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Tax deductibles for sole traders

One question that many business owners ask is “which business expenses are tax deductibles for sole traders?” This is important to know so you can establish your taxable profit, and calculate the tax that is due to HMRC. As a business owner you don’t want to overpay on your tax bill, but on the flip side you definitely don’t want to underpay and risk a fine and potential HMRC investigation!

Picture of a tax return and expense records

Below is a list of the types of taxable business expenses you can claim for as a sole trader:

Office costs
  • Rent, business rates, utility bills, property insurance and security costs
  • Property repairs or maintenance (but not improvements)
  • Phone, mobile and broadband bills
  • Postage, printing and stationary
  • Computer software
Travel costs
  • Vehicle insurance, breakdown cover, servicing and repairs
  • Fuel and parking costs
  • Vehicle hire charges
  • Other travel costs (i.e. train, tax, bus and flights)
  • Hotel rooms and meals for overnight business trips
Clothing
  • Uniforms and protective clothing
Staff Costs
  • Salaries, bonuses, employer pension and national insurance contributions
  • Staff benefits
  • Recruitment fees
  • Sub-contractor fees
  • Staff training
Production costs
  • Stock
  • Raw materials
Financial costs
  • Business insurance
  • Accountants fees
  • Business legal fees (including solicitors)
  • Business bank charges (including interest and fees)
Marketing & advertising costs
  • Advertising, including business cards and brochures
  • Website costs
Other costs
  • Trade and professional body subscriptions/memberships
  • Warranty costs for equipment
  • Equipment rentals
  • Books and business related magazines
  • Bad debts already included in turnover

One key area that you can’t claim for:
  • Entertaining (either clients or suppliers)

Other considerations

Some important points to consider when calculating your tax deductibles for sole traders are:

Business vs. personal use

You can only claim for the % of spend used by the business. For example if you use your home phone for business and personal calls, you can only claim for the business call element.

Working from home

You can claim a proportion of house costs (i.e. council tax, utilities, rent), but have to use a reasonable method for apportioning costs. An example is an office taking up 10% of your home space. If you use the office 7 days a week you could claim 10% of relevant costs. If you use the office for 2 days a week, you could claim 3% of costs.

Simplified expenses

Sole traders are able to claim simplified expenses for a couple of areas, to make the claims easier to manage. Below is a list of the expenses you can claim for in a simplified way:

Mileage (records must be kept)
  • Motor vehicles (exc. motorbikes): 45p per mile for first 10,000 business miles, then 25p per additional business mile
  • Motorbikes: 24p per business mile
Home costs (must work at least 25 hours per month at home)
  • 25-50 business hours = £10 per month
  • 51-100 hours = £18 per month
  • 101+ hours = £26 per month

While simplified expenses may be easier, you may not save as much from a tax perspective. It’s best to check which method of expense calculation will save you the most money on your tax bill!

Capital allowances

If you are going to use an asset for over 2 years, you are able to claim using capital allowances. Some examples of capital expenditure include:

  • Property (including legal expenses for purchase) including improvements
  • Vehicles (i.e. cars, bicycles)
  • Equipment to produce goods (i.e. machinery)
  • Office furniture and furnishings (i.e. desks, curtains)
  • IT equipment (i.e. computers, printers, photocopiers, cameras, tablets and phones)
  • Goodwill on acquisitions
  • Research and development costs

Note: You can claim capital expenditure on items introduced to your business that were purchased before you started your business.

Still need further help?

If you are unsure whether to claim for an expense, you can contact HMRC on 0300 200 3310 or here. Make sure you have your National Insurance and Unique Taxpayer Reference ready!

Alternatively contact Paul at Enrich Accounting here, on 07403 407455 or at paul@enrichaccounting.co.uk for further advice.

Work management is on the rise!

One of the benefits of becoming a virtual FD is the opportunity to support local businesses in achieving their goals. I have recently spoken to owners of several local businesses to understand their views on both their individual industries and also how finance and accounting impacts them.

This blog has been created following an interview with Steph Lucas, founder of APARO. APARO is a consultancy business that specialises in work management strategies. They improve efficiency by developing strategies and systems that aligns the work of their client’s employees. APARO specialise in distributed and agile working practices, which is of course very apt at the moment with so many businesses working from home or requiring new ways of working following Coronavirus!

