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Crunchers Accountants

Crunchers Accountants

Where do Profits arise?

Archive for September, 2012

Where do Profits arise?

If wages come from work and rent comes from land or property, where do profits come from?

This was one of the questions posed in this month’s seminar ‘The Numbers that Matter’ and is a great starting point for the theme of this month’s newsletter, business finance.

The standard answer is that profits come from sales less expenses, but we invite you to consider the following: profits come from risk.  Profits only arise in business and all business entails taking on a risk.  Starting one is like taking on a bet, the bet is that if you invest some time and money into a venture you will reap some profit.  You see an opportunity to sell at a price that allows you to make a profit and you take the opportunity.  Ultimately we can never know the future, anything could happen.  You could be wrong about the price that customers will pay or the cost of doing the work,   circumstances could intervene, literally anything could happen.

So business is a calculated risk.  As an aside, we notice at Crunchers, that the tendency in business is to play safe and follow the crowd.  To succeed we need to risk being different.  Nevertheless, however we set up we take on a risk.  If you think this through, this implies that something is at risk and clearly what is at risk is some time or money.  Given that most of us can only afford to invest time at the expense of some money, we can simplify and say what we risk is our money, our capital.

Whilst this might seem obvious, the truth of this tends to get lost once a business is established.  Having experienced the tremendous risk of starting out, we tend to get more risk averse and avoid it  in the future.  In short we revert to human nature.  However a business cannot stay static, the environment shifts around it and we need to be able to respond, shake up the business, rethink and continue in the process that got us into profit in the first place – namely spotting an opportunity and risking some capital to make a profit.  That is why investment capital is so important to business.  Investing is not a one-off thing, it needs to be part of the culture of a business.

It is also one reason why people use the expression ‘Cash is King’.  Without cash we aren’t in the position to spot an opportunity and exploit it, and if we aren’t, probably a competitor is right there, stepping into that space.

Given the current climate of lending from banks, we explore some other resources available at this time in the rest of the newsletter – Invoice Finance, Asset Finance and Crowd Funding.

Alternative Business Finance – Guest Blog, Mark Jefferson

Since Britain plunged into recession in 2008 businesses have found it harder to gain the funding they need via traditional lending. Long gone are the days of unsecured loans and overdrafts, where the bank manager was a respected figure and trusted advisor to the SME they are now the figureheads of an industry that is now widely reviled. The banking sector has been the subject of much media and political scrutiny and while the stories of “fat cat” investment bankers are certainly not helping the UK banks image most small business owners are more concerned about what is happening at their local branch.

Over the last four years business funding has dried up  businesses are having to scale back their plans for future growth or abandon them altogether as the banks are unwilling to lend. After countless attempts by two governments to kick-start lending when you talk to the average business owner, it is clear that funding is still almost impossible to find. With many business owners’ still believing that their banks are the only option for finance when they are unable to gain funding via the bank then they look no further meaning that vast numbers of SME’s in Britain are running without the funding they need and are unable to grow.

Thankfully, though, the bank overdraft or loan is no longer the only available means of funding for businesses in the UK. Now, firms of every size are free to take advantage of alternative finance options such as Invoice Finance and Asset Finance. Many of the other options available are more affordable, more flexible, and more business-friendly.

Invoice Finance allows a business to release funding against the value of its sales ledger and can be run on a disclosed basis or confidentially so customers are unaware of any funding facility. Invoice finance improves company’s cash flow by unlocking the money tied up in the existing debtor book and can be used to support growth, fund a new venture or acquisition and even raise capital to purchase stock or plant & machinery. In comparison to a traditional bank overdraft or loan Invoice Finance is more flexible and as the funding is based on the businesses sales then as the business grows the funding grows with it.

Another alternative form of lending is Asset Finance, releasing money from existing assets or funding the purchase of new or used assets such as plant, machinery, vehicle and property. There are several ways asset finance can be used; whether it is to generate funding against existing assets through refinancing or requirements when structuring repayments with the option of retaining ownership of the asset or to sell the asset and then lease it back.

Neither of these forms are finance are new and both are offered by various high street banks, however thousands of cash starved business across the UK are unaware that there might be some other options for them to inject some funding into their business.  These are just two forms of “alternative lending” with many different options available provided by both independent and bank backed lenders then it is vital that SME’s find the financial support they need and if the banks cannot provide that, then businesses should look elsewhere.

Mark Jefferson offers a free consultation to anyone interested to explore the possibilities of alternative funding.  Click here for contact details.

 

 

 

The Numbers that Matter – Seminar Report

Is it possible that what you measure influences the results you get?  If I measure efficiency, I may well get efficiency but at what cost?  Could it be that customer service will suffer as a result?

The seminar explored this possibility and inquired into finding the numbers to measure that would make the biggest difference to a business.  We looked at types of indicators, lagging, coincidental and leading indicators and crucially understood that the numbers that matter most are the numbers that are important to our customers.

Taking Continental Airlines as a case study we examined what happened when they started getting into the world of their customers and measuring what mattered to them – arriving on time, not losing baggage, dealing with complaints.  It turned out that these were the really important numbers that actually drove the profits in the business, and for those who know the story of Continental Airlines, turned it from one of the worst performing companies in the industry into one of the best.

To identify the right numbers to measure, requires thought, observing what makes our clients tick and ultimately a theory of what the foundation for success in a business will be.  For example as a firm of accountants we have a theory that if we are really on top of clients affairs and responding to their requests and we are making a difference to their businesses, then we will be successful.  From that theory we can develop a much more powerful set of indicators to track that than simply how efficient we are in doing the work.

The seminar’s workshop session gave space for everyone to apply the ideas to their own business, identifying the theory on which they were building success and the leading indicators for their business.

As we have come to expect feedback was very positive.  Overall value was rated 9.5/10.  The following is a selection of written comments:

“It got me thinking creatively about what I can do to expand my business and make it more profitable.”
“Excellent subject! I’m so glad I made the time to attend. I know this seminar would cost hundreds elsewhere.”
“This seminar was excellent! If you are a new business or an existing business, you need to attend.  Exceptional value with practical examples.”
“Once again I arrived at the seminar not really knowing if it was going to be relevant to me, but of course the content is interesting and relevant to all business owners and self employed people.” 
 

Budgeting for Success – Seminar Report

Ask most people why the don’t do an annual budget for their business (and most small business owners don’t) and the answer is likely to be ‘I don’t have time’. In the seminar we started by inquiring whether that was really true.  Is it really true we can’t carve out the day or two in the year it might take to do a really thorough budget, or is something more powerful and subtle at play?  Could it be, for instance, that not having a budget allows us avoid facing up to  what doesn’t work in our business?  Does it allow us carry on doing things the way we like without challenging them?  Does it save us from the hard work of thinking things through?

On the other hand we explored what a budget can produce: avoiding business threats, spotting business opportunities, control, release from worry, happiness and dare we say it, excitement at what is possible.

The seminar went on to take attendees through a 12 step process of building a budget starting from Strategic Objectives.  We considered a radical approach to budgeting building from business drivers and isolating assumptions to be tracked and monitored.  Finally we considered some of the pitfalls of budgets.

In summary it became clear that budgeting is one of the few times that we get to play the role of entrepreneur in our business.

Standards have risen high in the feedback we have been getting and this seminar did not fall short.  On average attendees rated it 9/10 for overall value.  The following is a selection of written comments:

“This was realloy useful, well structured adn pitched about right for a non-accountant audience. I’ll be looking at my budget – now set in a new light.”
“Excellent – as always very practical advice.  Lots of things to take away and implement.”
“”Really informative, presented in a great unstuffy manner.  Would come again.”