Funding and Debt Management

BBC Worldwide BBC WORKING WORKING FOR YOURSELF Finance Basics

Evan Davis

00:25EVAN DAVIS In this program, we're gonna show you a number of waysto improve your businesses' performance both by boosting your profitsand by making better use of the capital invested in your business. These ideas apply whether you have a very small business or a very large one. The basic techniques are the same.

00:45Improving gross margin Improving Operating costs Using fixed assets effectively Better use of working capital

EVAN DAVIS The key levers to increasing financial performance are improving gross margin, widening the gap between your selling price and your production costs, improving operating costs in particular,controlling your overheads, using fixed assets effectively, improving productivity and making better use of working capital, controlling thestock or inventory levels and datas. And we'll see how these levers work in a number of different examples and find they can often be combined to increase the impact. But first of all, you can only improve your financial performance if you have the right information available. Jayne Murraydiscovered this with her restaurant.

01:30Jayne Murray

01:35JAYNE MURRAY Once you actually get into a business and you're running it, it's very difficult to sit back from it and to think about how the business is going and think about what's actually happening because you don't get an objective view anymore. You're so busy with the day-to-day running of everything. During the first day of months, the takingswe're going up every week and I was thinking this was great and I was doing ever so well. But what I didn't realize was the expenditures are also going up, ah, at an incredible rate faster than the takings were going up unfortunately and I had no way of monitoring that. I didn't have financial control which I needed.

02:25[music]

02:30JAYNE MURRAY After the first day of months, I can got into trouble, ah,with the bank. I had a phone call from the bank manager. I was told that my bank account was frozen and it was the worst Christmas I've ever had.

02:45EVAN DAVIS The first thing Jayne had to do was to prepare profits and loss accounts for the first eight months to find out the difference between her revenue and expenditure. They showed that she was making large losses. The figures meant that she have to take some tough decisions to reduce costs. So she reduced food wastage andnegotiated better deal with fuel suppliers. But she's still had to take harsher action.

03:10JAYNE MURRAY I had to cut the wages by 20% which meant working much longer, I was myself including being in the dish wash at the end of the day. I also had to think of a way of expanding the business but using no capital whatsoever because I just didn't have any money.

03:35[sil.]

03:40JAYNE MURRAY I had to, to move the buffets as best I could to make some money. Ah, I picked several names out of the yellow pages directory and I used to ring up, ah, on average about 10 a week and most of them used to say that they weren't interested in catering because they already had caterers. Eventually, I used to get quite a few bookings because I was assisted. It's about 15% of my business at the moment which is a difference between, ah, losing money unlike in a profit and without that business, I would have gone under.

04:35JAYNE MURRAY Hello, where would you put the buffet?

Just in the usual place, please.

JAYNE MURRAY All right, thank you.

JAYNE MURRAY It's stabilized the business quite a bit. It's meant that the business has become, ah, slightly profitable instead of making huge losses.

04:50EVAN DAVIS Now, Jayne knows exactly where she is. Ah, she regularly produces monthly profits and loss accounts. Jayne brought her restaurant into profitability by controlling costs more effectively. She reduced wages, food wastage, and she was cannier with her purchasing. And by expanding into outside catering, she improved the use of her fix assets aye, ah, her kitchen by making more sales without needing further investment. But it was only by using her profits and loss account to identify what was going wrong that she was able to make the right decisions.

05:30TOM HARRISON My name is Tom Harrison calling from a company called Infoconomy. Uhm, ah, are you familiar with Infoconomy or with the Infoconomist, one of our magazines that we published?

05:40EVAN DAVIS If you are just starting new business, then forecasting your profits and loss account is crucial. It's a vital element of the business plan. You will need to produce a business plan in order to raise money. Once the business is up and running, you should check how you'redoing against this plan. Infoconomy is a new company start-up. It publishes magazines and it runs a website providing market and financialinformation for the new technology sector. Writing the business plan was not only essential for raising the initial capital but it also help them monitor their progress.

