Steering your business through a recession.
Managing your business is not an easy task at any time. In a recessionary environment, things get even trickier. Quite often, the best thing any business owner can do is get back to basics i.e. managing cash, managing costs and thinking about the future.
Tom Stewart from Booz & Company provides some sound advice. He suggests business’ owners and managers should concentrate on three things (1) liquidity, (2) operational costs and (3) planning for the future. Liquidity means having enough cash resources to pay for goods and services as required. Having enough liquid resources to survive the recession is essential. Focusing on operational costs is also very important. A lean, mean organisation has a better chance of survival. Finally, a view of the future helps business owners and managers identity how and where the business can grow as recession peters out.
It’s quite a difficult task to overcome the ‘paralysis’ of focusing on reducing costs now and not having a clear view of the future. According to Tom Stewart, overcoming this paralysis is a must, as if your business does not, another will and you will loose out. He suggests that business owners and managers while recognising the truth of the current economic climate, should also be optimistic and motivate staff to find ways to participate in decision making and planning for the future. One failure to avoid is cutting costs without a view of the future. This can result in an under-resourced business which will have difficulties as economic growth returns.
If you want to see the full video by Tom Stewart click here: http://bigthink.com/tomstewartmicrosoft/managing-and-thriving-in-a-down-market
Measuring monetary value in accounting
You would imagine that in the world of accounting, putting a monetary value on an asset is simple. All that is needed is a unit of measurement i.e. a Pound, Dollar or Euro. Measuring things in the natural sciences is easy as units of measurement have been defined and are totally static e.g. a mile, a metre or a kilogram. When is comes to measuring using money values though, things can get messy. A article in The Economist (July 18, 2009) provides a useful example, which is receiving a lot of attention as a result of the recent financial and economic downturn.
Financial institutions like banks and insurance firms have always had problems valuing items like loans, securities and other financial assets. The debate is hot divided between those who want to ‘mark-to-market’ value and those who want to use the historical cost of such assets. The latter is the easy solution as the value can be readily determined. Using mark-to-market is problematic in that first, a market value can be difficult to determine, and second can cause huge swings in the balance sheet figures. Large changes in the balance sheets are not looked on well by shareholders as comparisons with prior years become difficult. To make matters worse, some firms have used a mixture of both mark-to-market and historic cost to value assets making comparisons even more difficult. Finally, some commentators argue that mark-to-market values actually add to the woes of financial institutions as falling values drives shareholders away.
The International Accounting Standards Board (IASB) is trying to come up with a solution. The IASB sets accounting rules for Europe and most of Asia and is likely to have authority in the USA in the future. There task is not easy. They need to balance maintain comparability between accounts of financial institutions, but also prevent accounting for exacerbating any economic downturn. This may help investors place more trust in accounts in the future.
Child friendly business?
I really need to turn off the accounting brain – at least sometimes!
As an accountant, when confronted with business situations my brain turns to costs and revenues. It’s a typical accountant’s problem. In my other life as a parent, there are many hills to climb as you do your best to ensure your child gets the best possible upbringing. And boy can it cost you! Sorry, there’s the accountant again.
After a recent visit to Finland the accounting brain and the parenting brain came together – cost conscious Dad, a dangerous phenomenon for my kids. That’s not how the two came together actually. During our week as a family in Finland, it became apparent that the country is very child-friendly. Restaurants typically have a small play area for kids equipped with table and chairs, colouring books, soft toys, wheeled toys etc. Even mainline trains have play areas on board. While in a restaurant, I observed one such play are. It probably took up the space of one normal dining table. What a great relief for Mum and Dad, as the kids can play with other kids and we can eat in some peace. Now the accountant’s brain kicks in. How much would this play area cost? Maybe £100 for the toys and equipment I’m thinking. But a table could be there, so how much profit is lost each (busy) night by not having a table. I’m not even trying to guess. Nor am I a marketing expert, but I think happy long-term customers is very important. Would this balance against the lost revenue?
The point in this example is that sometimes business decisions can be made which are at a minimal cost (yes, accountants love this) and provide long-term benefits which cannot easily be expressed in monetary terms (danger zone for accountants). So, sometimes it is good for accountants to switch off their well-trained accounting sense and see the broader picture.
