Clarity Beats Uncertainty
Remember that round: ‘What Happens Next’ from a Question of Sport?
At the moment, we are all asking that question constantly…
- What changes will there be to lockdown restrictions?
- Will any uptick in revenue stall?
- Will people be able to pay me for work done?
So, to combat all this uncertainty we can at least ensure that we have clarity of where we need to be and the impact of missing or achieving those targets. This way, we can act fast to address any issues – being proactive with cost-cutting, additional funding or growth planning, as required.
When meeting regularly with my clients we look at certain key targets to help them know where they need to be. Let’s take a little look at what these are.
Understanding breakeven will highlight a good from a bad month.
If you are making profits it will trigger a need to ring fence monies for future corporation tax. If you are making losses, then you need to understand the impact on retained earnings (i.e. the profits you have built up over the years).
This is particularly relevant if you take part of your income as dividends. Dividends can only be taken where there are sufficient retained earnings and repeated losses will erode this and so you will need to monitor your position.
Knowing your breakeven will ensure you don’t get to year end without either sufficient provision for corporation tax or having taken illegal dividends.
2. Cashflow Neutral
The income you require to be cash neutral each month may well be higher than your breakeven. This might be due to loan repayments or if you take some of your income through dividends.
Knowing this straight away will help you understand if your bank balance will start reducing and immediately by how much. Clients may not pay straight away but already you have the insight as to how much your cashflow will be impacted even after all invoices are paid.
We also look at the capacity that the current workforce can deliver in terms of income.
This helps in two ways.
Too much resource:
Firstly, we can understand if we have too much resource for current levels of income and assess how long we can support this.
Not enough resource:
Secondly, and on a more positive note, we can see as the business grows when we will need more resource. We can assess whether to employ or outsource and we can do this in advance of hitting capacity thus ensuring service levels are maintained.
4. Bank Balance
Many clients start off thinking just monitoring their bank balance is sufficient.
I can see why they think this way, but this just tells you the here and now and doesn’t help anticipate the impact of loss-making months now. With many businesses having recently taken out Bounce Back Loans their bank balances are currently quite healthy and can, in fact, be masking issues for later down the road.
So, in summary, to grasp back some of that certainty, ask yourself if you know these three figures. With our environment being so uncertain, you at least know where you need to be and the impact of falling short or exceeding it – because clarity beats uncertainty.
About Helen Fleet:
Helen Fleet of HF Financial Strategy works as a Finance Director and guides companies to deliver their financial and business objectives. This can include cashflow planning, pricing reviews and ways to improve profitability.