06:20Andy Lawrence Joint Chief Executive, Infoconomy Limited

ANDY LAWRENCE Well, the business plan serves a lot of different functions. I mean, the first thing is that it's your fund raising document. It's your advert for your ideas, uhm, it's your vision, uhm, and it's, it's really the crucial document to attract money and without money, you go nowhere.

06:35Tim Langford Joint Chief Executive, Infoconomy Limited

TIM LANGFORD It gave a, uhm, potential outside investors something really solid and substantial to read and understand. Uhm, and it proved that we were serious business that knew what they wanted and knew what they wa-- knew how to do it.

06:55ANDY LAWRENCE It's uhm, blueprint really for everything you do in the first year and, uhm, I think in our particular case, we spent a lot of time nailing down on the detail. So I would say, you just could not start a successful business without a, a failure where it works out business plan.

07:10EVAN DAVIS The business plan provides details of how the business expects to grow its market and perhaps most importantly, a detailed month by month profit and loss budget and also a forecast of cash flow for the first three years. But how realistic is that figures?

07:30TIM LANGFORD We knew the, the vast amount of our revenue would come from advertising. We knew from our experience with other custom-- with, with, with customers and selling advertising in the past that we knew the kind of levels that they would pay uhm, and that's how we based our forecasts. Uhm, what we didn't anticipate was that so many of them would pay those levels and that's a very good precision to be in. Uhm, with regarding the web and revenues in particular from that, we have no real idea. We made a stab at it and it's-- and we based it all around the growth in number of visitors on the site, uhm, and we've been fortunate that, that actually turned out that we were quite close to what we thought that would be the outcome. But we-- honestly, and we said it's our investors we don't really know. The important thing in the plan was that we were as conservative as possible with our revenueforecasts and, uhm, as worst case scenario as possible with our cost plans. And, and in that ca-- in that case we wouldn't be-- if we are over achieved on the revenues, we wouldn't disappoint, uhm, and we we'repretty sure that this was the most we could possibly expend so we would be very unlikely to over, over expend uhm, in the, in the initial period.

08:45ANDY LAWRENCE It is absolutely essential that when you go in front of an investor and they flick through, they never ever read it from cover to cover but they flick through and they go, "Tell me what that figure means." It is absolutely essential that you have the confidence to build to answer, so we went through a process where we were confident in every figure.

09:05TIM LANGFORD There were lot of competitors for the magazine ad than we started which will-- which just didn't rate and one by one they willdisappear so...

09:15It's a very stark contrast between that information age isn't alwa-- which is now we can confidently go and say, "That's looking like the leader in its sector," and we can't say that its about Infoconomist but that's clearly to go. So we have to work...

09:25EVAN DAVIS The business plan has provided Infoconomy with the basis to monitor its performance in the early months of trading so they can learn from their successes and work on their weaknesses.

09:35TIM LANGFORD We often refer back to it and for goodness. What if we say that or, or what have we done about that? And, and, and, and it's,it's, it's always a good thing to come and, and really to refocus on areas you might be missing out or if not worked on enough, etcetera, etcetera.

09:50SANDRÉ Hi, good afternoon Paul(ph), it's Sandré(ph), ah, from, fromInfoconomy. Hi, Amara(ph), how are you? Yeah, I'm still waiting for the check that you're suppose to send last Friday Paul, yeah.

10:00TIM LANGFORD The most important thing in, in, in anyone should tell you when you setting up a business is you have to manage your cash.