Steph Lucas, founder of APARO, work management strategists.

Steph’s background of working closely with CEO’s and high performing entrepreneurs enabled her to identify that a common pain point for most was how their workforces were not aligned, meaning they weren’t working together to enable the overall strategy and vision of the businesses. Steph realised there was an opportunity to promote work management as the answer to this. 

APARO has a human first approach, with people put at the forefront of any strategy, as research shows that people are pivotal to the success of change management and implementing change management. The more involved and aware staff are in change, the greater the likelihood of successful implementations.

Location isn’t a barrier for working with APARO. Although they are lucky enough to be located on the sunny south coast, they work with companies across the world!

Steph answered the following questions about the work management and accounting sector during our interview:

What inspires you?

Technology, as that’s what businesses are built on in a changing and adapting world. I can’t wait to see where technology moves in the next decade. My team also inspire me, with their approach to listening and learning and being really invested in APARO. Their passion has been fundamental to driving APARO’s growth and success.

What is your favourite memory since starting up APARO?

When APARO initially formed its focus was providing a business management service. In May 2019 we decided to pivot to our consultancy service. It was scary initially as we felt like a start up again, but the move gave us the opportunity to grow as a B2B (business to business) service, instead of providing a service predominantly to private individuals, because I could really see the future in remote working. This also gave us a larger pool to generate clients from, giving us a better chance of success. The results over the last year have shown that it was the right move to make.

How has Coronavirus impacted the business?

From a working perspective it hasn’t, as we were already set up for remote working. We literally shifted home working only with the team, and were able to carry on as normal. We have now got our office open, but it’s a hub and most of the team still mainly work from home.

What has happened though is it has rapidly changed the demand for what we do, as people try and find their way in this new way of working. Where Coronavirus has forced a change to remote working, I have been pleasantly surprised at how people have embraced this change. I thought there would potentially be more resistance, but workforces have been extremely receptive to improving the way they work.

Research has shown that flexibility is more important then remuneration for employees, and current events are backing this up.

What do you think will change in your industry over the next 5 years?

It’s hard to say as recent studies have shown that the current pandemic has accelerated remote working 5 years ahead of where it was originally thought we would be in 2020. This is really exciting for us in the work management arena, but it makes it harder to predict the future.

What do you know now that you wish you had when you started your business?

Firstly, that should make cash your priority, as it’s fundamental to the success of your business. Then it’s developing an acceptance and understanding that you can’t control everything that impacts your business. Owning your own business is a roller-coaster of highs and lows; you just have to do your best and then let go and enjoy the ride!

How do you measure business performance?

Our main financial metrics are revenue and profit however, we also monitor sales metrics (for example conversion rates) to understand our sales funnel and ROI (return on investment) on marketing and sales activities. 

We review each project on an individual basis and report on these. We have project debrief sessions where we look at the learning (there is always learning!) and see what worked well and if there are any efficiencies to be made that we can take onto the next project.

What do you find most challenging from a finance perspective?

Pricing and cash flow management, due to being a project-based business which impacts the timing of expenditure and receipts.

Are there any products/services you use that you would recommend to others?

We love technology and have multiple systems that we use, such as:

Xero – for our accounts, expenses and payroll

GoCardless – for direct debit collections

Calendly – for arranging meetings

Asana – this is our core project management system

Harvest – this is a time tracking software

Slack – for communication with our clients

Dropbox – to share documents securely

We also use Float for cash forecasting and scenario planning. I look at this daily and it really helps me keep focused.

How has your accountant helped you understand the financial side of your business?

I have monthly financial planning meetings with my accountant where we look through my plans and multiple scenarios. They support me when making some of the more key financial decisions, such as how much growth is required to support expanding my team, or working out how my plans could be achieved by making adjustments. It’s great to have someone to talk to as a business partner, who supports me to understand if decisions pan out as expected.

What finance changes would you like to see in future?

IR35 is potentially a big issue for our business in the future, where we will have to take staff on as employees instead of them being contractors, which increases the pressure on the business. Ideally, I would prefer the government changes the way it taxes the self-employed rather than implement this solution.

