Finance – Logical BI

How to Analyse Your Business’ Financial Position

Pauline Healey — Wed, 01 May 2024 14:41:43 +0000

Keeping a close eye on your company’s financials is essential in planning a business strategy.

Every company should pay attention to its current financial state. It can be of immeasurable value for future business ventures and financial projections. Not to mention serve as an orientation point when deciding on the direction in which the company will move.

Proper financial analysis is complex and requires a level of understanding of the relevant information. But if you approach the task with care and attention by following the steps below, you’ll manage to get a clear picture of your company’s financial position.

Step #1. Analyse the Value Chain

If your business is product related, the value chain is a process that identifies activities related to the creation, manufacturing, and distribution of your product. This process also involves a thorough examination of the internal activities to determine which are the most valuable and which need improvements.

Reviewing individual steps and their costs will give you valuable insight into the basic expenses of making your product ready and available for sale.

Step #2. Review Financial Statements

When you review the financial statements, it’s important to understand the vital components and terms. Here are some brief explanations of what you might see in your financial information:

The balance sheet should be your starting point. This statement presents assets and liabilities, as well as equity, on an annual basis.
Under assets and liabilities, you’ll have both current, expected to last for less than 12 months, and non-current, which will last for more than a year.
Dividing total assets by total liabilities will give you the current ratio, which is a reliable way to assess your company’s ability to fulfil all ongoing obligations.
Subtracting liabilities from assets produces the book value, which expresses the shareholder capital and company profits.

Step #3. Measure Risk and Potential Profit

Once you understand your financial statement, you should examine how profitable your business is at the moment and compare that to the company’s assets and equity.

Doing so will help you understand how well your company can deal with the market’s risks and challenges.

The crucial aspect of this step is comparison – you’ll need to look at current data concerning past numbers, as well as to the competitors and marketplace averages.

Step #4. Create a Forecast

To make the most out of the analysis, you should use the above information to create a financial forecast. The forecast will be based on your assumptions about how your business will grow and the market situation in the foreseeable future.

When you build a forecasted statement, it will be a valuable tool for detecting areas of your business that could be improved. It will also prepare you for challenges that might lie ahead.

Analyse, Plan, and React

Dealing with the challenging task of financial analysis shouldn’t be an isolated effort. The point of developing a thorough understanding of the financials is to formulate a strategy and execute it efficiently.

Cut down the costs, prepare a precise plan of action, and be ready to push your business in the right direction.

Logical BI Limited can provide one-off consultation with our two hour The Business Booster Consultancy Call – Logical BI , four month review and reset project Logical BI or continuous support https://logicalbi.com/cfo-retainer-services . Feel free to book a free, no-obligation call today https://calendly.com/pauline-healey/discovery-call-outsourced-fd-support

Top Eight Tips for Accurate Cash Flow Forecasting

Pauline Healey — Wed, 24 Apr 2024 15:43:18 +0000

Do you want to know how your business and cash will perform in the future? Apply the following methods to improve your cash forecasting.

Forecasting your company’s cash flow helps minimise potential risks and indicate if the company is in a position to go after opportunities and grow.

Correct cash flow management is a given. But monitoring all the money coming and going doesn’t always provide all the vital information you need to make accurate predictions.

The following tips and areas of focus should contribute to a better strategy for your forecasting.

Tip #1 – Estimate Future Sales

The accuracy of cash flow forecasting relies on multiple variables, of which arguably none is as important as the sales forecasts.

To improve accuracy, the estimate should depend on the following series of factors:

Past results
Market share
Resources
Competition
Pricing

Tip #2 – Estimate Profit and Loss

After your sales projections, you need to factor in the projected costs, too. This gives you more information about your profitability.

Of course, you have to know both the expected revenue and the cost of sales to estimate projected gross and net profits. Costs include direct costs which are variable to the volume of sales and also overheads which may be fixed or semi-variable but generally do not alter with sales volume.

Tip #3 – Perform Monthly Sales Estimates

Some businesses don’t turn out enough data in a single week to make accurate projections. This happens because customers sometimes delay payments. Or, the money simply doesn’t come through in time to match the daily revenue on the books.

For that reason, it’s important to stick to monthly estimates with consideration to any known delays.

Tip #4 – Include Payments Due

Sometimes a business might have to pay for expenses, services, or purchases. And those types of payments usually find their way on P&L statements.

In some cases, however, a registered payment does not mean that the money is to leave right now. That money could leave the account only in the next month, for example.

Hence, you have to include projected payments in the cash flow forecast to further improve its accuracy. Remember the credit terms given to your customers and the credit terms for your payments to suppliers.

The following are examples of payments due worth considering:

VAT taxes
Interest rates on loans
Utilities
Corporation tax
PAYE taxes

Tip #5 – Compare with Current Cash Flow

One of the causes of inaccurate forecasting is unrealistic expectations.

It’s always important to check the forecast versus the current cash flow statement. Large discrepancies that no one can back up with facts may signal missing variables in the equation.

Each month start with the correct opening bank balance per your bank statements.

Tip #6 – Make Consistent Predictions

Doing a cash flow forecast once may not give you a degree of accuracy that all business owners hope to achieve.

One of the best ways to improve the accuracy of cash flow forecasts is to make it a habit. Updating your forecast as often as possible with new information can drastically improve its accuracy.

Furthermore, forecasting over long periods of time helps uncover certain trends. Again, it’s all data that can help improve future predictions.

Tip #7 – Account for Variable Costs

VAT taxes and interest rates are unlikely to change from month to month. But other costs may change depending on the weather, season, and other exterior factors.

So when calculating costs, it’s critical to allow some wiggle room for the variable costs. Those are costs that may vary from month to month – utility costs, for one, and perhaps the phone bill.