10:10EVAN DAVIS Now, keeping a beady eye on that thing called cash flow, turns out to be vital for any business, get the cash flow wrong and even a profitable business can fail. And that's because profits and cash are not the same thing and it's worth understanding why. Suppose I buy an egg for 10p and I sell it for 20p. Well, I'm making a 10p profit on every egg that I sell. But suppose I buy two eggs and I sell one. Have I made a profit? Yes. I've made 10p on the egg that I've sold. But have I got any cash? No. I've spent 20p on buying the eggs and I've made 20p on selling the egg, 10p profit but no cash. The 10p profit is tied up in this egg that I've still got. There goes my profit. A business needs profit to grow and develop but it needs cash to pay for its supplies. So what exactly do we mean by cash flow? Well, all businesses pay out cash on things like rent, wages, materials, and they receive cash for what they sell. But those two amounts are not necessarily exactly the same. The difference is cash flow. So business maybe making a profit but has it got cash to pay for its supplies? If it hasn't, then it's in trouble. And in fact, running out of cash is the number one reason why businesses fail. Running out of cash is the problem of California Cake and Cookie faced.They make cake, brownies, and cookies made to original hometown recipes but then one of their major customers went under leaving a crippling bag debt and not enough cash. The company needed money.

11:50Tom Lambie Executive Chairman, California Cake & Cookie

TOM LAMBIE We got two things, one is that, do we got some new investment into the company which at the stroke brought additional money and which helps stabilize. And secondly, we took quite significance steps within the company to ensure that the control of cash coming in and coming out with even take, to, ah, I have been before. One thing the company had lend because of the problems was the ability to control cash very tightly so the, the basic attitude was there already. It was just a question of taking that attitude and building on it. On a regular basis, weekly and monthly you can influence your cash flow by doing a variety of things. One is to ensure of that the procurement of raw materials and services is very strictly controlled and that no purchases made unless it's absolutely necessary. So, if you don't constantly monitor where your money is coming from and where your money is going, then you'll going to have cash flow problems. You can also make contact with your key costumers, customers whom you know will be prepared to pay you in a regular basis and who are receptive to your request perhaps for every payment. You can by deduction, ah,avoid those kinds of customers with whom you had previous problems or make sure that if you are going to continue trading with them, you do it on a week by week cash upfront basis. So in fact, you are getting the cash and...

13:25We started of the month that are not in balance over a 165K. Interest received was 2,000 against 1,000 forecast. This was primarily due to our major customer not paying within the end of the month -

13:40TOM LAMBIE Uh-hmm.

- and were a few days late in paying. And, yeah...

TOM LAMBIE Be sure the importance of making sure -

13:45Yes.

TOM LAMBIE - all the customers pay on time...

TOM LAMBIE The cash flow to me is a fundamentally important because I will monitor the sales, I will monitor the customer, I will monitor the product, and from that I can get a good indication early on after how much cash profit we will generate. And with the financial controller, he and I can then see with a fair degree of accuracy, what the effect is going to be as far as covering all the other costs or concern. Then we can then predict whether it will be going to be a profitable or non-profitable situation. So if the sales department have sold a lot at low margin, we still could be in a situation of not making money. Whereas, if it sold a little quantity at a very high gross margin, we could be making profa-- ah, profit. It depends very much on this mix.

14:35EVAN DAVIS Tom Lambie used the profits and loss account and the cash flow to understand and plan the sales mix. His aim is to improve the gross margin on his products. Debbie Peterson, head of the sales force and she's hoping to agree a price rise with one of her customers.

14:55The, the introduction of your request for the, the price increase now is that we would have to observe that given the we're not into, uhm, issue another process now until January next year.

15:05DEBBIE PETERSON We haven't put the price up on anything except this one product where we have a very little margin. And that one, even the 2.7% we're putting over to you isn't enough to, to make it a uhm, a particularly good product for us. And if we can't do anything with it then we have to seriously look at whether is it the product that we want to continue doing.

15:30TOM LAMBIE The sales mix is very important in the influence of how the cash flow because you are not-- unless your very fortunate. You're not selling to 1,000 with one product. You're selling with variety of products to a variety of people at different places and the profit or the margin you make in this products will differ. And therefore, that anyone came if your sales mix changes it is automatic that the amount of cash that you spend that come in will change as well.