What is your view of the accountancy sector?

They are pivotal to the success of any business, but it is important for me that my accountant is not just looking at the technical / transactional elements of the business, but is privy to the full business vision so that they can really add value.

What do you do when you’re not working?

I have a young family, so I tend to spend time with my daughter. It’s her 4th birthday soon and she wants to go camping, and I have been told I need to leave my work phone at home! We are currently renovating our home which takes up a bit of time! I also LOVE wine, and am obsessed with learning about it – not just drinking it!

One of my passions is fitness, so I currently use the FIIT app to put on-demand workouts on our TV. You are able to monitor your heart rate, and there are also class leaderboards, which makes it a bit more competitive!

I would like to thank Steph for her time being interviewed, and if you or anyone you know requires any work management advice, you can contact:

APARO

connect@aparo.co.uk

020 3488 2774

https://www.aparo.co.uk/

If you are a local business who would like to be interviewed or have any questions around finances, please contact Paul at Enrich Accounting here, on 07403 407455 or at paul@enrichaccounting.co.uk

When procurement met accounting!

One of the reasons I decided to set up my own business was because I want to support multiple businesses. Therefore whilst setting up Enrich Accounting I have spoken to local businesses owners to understand their views on their individual industries and how the accounting sector impacts them.

This blog has been created following an interview with Andy Neilson, owner of Twisted Orange. Twisted Orange was founded 5 years ago by Andy’s wife to offer commercial and sales support in the food & drinks industry by providing a consultancy and training service. Afterwards in early 2018, Andy transitioned from the corporate world and joined the business to add his experience within the procurement and supply chain world to enable the business to offer a broader service.

Andy Neilson, owner of Twisted Orange, providing his views on the consultancy and accounting sectors
Andy Neilson, owner of Twisted Orange
Adding some zest to your business!

Andy describes Twisted Orange as “quirky”, with a people/client focus, trying to make the services fun! They are able to offer bespoke consultancy and training services to anybody in any industry. Andy enjoys the opportunity to build new client relationships and impart his extensive knowledge from 25 years’ experience onto others.

Moving from the corporate environment, Andy has been pleasantly surprised how the world has moved on. The flexibility of his clients is different to his memories of the corporate world. This has influenced how Andy’s working patterns and behaviours have adapted over the last couple of years.

A key factor in Andy joining Twisted Orange was to support his recovery from health concerns. His new role enabled him to start working in a different way, supporting his creation of a coping mechanism. Having control of his destiny is extremely powerful, giving Andy drive and determination to make Twisted Orange a continuing success.

I am very grateful to Andy being open about his mental health, as Andy describes himself as a shy character. His ability to conquer this when providing consultancy or training services is by treating his role like that of an actor. It’s something he can throw himself into, using a guise to take his services forwards.

When looking for a consultant, clients usually require some trust in the expertise of the business. This is particularly easy for Andy to evidence! Andy won a CIPS (Chartered Institute of Procurement & Supply) award in 2008 for the set-up of a procurement supply chain function. This is an award Andy is extremely proud of, having been recognised by his peers in the procurement sector. In this case they are the ideal group to understand and judge his achievements!

During my interview with Andy, he offered his opinions on both the consultancy and accounting sector by answering the following questions:

What inspires you?

My main inspiration is seeing someone whose utilised our services making a success of their idea. Our goal is to deliver added value to our clients, where they can benefit from our experience and training in our respective fields. We’re not money motivated; we take greater pride in the satisfaction of a job well done and getting to know our clients. I’ve also become a bit of a “sponge” learning from the different clients we have.

What is your favourite memory at Twisted Orange?

When I landed my first contract as a consultant, mainly because it wasn’t someone that I approached. My previous colleagues and friends were wonderful in recommending our services to businesses they worked with. As a result, one of these recommendations became my first client. Above all, this gave me the confidence that starting this new journey was the right move, and helped my mental health recovery.

How has Coronavirus impacted the business?

It has varied the way we deliver our services. Previously the majority of training provided was face-to-face, but this had to all be cancelled or postponed. However, this turned into an opportunity for us, as the ability to deliver training virtually has now become more acceptable. From a client perspective this is less intrusive. They can remain in the office, and the amount of time taken out of the business can be as little as 2/3 hours, instead of 1/2 days when factors such as travel are included.

