Managing Cash Flow & Accessing Finance

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1 Managing Cash Flow & Accessing Finance A Presentation by Clive Lewis, Head of Enterprise, Institute of Chartered Accountants in England & Wales (ICAEW)

2 Managing Cash Flow & Accessing Finance Presentation will cover: Managing your cash flow (slides 3 to 15) Getting appropriate finance for your business (slides 16 to 20) Getting the best from your bank (slides 21 to 24) Equity finance (slides 25 to 32) ICAEW Business Advice Service (slides 33 to 35)

3 Managing your cash flow A recent ICAEW survey revealed that 58% of micro businesses (less than 10 employees) and 35% of small and medium businesses (between 10 and 250 employees) had no debt. Many businesspeople must wonder how they can manage without borrowing. The answer is largely to do with good cash flow management.

4 Managing your cash flow Why is cashflow important? Isn t profitability more important? Well, there is an old maxim that no business ever collapsed because of lack of profitability but many have gone under because they lacked cash. Having cash allows a business to operate. So managing your cash resources and making sure you have enough to meet your needs, e.g. paying wages, buying supplies, meeting your personal financial requirements, is absolutely critical.

5 Managing your cash flow Starting up things soon get complicated Most businesses start with a small amount of cash from the proprietor. As they build up the business they leave sufficient funds in the business to cover the bills. Problems often start when they offer credit to customers or buy on credit. Or they take on an employee or a subcontractor who requires regular payment. Suddenly cashflow payment from customers and payment of supplies bought on credit - becomes an issue.

6 Managing your cash flow Get a grip do a regular cashflow forecast Business people need to establish some good habits. These start by making sure that the business accurately and regularly records details of trading transactions. This might be in a manual cashbook, on a computer using a spreadsheet or accounting software or using a simple paid / unpaid system for bills. Accounting records must allow the business to instantly find out what monies are owed from customers and the amounts unpaid to suppliers.

7 Managing your cash flow Preparing a cashflow forecast. You start with what bills are already owed or owing and known commitments such as the weekly or monthly expenses such as payroll, rent and leasing or hire purchase payments. You then build in predictions of receipts and payments from future sales and purchases over the forecast period. Cashflow forecasts should be a key tool in the management toolkit. They can highlight when the business might run low on cash and can be the basis for an action plan to remedy the situation before it happens. The rest of the presentation covers how to manage cash flow.

8 Managing your cash flow Receipts from Customers -vital steps to maximise receipts: For big value sales on credit, check the customers credit rating Agree the terms of payment with the customer before starting work Invoice as soon as the goods have reached the customer or service rendered Regularly progress payment with the customer starting after a few days If payment not received within the agreed period, progress payment higher up the customers management and consider how quickly you stop supplies or services If still unpaid, use solicitors letters and threaten court proceedings. If still not paid, consider whether to go to court, or are you throwing good money after bad?

9 Managing your cash flow Payments to Suppliers Agree payments terns with suppliers at the start of trading with them and always try to stick to them If you think it may not be possible to pay, contact the suppliers concerned and ask for more time. Provided you consistently pay on time, and requests to defer payment are rare, they will probably agree, to delay payment. Letting suppliers down will reflect in your credit rating which may come back to affect future supplies.

10 Managing your cash flow Working Capital Control Managing cashflow is in part a mirror image of the businesses investment in working capital. Generally, the higher the value of stock or work-in-progress, or monies owed by debtors the greater the difficulty in keeping control of cashflow. So maintaining a tight grip on stocks and debtors should free up cash for use elsewhere in the business.

11 Managing your cash flow Capital Expenditure Decisions to invest in capital equipment such as computers, equipment or motor cars should be scrutinised carefully. The acid test is can the money be more profitably used elsewhere? If the new asset is essential to the business, think about deferring payment by hire purchase, leasing, or hiring. Also consider the tax perspective. If you have been making losses, leasing or hiring might be preferably.

12 Managing your cash flow Cash is King 6 Tips for keeping on top of your cash 1. Know you current cash situation You should always know how much cash the business has to draw upon and what the position will be in three months time. 2. Regularly prepare and update cashflow forecasts You must know the effect of a lost sale or a bad debt on the cash position.

