Finance for the non finance manager Chris James ACA June 2010

1. Finance for the non finance manager Chris James ACA June 2010

2. Today • Understanding accounts • Current tax issues • Trading through and out of a recession

3. My profile • Started in accountancy in 1998 • Worked at BKL from 1999 to present • Trained and qualified with the firm • Have a portfolio of SME clients in a range of industries and sectors • Some TSA members • 22 month old son

4. Berg Kaprow Lewis • 3000+ clients, Audit and accountancy core • Strong tax consultancy department, advising other accountancy and legal firms • Corporate Finance, Human Resources consultancy, Business consultancy • Outsourcing – management accounts, payroll, bookkeeping and ledgers • UK 200 group firm of the year 2009

5. Understanding accounts • Financial statements can add to your understanding of a business • The story they tell should ring true • They can help you manage your business • They can help you decide who to do business with

6. Obtaining accounts • Small companies file little information • Full and management accounts often requested • How good is the information? • Who has prepared it? • No information?

7. Important figures • Turnover • Gross profit • Net profit • Breakeven • Current ratio • Net assets • Debtors • Work in progress • Lockup

8. Turnover • Turnover is vanity… • Should you care how high it is? • Of limited use

9. Gross profit • Crucial figure • Turnover • Less • Cost to perform that turnover • Why might it be high or low? • Work in progress or stock value • Can be misleading - see example

10. Net profit • Crucial figure? • Turnover • Less • All costs • Why might it be high or low? • Work in progress or stock value • Important in a different way • Dividends are included?

11. Breakeven point • Absolutely crucial figure • Turnover required for no net profit or loss • At your gross profit margin • Why might it be high or low? • So, change turnover or change breakeven? • Quick example

12. Breakeven example 500,000 400,000 300,000 200,000 100,000 50,000 25,000 0 Sales (£) Breakeven 2006 2007 2008 2009

13. Balance sheet Some assets and liabilities: Current assets Work in progress 10,000 Cash 1,000 Trade Debtors 100,000 Current Liabilities Trade Creditors 100,000 HP 50,000 VAT, CT, PAYE 50,000

14. Balance sheet Fixed Assets 100,000 Current assets 111,000 Current Liabilities (200,000) Net current liabilities (89,000) Fixed assets less current liabilities 11,000 Long term Liabilities (50,000) Net assets (39,000) Shares 1,000 Retained losses (40,000) Net assets (39,000)

15. Current ratio Current assets Work in progress 10,000 Cash 1,000 Trade Debtors 100,000 111,000 Current Liabilities Trade Creditors 100,000 HP 50,000 Tax 50,000200,000 • 111/200 = 0.55 or 55% • What should it be? • Why? • Supermarket • Jeweller • Surveyor

16. Net assets • Total of all assets less all known and accounted for liabilities • If low, why? • Historic patterns and recent trends • Different types of business • Do you want to trade with a business with low asset value? • Is this the value of the business?

17. Net assets and Dividends • Net assets are required to vote dividends • Dividends voted without net assets are illegal • Prepare management accounts on which to base a dividend payment • Speak to your advisor • Dealing with incorrectly paid dividends can cost a lot in tax

18. Debtors • People who owe us money • Higher they are the more it costs us • What is the quality of your debtors? • How can we improve this quality?

19. Work in progress • People who don’t yet agree they owe us money • Higher they are the more it costs us • WIP costs as much as debtors and can be even more risky • Ensure valued correctly – HMRC like to find WIP

20. Lockup • WIP plus Debtors equals lockup • Lockup / Turnover = Lockup days • Our exposure at any time • Higher it is the more it costs us • Eliminates billing policy from comparisons • Generally speaking,high lockup is BAD

21. Benchmarking • Compare yourselves with the market • Use this to analyse customers and suppliers • Ensure you are comparing yourself to the right sector (see GP analysis) • You should know why you are where you are against your peer group

22. Using accounts - limitations • Accounts are by definition historic • Order book? • Business value? • How do the owners get their money (or value)? • Recent spectacular business failures

23. Understanding accounts • Make sure your accounts aren’t a mystery • More than a tax calculation • How have you performed on the key figures? • Why are you different from your peers? • Have a look at some accounts – do they tell you the story you’d expect to see?

24. Let’s look at some accounts • These are balance sheets all with similar Net Asset values. • What do they tell you? • Who would have the highest stock value? • Who would have the highest Trade Creditors? • And what is example D?