Our delivery method has changed though, as we are unable to impart information on the same basis with online training. This is because we are unable to have the same levels of interaction with the trainees.

What do you think will change in your industry over the next 5 years?

I think the ways of working will change, with more virtual and strategic work. I also believe there will be an increased focus on sustainability and the importance of mental health, as these go up the social agenda significantly.

What do you know now that you wish you had when you started your business?

When setting up the business I wish we had known more about company structures, vat registration (and when to apply) and various financial information. When we set up the business we spent a lot of time on Google for research.

How do you measure business performance?

The main metrics we use are cash flow and turnover. As there are only 2 of us in the business, our main aim to be financially sustainable. Any client proposals we receive have services tailored for their requirements, enabling us to look at taking on projects based on merit.

What do you find most challenging from a finance perspective?

All of it! That’s why the accounting sector exists, as you need expertise in this area. I’m happy we outsource this work, and we are lucky that our accountant is patient with me, and helps us to ensure we understand how to update Quickbooks, our obligations to HMRC and our financial results.

Are there any products/services you use that you would recommend to others?

Quickbooks as it’s easy to use, and our accountant can access the records to complete the necessary work. We use it for basic requirements, but it fits well with our needs.

What finance changes would you like to see in future?

Vat and taxation are quite convoluted, I would prefer more basic systems. If we started a business again I would like a set of top 10 tips from HMRC, of what to look out from a tax perspective for sole traders and small companies. It would also be good if there was just one register of local accredited accountants.

What is your view of the accounting sector?

They play an important role in your business as they add significant value, knowledge and expertise to your business. They aren’t there to just provide year end accounts, so use them to get advice. When looking for an accountant speak to some of their other clients for referrals, as similar to the procurement and HR functions, you need to build up trust.

What do you do when you’re not working?

I regularly play golf, with a handicap currently of 12. My aim is to reduce this back to 9, which is where it was 2 years ago. Going to concerts is also something I enjoy (although not recently!), with my favourite bands being Faithless and Linkin Park. I was lucky enough to see Linkin Park’s last ever concert in Birmingham.

I would like to thank Andy for his time being interviewed, and if you or anyone you know requires any consultancy or training in the marketing, procurement, sales or distribution fields, you know who to contact:

Twisted Orange

andy@twisted-orange.co.uk

07875 166492

https://www.twisted-orange.co.uk/

If you or someone you know requires any mental health support, you can contact the following for help and guidance:

Mind 0300 123 3393            www.mind.org.uk

Rethink Mental Illness   0300 500 0927            www.rethink.org

Samaritans                116 123                  www.samaritans.org.uk

Sane                      0300 304 7000            www.sane.org.uk/support

If you are a local business who would like to be interviewed or have any questions around finances or the accounting sector, please contact Paul here, or at Enrich Accounting on 07403 407455 or at paul@enrichaccounting.co.uk

How finance impacts businesses

As part of my market research when setting up Enrich Accounting I have spoken to several owners of local businesses. This was to understand their views on both their individual industries and also how finance impacts businesses.

One of the main reasons why I decided to set up my own business was because I wanted to help more than one business, and preferably as many as possible. Corporate businesses employ multiple staff in finance teams to support them. However smaller businesses require the same level of advice and support to help make the right financial decisions. Most importantly these businesses are vital to keeping the economy going, and helping them survive and thrive in these difficult times is my goal. Offering a part time service gives smaller businesses access to this advice at an affordable cost.

All aboard!

This blog has been created following an interview with Steve Davis, owner of Harbour Upholstery, which is based in Dorset. 90% of their business comes from the marine sector, predominantly on yachts. However their slogan “Marine and more” gives an insight into the variety of business they obtain, including refreshing patio furniture covers, motorbike seats and camper vans.

Steve Davis of Harbour Upholstery

Steve entered the industry 17 years ago through a slice of luck! His current employer was shutting their office down, and Steve was on the brink of redundancy with no future plans. He noticed a traineeship role being advertised, which was rare at that point in time. His current employer gave him a glowing reference, and out of 30 applicants, Steve was 1 of the 2 employed by Toomer and Hayter. Steve was fascinated by the role and constantly learning new skills, with a growing reputation in the sector.