13 Managing your cash flow 6 Tips continued 3. Raise awareness about cash across the business Make it clear to colleagues how important knowing when customers are expected to pay and go through aged debtor schedules to make sure delinquent customers are chased up. Assign actions to staff and check they happen. 4. Think about your credit rating Paying suppliers when agreed can help improve you credit rating. Preparing monthly management accounts and sharing the information with your bank or the credit reference agencies might also help your credit score.

14 Managing your cash flow 6 Tips continued 5. Consider factoring or invoice discounting Factoring or invoice discounting can offer financing up to 90% of the value of an invoice. This is likely to be much more than on an overdraft. They require a more disciplined approach to credit checking and only business to business invoices can be covered. On-line auctions of sales invoices a growing alternative to the traditional factoring model 6. A bank loan or overdraft If you decide on a bank loan or overdraft, you may be asked for personal guarantees or asked for security. Be aware of the interest rate and charges to be paid as well as any covenants with the finance.

15 Managing your cash flow Summary A business should have a continuous focus on cash flow Good practices and clear lines of responsibility are important. Have clear credit agreements with customers and suppliers Have a system for following up late receipts from customers Knowing your current bank balance and how you expect it to change over next 3 months is vital Good financial management not only helps manage cash it will reassure finance providers A growing business can mean increased working capital. Arrange your finances to meet any increased need.

16 Getting the appropriate finance for your business Some key questions to consider before seeking finance: How much are you looking to raise? Are monies needed for short or long term needs? Are monies needed for growth or just to sustain your business? Are you prepared to offer security over an asset being personal or business? Are you prepared to bring in an outside investor and give up either a minority or majority stake?

17 Getting the appropriate finance for your business - banks Loan these are monies borrowed for a set period and set repayment dates with fixed or variable interest applied. Normally this type of finance is secured whereby the lender has a charge over asset(s). Often has conditions attaching to the loan which can trigger a demand for immediate repayment if they are not met. Overdraft the lender would provide a facility with a limit with an agreed interest rate and probably secured. The business can dip in and out of the facility up to the limit. Debt Factoring the sales debtor book is used to provide finance where the factoring company pays a percentage of the debtor book immediately to your business. The balance is paid once the debt is collected from the customer.

18 Getting the appropriate finance for your business- asset finance Outright Purchase or Deferred Payment if you are considering capital expenditure the asset(s) can either be purchased outright or paid for by instalments. There are various types of deferred payment - hire, hire purchase or leasing. Leasing can be either a finance lease or an operating lease. Each type of deferred payment is different but essentially you use the item of capital over a fixed period with regular payments. Mortgage a mortgage would normally be used to finance a property acquisition or to expand an existing business premises. The features of this funding are similar to the bank loan above with the mortgage usually being secured over the premises.

19 Getting the appropriate finance for your business - equity Self funding, friends and family this can be a useful option if you, with your own funds or those of friends and family, inject monies into your business. This can be by way of a loan or equity finance. It is important to understand the expectations of the family and friend on what they will receive back. To avoid arguments the key features of the arrangement must be put into a written agreement. Equity Finance if you obtain equity finance whether from say friends, family, business angels or other private investors, be prepared under this option to relinquish a share of your business. Small scale equity business angels bring (up to 2 million) finance to a business and they normally have experience in what makes a successful business. They could ask for a stake in your business and so it is important for you to consider how much you are prepared to give up. For finance over 2million you would need to talk with venture capitalists who would also look for a stake in your business.

20 Getting the appropriate finance for your business -online Newer online sources of finance: Debt funding Equity finance Working capital funding factoring & invoice discounting Seeking to match businesses looking for finance with individuals and businesses looking for diversification of risk and yield. Business models vary. Vital to understand how risk of proposition has been assessed. Cost proportionately higher than bank finance but risk often greater.

21 Getting the best from your bank Banks require more information to support applications Greater transparency leads to a better relationship Increased information should make it easier for banks to understand the business and its business plan Trends, changes and unplanned events should quickly become apparent Banks do not like surprises, try to balance bad and good news. Try to build a relationship and keep the bank informed.

22 Getting the best from your bank The business risk profile matters Banks use a variety of information to assess risk Behavioural scoring data (how accounts are run, facilities repaid and evidence of a drop in turnover) Credit reference data also referred to (paying suppliers later, court judgements, late filings at Cos House)

23 Getting the best from your bank When applying for credit the minimum requirements will be: Cash flow forecasts Aged debtors & creditors Management accounts Past financial reports (for 3 years) Profit and Loss forecasts A current Balance Sheet The detail in the above must support the amount of finance required and offer assurance that the business can repay the required facilities.

