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.
For more information about HF Financial Strategy, visit her website here or discover more of her guest blogs here.
Businesses are facing many challenges right now as they seek to recover from the shock of the pandemic, recover as best possible and plan for rocky tides that lie ahead. However, perhaps one of the most pressing challenges for businesses post-lockdown is about being lean but not mean.
What am I trying to say?
I am talking about balancing cashflow and the affordability to resource with customer and employee satisfaction.
Many business owners have had staff on furlough and are trying to get the timing right in bringing those staff back to work, whilst others are debating how much temporary resource they might need and when.
How does this impact Customer Satisfaction and Employee well-being?
Two examples I have seen this week…
I am currently going through a house purchase. Our buyer changed solicitor mid-way through the process as the firm had furloughed so many people, he couldn’t get the service he needed.
A client of ours was telling us about her husband who is being asked to carry the work of his department of three; to achieve this, he’s having to work twelve-hour days to keep up. The firm can then maximise their use of the furlough scheme.
In both of these examples, the firms are clearly trying their best to manage cash to preserve their future.
However, the outcome is not good for the business with the first example meaning the solicitor lost the work. In the second, the employee, who is already drained after everything we have all gone through in the last few months, due to worries about job security, is sadly expected to accept this increased workload.
What can you do to get it right?
Plan, plan, plan
Of course, no-one knows what the future holds right now and what the recovery will look like, but you still need to try. Doing so will help to estimate the optimum time at which you will need more resource. My advice; –
- Make your best estimate on what income will look like
- Assess the staffing capacity you need to service this well
- Understand the trigger points in advance on when you need to bring the additional resource into service customers and ensure employee well-being.
Consider Capacity requirements
If you have used the furlough scheme, take advantage of its flexible nature. Remember, you can bring people back on any working pattern now so assess what is right for you.
Consider: is it more efficient to bring people back for one day and get everything done for the week ahead or is a few hours per day more appropriate?
If you use any temporary or outsourced resources, talk to them. Make the situation collaborative and discuss what you need, try to be flexible to ensure they can perhaps top up with work from other sources.
Once you’ve looked at what income you might get, and the resource required then look at your cashflow.
- What does that mean for you as a business?
- Do you need additional funding to get you through the next few months?
The balancing act
It is very hard being a business owner right now.
We are all trying to manage cashflow as best we can in uncertain times. A little bit of planning will ensure you can look after your employees, your client and your bank balance.
Be lean but don’t be mean.
About Helen Fleet
Helen Fleet of HF Financial Strategy works as a Finance Director and guides companies in delivering their financial and business objectives. These can include cashflow planning, pricing reviews and ways to improve profitability.
Follow Helen on LinkedIn here.
Remember your swimming badges at school… My least favourite was the one where – after you had already swum multiple lengths and dived in for a brick – you still had to swim a length in your pyjamas. I remember feeling tired, my swimming stroke wasn’t particularly strong and the weight of my wet PJs made the last bit pretty tough.
I think a lot of us feel like that now, having got through the last few months and fortunate to still have a business, we now must turn our attention to making it post-lockdown. We all feel a bit beaten up by it all. That’s why I’ve decided to share a few tips to get you energized and ready to tackle the post lockdown period.
We are all in a growth phase now as we rebound from this period, but this is different from when you started your business and grew from nothing. Now you can use everything you have learnt from the first time you did it and grow faster and more profitably.
My two key questions to consider;-
Who you want to sell to?
Is it the same people you sold to before or do you now better understand the profile of customer you want to work with? Think about the size of customer, the sector they are in, the location or even the number of decision makers you have to deal with.
What do you want to sell?
Do you know which of your products or services are the most profitable? Can you drop services you didn’t enjoy delivering, have you pivoted during lockdown and have great new offerings to get out there?
Do you know the maximum capacity you could deliver right now based on your existing cost base?
It’s important to understand this and compare it to what you are delivering and think you may be able to in the coming months.
If you realise you are currently over- capacity, then consider:
-Use of the flexible nature of the Job retention Scheme from 1 July. Understanding what staff you need now is key and knowing your trigger points in terms of sales vs capacity, so you bring people back at the right time.
-Unfortunately, you may need to make redundancies now to preserve the long-term future of your business. If based on realistic sales this is necessary, then do not take too long making this decision.
If you are under capacity because business is going better than anticipated, then think about whether you really need to employ or are you better surrounding yourself with a network of good quality freelancers. The second option puts less pressure on fixed cots during what may be a volatile time.
In such an uncertain time there is no getting away from the fact you need to forecast your cash flow.
Factors to consider:
Income – So hard to really know what will happen- will recovery be U or V shaped- who knows. Start with your best guess based on what you know now.
Costs – Ensure you build back in any costs which have been reduced during this period e.g. rent reductions, other premises related costs. You may also want to build in costs to help you re-build such as advertising or marketing.
Loan repayments– any loan repayment holidays may be about to expire so ensure you have considered these.
Tax deferrals – If you deferred Vat as part of the Vat deferral scheme ensure you rebuild in repaying this before 31 March 2021.
Sensitivity – Now you have done all this look at how sensitive you are to change – if sales were 10 or 20% lower than you have forecast what impact will that have on your cashflow
Financing – Now you know your position consider if you have the right financing in place.
So deep breath folks, we made it this far. You built your business before and all of this will help you to build faster and more profitably second time round.
Helen Fleet of HF Financial Strategy works as a finance director and guides companies to delivering their financial and business objectives which can include cashflow planning, pricing reviews and ways to improve profitability.
Helen kindly crafted this blog as part of our Return to Work Toolkit. You can download it for free here.