After 12 years working in the industry for various companies, Steve decided to open Harbour Upholstery in 2005. With a young family Steve required more flexibility, and he had always held a desire to set up his own business, so this seemed the perfect opportunity, especially in a sector where good financial returns can be achieved. I don’t know many poor yacht owners, do you?!

Harbour Upholstery may be a small company, but it has a big reputation in the marine sector. Steve and his team provide a personal approach from start to finish, and have retained a large contract for several years from a local well known yacht builder.

I was very fortunate that Steve was prepared to speak to me for this interview. His career has led him to work for some famous individuals, with a particular highlight working on one of the boats owned by the King of Jordan! I had to use my “Lord” status to get him to answer the following questions:

What inspires you?

I want to provide the best service possible to the customers of Harbour Upholstery. A happy customer ultimately leads to future referrals and is therefore good for business. Most personal customers place one-off orders, so the referrals are vital for the sustainability of the business.

The business being successful enables me to provide for my family, enabling us to enjoy quality time together, either locally, or on day trips and holidays further afield.

What is your favourite memory since opening Harbour Upholstery?

The memory that stands out for me is when I received my first referral. I started the business with a couple of clients, but the feeling of pride when a new customer contacted me after all the effort put into starting the business was a particular highlight and made it all feel worthwhile!

How has Coronavirus impacted the business?

During lockdown with all marinas shut and no customers allowed in the workshop, some appointments were cancelled. With lockdown now easing, business is picking up again.

Coronavirus has made quoting for work more time consuming for Harbour Upholstery. Where previously we were able to hold 10 minute personal face to face conversations either at the client’s home or the company workshop, more customers have been communicating by e-mail. The back and forth nature of the discussions have made them more time consuming.

What do you know now that you wish you had when you started your business?

During the early stages of setting up the business, I panicked if I had a quiet month, as I worried about the business surviving. Over time I have learnt to utilise any quiet time on being productive and concentrating on other areas such as design/development work, getting on top of paperwork or sorting out the workshop.

How do you measure business performance?

The main metrics I use are turnover and profits, monitoring the year on year improvements in these results.

What do you find most challenging from a finance perspective?

Tax! Knowing what expenditure is tax deductible and what is disallowed for tax purposes.

Are there any products/services you use that you would recommend to others?

Since starting the business I have used Invoice2Go. It’s easy to use, and creates a professional invoice appearance with the ability to add your company logo. You can create templates for future use, and I set everything up on my Iphone. You can also accept payment directly either via card, Paypal or Applepay.

What finance changes would you like to see in future?

I would like to either see the vat rate lowered, or the vat threshold increased. In a business where the majority of clients are personal, anything that can reduce the cost to them is beneficial.

What is your view of the accountancy sector?

They provide a vital service to small businesses if you find the right partner. They can give you advice to help your business become or maintain profitability, and also their advice can also deliver some significant tax savings!

What do you do when you’re not working?

I enjoy spending time with my family and walking the dogs. I’ve been lucky that my fiancée has taken control of the home schooling for our children, which we recently had a graduation party for to celebrate it all being over!

I would like to thank Steve for his time being interviewed, and if you or anyone you know requires any re-upholstery being completed, you know who to contact:

Harbour Upholstery

steve@harbourupholstery.co.uk

07814 664160

https://www.harbourupholstery.co.uk/

If you are a local business who would like to be interviewed or have any questions around how finance impacts businesses, please contact Paul at Enrich Accounting here, on 07403 407455 or at paul@enrichaccounting.co.uk

Effective Performance Reporting

What is your company vision? Does your current performance reporting show your achievements against this vision? Even if your sole aim is to generate as much profit as possible, just looking at your profit and loss will not give you all the insight into why you are achieving the results you are.