25. Spotting a business in trouble • Gross profit going down • Stockholding / lockup days increasing • No reserves / repeated losses • Spare fixed assets • Debtors up or down without credit control (Sales?) • Creditors increasing and late payment penalties • No accounts to show you • NO CASH

26. TAX • We’ve had an emergency budget • The law has not yet been finalised (Finance Act) • Watch VAT rules when rate changes • More tax is online or will be soon • VAT online now • PAYE already online • CT online from April 2011 • Penalties are getting higher

27. Income tax • Personal allowances going up next year • New 50% rate • New 60% rate! • Don’t forget dividend rate up too • Car benefit – at least 92 rates

28. “60% rate” • Income £100,000 • Personal allowance £6475 • Basic rate tax 20% on £37,400 = £7,480 • Higher rate @ 40% on £56,125 =£22,450 • Total tax =£29,930 • Personal allowance reduced by £1 for each £2 of income over £100,000

29. “60% rate” • Income £113,000 • Personal allowance £Nil • Basic rate tax 20% on £37,400 = £7,480 • Higher rate @ 40% on £75,600 =£30,240 • Total tax =£37,720 • So extra income =£13,000 • Extra tax = £7,790 • Rate = 59.9%

30. National insurance • A targeted scheme will allow employers to reduce their Employers NIC contributions by a discount of up to £5,000 per employee, in the first twelve months of employment • New businesses • Only in some geographical areas • First ten employees • Max benefit therefore £50k • Watch out for schemes – there will be anti avoidance measures put in place

31. National insurance • Government is putting up NIC rates by 1% from April 2011 as previously announced by last government (Employees and Ers) • Threshold increased by around £1k to lessen the impact of this • Future – pension contributions / NEST

32. VAT • Going up on 4 January2011 to 20% • At least we can plan – and the fraction is easier… • Anti-forestalling rules will apply to any artificial arrangements intended to accelerate tax points • When should you bill? How do you bill? • Get advice from your accountant

33. Capital gains • Changes from 23 June 2010 • Went up to 28% for higher rate tax payers- not as bad as it could have been • 10% with Entrepreneurs Relief (ER) • ER extended to £5m per person (lifetime) • Can any income be converted to capital?

34. Company taxes • Rates going down from 21% to 20% (£300k) and 28% down to 24% (£1.5m) • Marginal rate will change each year • Be careful with associated companies • Company house deadline now in line with tax payment deadline • Annual investment allowance now £100k but going down again – watch timing and change over (1 April 2012 - £25k)

35. Other taxes • PAYE – late payments during the year can now cost a lot of money • ISA allowances up with RPI from 2011 • Special rules on pension contributions and limits – watch this space • Don’t forget HMRC payment plans • Consider fee protection insurance

36. Recession and the future • We’re still trading • What should we be doing now? • What happens after a recession? • What can we do to prepare?

37. Background • We had 17 years of solid economic growth in the UK • Many businesses have not seen a downturn before • Some of these businesses’ owners were not in management positions in the last downturn • This downturn is different to previous ones

38. What has the downturn meant? • Less work • Longer lead times and false starts • Fee pressure • Uncertainty and fluctuating revenue • Bad debts and disputes • What can you do as owner / managers

39. What can we do • Review budgets and set targets for the next 12 months • Manage out can’t pay / won’t pay customers (hard decisions) • Review debtors list and chase overdue invoices • Check customers credit rating before agreeing services / price

40. Terms and collection • Make sure your terms of business contain explicit payment terms – if they don’t, change them! • Assign responsibility to one individual for invoicing and collections • Agree extended payment terms with suppliers in advance

41. Cashflow measures • Review banking facilities and discuss future needs – government backed schemes? • Watch banking covenants carefully • Make use of HMRC payment plans • Consider asset finance • Consider factoring / invoice discounting

42. Business processes • Review and flow chart the main processes in your business (order win process, sales processing) and challenge the need for each step • Use bottom up budgeting where everyone in the office gives input on areas over which they have control – target could be a 10% cost saving

43. Business processes • Review your staffing needs over the next 12 months and ensure everyone is occupied • Review your services and eliminate those that are unprofitable • Put extra effort into making sure your relationships with your better customers are solid

44. Numbers • Establish your KPIs and measure them on a frequent basis • Break even point • Budgeting • Job costing & monitoring • Lockup

45. People • Review efficiency of office processes and consider alternatives such as outsourcing • Pull everyone together and explain the business’ strategy and get their buy-in • Look at cheap ways to motivate staff • Be careful about proper procedures

46. After the recession • Businesses which survive will be well placed to thrive post-recession • Overtrading kills businesses • As many will fail in the early stages of recovery as during the recession • You must forecast even if it feels like the pressure is off

47. Forecasting What are sales based on? Compared to similar businesses? A P&L or a cashflow forecast? Both? What about VAT? Corporation tax? How far have you forecasted? Toilet breaks? Vigorously challenge the forecast

48. Out of the recession Remember cash is king Challenge expenditure Look after the customer Don’t chase turnover Keep lockup down PLAN

49. Today • Understanding accounts • Current tax issues • Trading through and out of a recession

50. Finance for the non finance manager Chris James April 2010