to grow the business even during this current economic downturn.
Goals:
The primary goal of any business owner is to survive the current economic downturn and to develop a leaner, more cost-effective and more efficient operation. The secondary goal is to grow the business even during this current economic downturn.
Objectives:
- Conserve cash.
- Protect assets.
- Reduce costs.
- Improve efficiencies.
- Grow customer base.
Required Action:
Do not panic. History shows that economic downturns do not last forever. Remain calm and act in a rational manner as you refocus your attention on resizing your company to the current economic conditions.
Focus on what YOU can control. Don't let the media's rhetoric concerning recessions and economic slowdown deter you from achieving business success. It's a trap! Why? Because the condition of the economy is beyond your control. Surviving economic downturns requires a focus on what you can control, i.e. your relevant business activities.
Communicate, communicate, and communicate! Beware of the pitfall of trying to do too much on your own. It is a difficult task indeed to survive and to grow your business solely with your own efforts. Solicit ideas and seek the help of other people (your employees, suppliers, lenders, customers, and advisors). Communicate honestly and consistently. Effective two-way communication is the key.
Negotiate, negotiate, and negotiate! The value of a strong negotiation skill set cannot be overstated. Negotiating better deals and contracts is an absolute must for realigning and resizing your company to the current economic conditions. The key to success is not only knowing how to develop a win-win approach in negotiations with all parties, but also keeping in mind the fact that you want a favorable outcome for yourself too.
Recommended Best Practice Activities:
The Nuts and Bolts. The following list of recommended best practice activities is critical for your business' survival and for its growth during an economic downturn. The actual financial health of your particular business, at the outset of the economic downturn, will dictate the priority and urgency of the implementation of the following best practice activities.
1. Diligently monitor your cash flow: Forecast your cash flow monthly to ensure that expenses and planned expenditures are in line with accounts receivable. Include cash flow statements into your monthly financial reporting. Project cash requirements three-to- six months in advance. The key is to know how to monitor, protect, control, and put cash to work.
2. Carefully convert your inventories: Convert excess, obsolete, and slow-moving inventory items into cash. Consider returning excess and slow-moving items back to the suppliers. Close-out or inventory reduction sales work well to resize your inventory. Also, consider narrowing your product offerings. Well-timed order placement helps to reduce excess inventory levels and occasional material shortages. The key is to reduce the amount of your inventory without losing sales.
3. Timely collection of your accounts receivable: This asset should be converted to cash as quickly as possible. Offer prompt payment discounts to encourage timely payments. Make changes in the terms of sale for slow paying customers (i.e. changing net 30 day terms to COD). Invoicing is an important part of your cash flow management. The first rule of invoicing is to do it as soon as possible after products are shipped and/or after services are delivered. Place an emphasis on reducing billing errors. Most customers delay payments because an invoice had errors, and therefore, will not pay until they receive a corrected copy. Email or fax your invoices to save on mailing time. Post the payments that you have received and make deposits more frequently. The key is to develop an efficient collection system that generates timely payments and one that gives you advance warning of problems.
4. Re-focus your attention on your existing clients/customers: Make customer satisfaction your priority. A regular review of your customers' buying history and frequency of purchases can reveal some interesting facts about your customers' buying habits. Consider signing long-term contracts with your core clients/customers which will add to your security. Offer a discount for upfront cash payments. The key is to do what it takes to keep your current customers loyal.
5. Re-negotiate with your suppliers, lenders, and landlord:
i) Suppliers: Always keep your negotiations on the level of need, saying that your company has reviewed its cost structure and has determined that it needs to lower supplier costs. . Tell the supplier that you value the relationship you have developed, but that you need to receive a cost reduction immediately. Ask your supplier for a lower material price, a longer payment cycle, and the elimination of finance charges. Also, see if you can buy material from them on a consignment basis. In return for their price concessions, be willing to agree to a long-term contract. Explore the idea of bartering as a form of payment.
ii) Lenders: Everything in business finance is negotiable and your relationship with a bank is no exception. The first step to successful renegotiations is to convince your lenders that you can ultimately pay off the renegotiated loan. You must point out to your lenders why it would be in their best interest to agree to a new arrangement. Showing them your business plan and your action plan that includes your cost-savings initiatives, along with "the how" and "the when" of the implementation of your plan is the best way to achieve this goal. Explain to them that you will need their cooperation to insure that you can survive, as well as, grow your business during the economic downturn. Negotiated items include: the rate of interest, the required security to cover the loan, and the beginning date for repayment. A beginning date for repayment could be immediate, within several months or as long as a year. The key is to realize that your lender will work with you, but that frequent and continual communications with them is critical.
iii) Landlord: Meet with your landlord. Explain your need to have them extend the term of your lease at a reduced cost. Make sure you have a clause in the lease agreement that entitles you to have the right to sublet any or all of the leased space.
6. Re-evaluate your staffing requirements: This is a very critical area. Salaries/wages are a major expense of doing business. Therefore, any reduction in the hours worked through work schedule changes, short-term layoffs or permanent layoffs has an immediate cost saving benefit. Most companies ramped up hiring new employees in the good times, only to find that they are currently overstaffed due to slow sales during the economic downturn. In terms of down-sizing your staff, be very careful not to reduce your staff to a level that forces you to skimp on customer service and quality. Consider the use of part-timers or the current trend of outsourcing certain functions to independent contractors.
7. Shop for better insurances rates: Get quotations from other insurance agents for comparable coverage to determine whether or not your present insurance carrier is competitive. Also, consider revising your coverage to reduce premium costs. The key is to have the right balance-to be adequately insured, but not under or over insured.
8. Re-evaluate your advertising: Contrary to the other cost-cutting initiatives, evaluate the possibility of increasing your advertising expenditures. This tactic realizes the advantage of the reduced "noise" and congestion (fewer advertisers) in the marketplace. The downturn period a great opportunity to increase brand awareness and create additional demand for your product/service offerings.
9. Seek the help of outside advisors: The use of an advisory board comprised of your CPA, attorney, and business consultant offers you objectivity and provides you with professional advice and guidance. Their collective experience in working with similar situations in past economic downturns is invaluable.
10. Review your other expenses: Target an across-the-board cost-cutting initiative of 10-15%. Attempt to eliminate unnecessary expenses. Tightening your belt in order to weather the downturn makes practical, financial sense.
Proactively managing your business through an economic downturn is an enormous challenge and is critical for your survival. However, through well-planned initiatives, an economic downturn can create tremendous opportunity for your company to gain greater market share. In order to take advantage of this growth opportunity, you must act quickly to implement the above best business practices to continue realigning and resizing your company to the current economic conditions.
Copyright © 2008 Terry H. Hill