 How should I effectively measure performance?
  • You need metrics that cover a broad spectrum of the business, covering the key influences on the business. These should usually include people (i.e. your staff), customers, operations and financial performance.
  • The metrics should link to your vision and strategy (i.e. if you want to be the most popular company in your sector, you should be measuring either sales or customer satisfaction)
  • Consider the impacts of each metric on one another. For example a low customer satisfaction rating will suggest lower future sales and income unless urgent steps are taken to solve the issues faced by your customers.
What will my ideal report look like?
  • It should be no more than one to two pages
  • It should have a visual representation of how you are performing (i.e. traffic light system using green for good and red for improvement required)
Performance Reporting example
Make sure your performance reporting has a combination of visual and numerical pointers!
How should I use this report?
  • The report will highlight the key areas of the business you need to improve to achieve your vision. You should use this analysis to generate ideas on how you can improve your business.
  • When coming up with options, also consider how these could impact performance across your other key performance indicators. You don’t want to solve one issue but create another.

For you to truly achieve your vision, you need the right reporting to set you on the path to success!

If you would like a FREE financial health check for your business, or alternatively support with developing effective reporting, please contact Paul at Enrich Accounting here, on 07403 407455 or at paul@enrichaccounting.co.uk

Cash in quick!

Your business could be increasing sales dramatically, but it doesn’t mean much until the money is safely into your bank account. One of the main issues facing growing businesses is managing their cash flows whilst waiting for expected income to be received.

cash

Ideas on monitoring your cash flows:

  • Calculate your average debtors days using the formula below:

Debtors / Average Daily Sales                                    

If the figure is close to your agreed payment terms, well done!

If the figure is higher, you have some work to do!

  • Use/Create an aged debtors report to establish the time it takes each customer to settle their accounts – this helps identify any overdue and nearly due customers – these are your focus to contact!
  • Check customer credit ratings. For new customers, you can check their credit score with a company such as Experian or Dun & Bradstreet, to establish the level of credit limit you should allow your customer to have early on in your relationship.

Ways to improve your cash flow:

  • Make sure payment terms are clear in any communication and documentation received by your customers (including invoices). This gives them no reason for not knowing your payment terms.
  • Include “Pay Now” options on your invoices, to enable easy immediate payment to settle your invoices. Stripe and Sagepay are examples of companies that provide these options.
  • Communicate with you customers a week before payments are due. Are they ready to pay on time? If not, is there a particular reason for the delay in payment? Do you invoices need to have further information or be in a different format to speed up payment? You want your customer to know you are aware of the situation, and that late payment is unacceptable unless there are exceptional circumstances. If you don’t chase, you may not get paid!
  • Offer early payment discounts, i.e. 2% for payment within 10 days. If you can afford this, it may make the difference to your customers.
  • Offer payment plans to customers in difficulty. Flexibility for your customers help to develop long term relationships and support in return when you need it.
  • Set and use late payment penalties for customers who persistently pay late.
  • Set up retainer billing. Calculate the annual spend of your customer, and then invoice 12 equal instalments, which makes monitoring cash flow easier for yourself and your customer.

If you would like a FREE financial health check for your business, or alternatively support with cash flows, please contact Paul at Enrich Accounting here, on 07403 407455 or at paul@enrichaccounting.co.uk

Money, Money, Money! Improving your cash flow.

At different stages of your company’s life, you are likely to need some additional funds. This could be either to manage a short-term cash flow situation, or potentially to help you grow your business further.

Cash Flow

What cash flow options do I have to access funds?

If you need access to additional funds, below are some of the routes you can take:

Quick to access

  • Company Credit Card – can be used for emergencies, but make sure you can afford the required repayments in time
  • Bank overdrafts – usually provides a quick option for cash flow, and you only have to pay interest on the amount overdrawn (as well as a set-up fee). However the overdraft amount is repayable on demand.
  • Invoice factoring – this is where you sell your customer debt to a third party at a discounted rate (i.e. 97% of the total value) to receive funds in advance.

Options that take longer to access

  • Asset finance – this is where you borrow money against an owned asset (i.e. a car or machinery). If you are unable to meet repayments, the asset will be repossessed.
  • Peer to peer loans – sites such as Zopa or Funding Circle provide access to private lenders, which may provide easier access than the banks.
  • Small business grants – you may have to meet certain conditions, and contribute a similar amount to a project, but go to https://www.gov.uk/business-finance-support to see if any funding is available to you
  • Bank loans – a longer term loan, the bank is likely to ask for security against the loan though
  • Crowdfunding – sites such as Kickstarter or Crowdcube enable you to raise funds in exchange for either rewards or equity. There is less risk of involvement from any interested parties.
  • Investment from Angel Investors – Investors will normally provide funds in return for a stake in your business. You should consider whether you are prepared to give us this stake, and also if the investors expertise will enhance the areas required to drive business performance.