If you’re a Dad like me, take a look at this website for some ideas to keep them occupied!
Buying accounting software
You have just set up your first business venture. You don’t have enough money to pay an accountant to do all your bookkeeping. You do want to start off on the right foot by keeping good accounting records and decide to do the bookkeeping yourself using some accounting software. But which one do you choose? Here are some simple tips.
Consider how much you know about accounting. If you know a little, then you may be more comfortable with software that uses lots of jargon. If you know nothing, look for software that is aimed at non-accountants.
- What are your business needs? The more features you think you need in software, the greater the cost. It’s often best to start with a version of software which needs your needs now and for the next few years. But don’t overkill.
- What is your budget? The more popular accounting software (e.g. SAGE, TAS and Quickbooks ) have versions ranging in price from about £75 to £500 and even more for larger businesses. The best tip is to get a reliable and reputable piece of software which is within your budget.
- What help and after sales support is available. Some software vendors offer 30 days support from date of purchase. This can be really useful to help you get set up.
The advantages of using software over manual accounting records are numerous. A good fit between your business’ needs and the software, will realise greater advantages. If in doubt, ask an accountant for help.
A good business plan needs to address the finances too.
A good business plan is something like a map in that it should help you to navigate to where you want to go. It is a necessity not just for you but also for potential investors or banks that may finance your business. A good business plan needs many things, one of which is financial projections for income, expenditure, capital and cash requirements of the business.
These financial projections will take some time to prepare. It’s worth it though as you need them to complete a business plan and tout it to banks and potential investors. You should first try to plan how much you can sell and at what price. Then, work out how much it costs to buy or produce what you hope to sell and any other costs. These plans won’t be 100% accurate, but they should be based on reasonable assumptions. You should also try to plan your capital requirements i.e. how much you need to buy equipment and other assets for the business. Plans for capital are very useful when approaching banks if you need to borrow to buy the equipment.
Finally, you should also include a cash projection in your business plan. This involves predicting when cash comes in to the business and when cash needs to be paid to suppliers, employees etc. This can help identify any cash shortages which might arise and plans can be made to rectify this.
Do I need to register for taxes?
Once you have set up your business, you will have to register for the collection and payment of various taxes. Here’s a very quick guide on what you need to watch out for.
Income taxes
If your business operates as sole trader or partnership, you will have to register for income tax. This is typically in addition to income tax you pay as an employee under the PAYE system. If your business is a limited company, you will need to register for corporation tax, which is a tax on the profits of a company
Value added tax (VAT)
VAT is a tax on goods and services. When the turnover of a business exceeds a certain amount (currently £70,000 in the UK), it is legally required to register. VAT is charged on sales and VAT on purchases can be deducted. Any surplus is paid to the tax authorities on a regular basis.
Payroll taxes
If you have employees, you need to register as an employer and collect PAYE and National Insurance from employees and also pay an employer’s National Insurance contribution. You should register when you have your first employee.
A good thing to do is look at the website of your tax authority. For example, HM Revenue & Customs provide simple guidelines for new businesses – see http://www.hmrc.gov.uk/businesses/iwtregister-a-new-business.shtml . Follow these guidelines and get your business registered sooner rather than later.
Looking after the small expenses can be important
Small expenses are common in all businesses. This does not mean that recording them is no less important. The following, while involving a very small cash expense initially, is a great example of the need to keep good accounting records. I can’t name the business, but the facts are real.
In this case, a relatively large business made quarterly refund claims from a foreign VAT authority. The average refund was about £120,000 per quarter. Each time the claim was sent, the registered postage expense (approx. £1) was recorded in the petty cash spreadsheet, but receipts were not retained as back-up to the expenses. One VAT claim went missing in the post and this was not discovered for more than 12 months. The VAT authority in question had a 12 month time limit on claims. The business pleaded with the VAT authority. They agreed that the claim could be resubmitted on proof of postage of the original claim. And, I’m sure you can guess what happened next. Yes, as no proof of postage was retained to support the petty cash spreadsheet, the company could not resubmit the claim.
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