24 Getting the best from your bank If refused credit by a bank Get a written explanation for the decision Consider requesting an appeal 40% of appeals result in the decision being overturned frequently because business provides additional information. Bank should offer suggested alternative sources/types of finance Review banks feedback and consider applying to another bank or source of finance Ask is equity finance the way forward?

25 Equity Finance What is equity finance? Business angels are people who invest in high growth businesses either on their own or as part of a syndicate. Amounts raised will be 10,000 to 2M. Above 250,000 is usually through a syndicate. They often bring sector experience, contacts and management expertise Venture Capital (Private Equity) usually invest in above 2M and majority 10M plus.

26 Equity Finance - advantages The funding is committed to the business and its intended projects, with investors only realising their investment if the business has performed well through a flotation or a sale to other investors; The right angels or VCs can bring valuable resource to the business, by way of skills, experience and contacts, which they can use to assist in key decision making and the development of the business strategy; Investors have a direct vested interest in the success of the business and its strategy, as its growth and profitability will increase the value of the business and therefore their shareholding; and Investors are often prepared to provide follow-up funding as the business grows.

27 Equity Finance - disadvantages Raising equity finance is demanding, costly and time consuming, and the business may suffer as time is devoted to the deal; Potential investors will seek background information, scrutinising past results and forecasts, as well as the background of the management team; The business will be subject to varying degrees of influence over its management when making major strategic decisions; Management time will need to be invested in producing regular information for the investor to monitor; The owner s share in the business will be diluted, although because of the funding this may be a smaller percentage of a larger business. There can be legal and regulatory requirements to comply with when raising equity finance.

28 Equity Finance key questions Before seeking equity finance there are five questions to be considered: How much funding is required? For what is it required? What skills does the business need? What level of control needs to be retained? How long will the funds be needed for?

29 Equity Finance the Business Plan The Executive Summary A history of the company, Current and future products and/or services (including patents), Sales channels and delivery, How the products will be produced, How the business is operated and why it will be successful. A description of the market and sector and details of the marketing strategy and sales and distribution process, Full details of the management team, Financial information (including debt finance already in place) and A risk analysis. A proposed deal structure and potential returns and possible exit routes available will be closely scrutinized by potential investors.

30 Equity Finance organisations UK Business Angels Association (Formerly British Business Angels Association) British Private Equity & Venture Capital Association (BVCA) European Private Equity & Venture Capital Association (EVCA) evca.eu But businesses are just as likely to access business angel finance through business contacts and networking. Some business angels shun formal angel networks, preferring to find and vet their own investments. So angels do sometimes frequent local business events in search of potential investment opportunities.

31 Equity Finance due diligence Before investing in a business, equity investors will need to do due diligence. They will want to see a business plan, talk to the company s owners and visit the premises. Business angels generally settle for these whereas private equity, as more money is involved, will want accountants examining the books and contracts. If they proceed to invest an agreement will be required, outlining the rights of the investor in the event of underperformance, ability to make changes to the board, force an exit, etc. The percentage of the equity and the total sum to be invested are frequently seen as the key issues, but these other issues can be more important in the longer term.

32 Equity Finance how might an accountant help? Some professional firms will also have access to angel/private equity funding. An adviser can help with: Identifying the most appropriate sources of money Reviewing the business to identify and correct shortfalls or omissions that would impact on an investment decision Guidance on investor expectations and attitudes Preparation of the business plan and of the live presentation Mentoring through the funding and due diligence process They will make a charge for the work undertaken from an introduction fee for contact with an angel through to a success fee when finance is successfully raised.

33 ICAEW Business Advice Service (BAS) ICAEW firms displaying this logo:

34 ICAEW Business Advice Service BAS offers an initial consultation for businesses and start-ups with an ICAEW Chartered Accountant free of charge. An opportunity to discuss your business issues with a finance professional Discussion can cover business issues from record-keeping to managing cashflow

35 ICAEW Business Advice Service Go to: businessadviceservice.com Or To find BAS firms in your area.

36 A world leader of the accountancy and finance profession

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