If you would like a FREE financial health check for your business, or alternatively support with raising business finance, please contact us or Paul directly at Enrich Accounting on 07403 407455 or at paul@enrichaccounting.co.uk

What is the sensitivity of your business?

Many businesses forecast financial performance using results from a variety of scenarios to monitor its sensitivity to varying factors. They will normally consider at least 3 scenarios: best case, expected and worst case. This type of scenario modelling can be used for forecasts and strategic business decisions, such as launching a new product.

Whilst completing this analysis, businesses also look at the key sensitivities that will impact the performance, to understand the metrics they need to monitor.

sensitivity
Make the right decision to ensure your business doesn’t fall down!

Sensitivity example!

Below is an example of the difference that can be made to profit based on just a 1% increase in performance for each sensitive metric:

Metric           Original Scenario     1% Increase

Prospects              1000                         1010                   

X Conversion Rate      10%                          10.1%                   

= Total Customers      100                          102

X Sales per customer  10                          10.1                       

X Average Price        £100                     £101                      

= Turnover             £100,000                   £104,050

X Margins              15%                          15.15%                 

= Profit              £15,000                     £15,764

Therefore just these small increases across all core drivers enabled the overall profit figure to increase by 5%!

Sensitivity

What are the benefits of scenario modelling?

  • It provides details of expected future returns of the business, enabling you to make decisions based on your expected cash flows
  • The results provide insight into the key drivers of business performance, allowing you to know which metrics to focus attention on
  • The results also enable you to plan some pro-active responses in case worst case scenarios occur in reality. This planning enables you to respond more efficiently and effectively than your competitors.

In these uncertain times, are you aware of how sensitive your business is to the market? Do you know what levers to pull to migitate the risk to reducing profits?

If you would like a FREE financial health check for your business, or alternatively support with business forecasts, scenario planning and sensitivity analysis, please contact us here or contact Paul directly at Enrich Accounting on 07403 407455 or at paul@enrichaccounting.co.uk

Cash (flow) is King!

In business the saying goes “Cash is King”. In these uncertain times, monitoring and understanding your current and expected cash flows is going to be even more important to ensure your business has the cash available to weather the storm! You need to have certainty not just about today, but your expected cash flows for the next few months, to ensure you can cover your expected costs.

Cash is king!

How do I monitor my cash flows?

  • First you must calculate your break-even sales point (where income generated covers the business costs incurred), as this is your minimum sales target! Sales above this level make the business sustainable in the long term.

The calculation for break-even sales is:

Average unit sales price – Average unit variable cost price (i.e. product materials) divided by

Total fixed costs (i.e. rent, insurance)

  • Now you need to consider your current cash position, and the timing of both receipts and payments out. For example, do you have to wait 14 days for payments by your customers? Is your rent bill quarterly, or your tax bill annually? Profiling the timing of payments will enable you to establish if you are likely to have any upcoming issues.

What tips can I use to improve my cash flow quickly?

  • Would selling stock held now at a cheaper price generate cash?
  • Ensure you send invoices out in a timely fashion
  • Shorten your payments terms for customers (i.e. from 28 to 21 days)
  • Offer early payment discounts (if it’s worth the lower income)
  • Cut any unnecessary costs out of your business (i.e. subscriptions not being used)
  • Speak to suppliers to see if you can extend your payment terms
  • Could you obtain a business loan/overdraft facility from your bank?

What is cash flow best practice?

Ideally you should build your businesses cash reserves up to a 3-6 month buffer. This enables you to navigate any market downturns like we are currently experiencing.

If you would like a FREE financial health check for your business, or alternatively support modelling your future cash flows, please contact us here, or contact Paul directly at Enrich Accounting on 07403 407455 or at paul@enrichaccounting.co.uk