Accuracy Comes From Good Data

It’s nearly impossible to create a realistic forecast without using all the right information. This is especially true when many things can happen in the future that will be out of your control.

But, using as much data as possible can only lead to more accurate forecasts. So keep collecting the right data and use it well.

Tip #8- Outsource Finance Direct Support

Why not take the pain away and hire expertise to help you understand your current and future cash position.

Four Tips for Improving Your Decision Making Process

Pauline Healey — Thu, 18 Apr 2024 10:44:35 +0000

Making the best choice for your business can often prove challenging. Luckily, there are ways to make your decision making skills better.

People who can make the right decision at a moment’s notice are always well-respected among their peers.

It might seem like this ability comes naturally. But in reality, it’s a skill you can learn and develop.

Here are four tips about decision-making that will help you do just that.

Tip #1. Learn From Experience

Experience from previous situations comparable to the present can inform your decisions and serve as a useful guide and point of reference. That’s why in many cases, keeping a record of past crucial decisions can prove invaluable.

But you don’t have to rely only on your own experiences.

When faced with a decision, especially if it’s a crucial one, don’t shy away from consulting other people. Those working in the same field as you could have useful insights and knowledge that you can leverage in your decision-making process.

Tip #2. Break Down the Questions

Complicated decisions can often be broken down into smaller components that are less challenging to understand and resolve. If you can see the large picture as a set of simple, interconnected factors, you’ll have an easier time reaching a decision.

Starting from the current state of matters, define the outcome of your choice as the endpoint.

Look at creating a journey, from your current position to your desired outcome. Ask yourself what’s the most optimal path leading from one to the other and weigh the costs and benefits of each step.

The gained insight from breaking down the questions can make your decision-making much more straightforward. You could even find a more effective way to resolve the issue at hand.

Tip #3. Compare Costs and Benefits

You can apply cost-benefit analysis to most choices. It comes down to weighing the pros and cons, considering what resources to use, and understanding the outcome of your decision.

Think about the available options and imagine what it would take to act on each of them relative to what you’d achieve through those actions. It would be very helpful to remain realistic when considering both positive and negative aspects.

Once you’ve measured the costs and benefits of your decision, the solution might become obvious even if it’s not the one you initially expected.

Remember not to only measure the gains, but also some potential loss of revenue whilst you transition.

Tip #4. Prioritise

If you’re facing one complex decision or a series of smaller ones that require your immediate attention, the situation can become overwhelming. However, you won’t always have the luxury of taking a step back and carefully examining each question.

This is when prioritisation can be of vital importance.

The essential decision you should make is which matter requires your attention the most. When you realise which issues are pressing and which can be put on hold, the situation will become more transparent and you’ll be able to direct your actions more efficiently.

Prioritising is equally useful when it comes to a single big decision. In this case, however, you should concentrate on which outcome is the most important rather than which question needs answering first.

Weighing short-term and long-term profit is a good example of prioritising. Faced with a choice between the two, a company will decide on the course of action based on which type of profit it prioritises.

Improve Your Decision Making

Making well-informed, reasonable decisions is at the core of every successful venture. Luckily, you can improve your decision-making process using the described methods and start making choices that lead to the most beneficial outcomes.

Logical BI provide business consultancy and mentoring which can support your decision making by reviewing your choices, current position and providing expertise on how to achieve your desired outcomes. Providing consultancy options from a one-off two hour consultancy call with direct booking link so you can schedule a convenient time for your call The Business Booster Consultancy Call – Logical BI, to short term projects Business Planning Packages – Logical BI or retainers CFO Retainer Services – Logical BI

Check out our other blogs which could support you or your business Articles – Logical BI

Cash Flow 101: 6 Key Terms You Need to Know

Pauline Healey — Mon, 18 Mar 2024 10:07:55 +0000

Cash flow is the lifeblood of your business. It’s what allows you to pay employees, suppliers, and other creditors on time so that you can continue doing business. However, many small-business owners don’t really appreciate how cash flow works or how to improve their cash flow situation.

Here’s a basic introduction to cash flow and the key terms you need to know.

What is Cash Flow?

Cash flow is the movement of cash in and out of your business. It’s calculated by taking your total revenue and subtracting your total expenses for a given period. This gives you your net income or loss for that period.

You can also think of it as the “lifeblood” of your business because it allows you to pay your bills and keep your business running.
Timing is Everything. One of the most important things to understand about cash flow is that timing is key. In other words, revenue received in one period may not be available to pay expenses until a later period.

For example, if you bill customers for services on the first of the month but don’t receive payment until the thirtieth, that revenue won’t be available to pay your expenses until the end of the month. And if you have bills due on the fifteenth, you may find yourself in a cash crunch.

That’s why it’s important to track your cash flow regularly so you can identify potential problems before they become too serious.

1 – The Components of Cash Flow

There are three basic components of cash flow:

Operating cash flow is the cash you generate from your day-to-day operations, such as sales revenue and collections, less your day-to-day expenses. This includes things like payroll, inventory purchases, rent, and utilities.
Investing cash flow refers to the purchase or sale of capital assets such as real estate, equipment, or business vehicles. This also includes purchasing marketable securities (stocks) from your available cash reserves.
Financing cash flow is generated when you borrow money or repay existing loans with available funds. It can also be generated from the sale of your business, a stock offering, or raising money through an investor.

2 – Accounts Receivable

Your accounts receivable (A/R or creditors) is one of the most important factors affecting your cash flow. It’s the total amount you’re owed by customers for products or services that have been delivered or performed.

The longer it takes to collect those receivables, the more impact it will have on your cash flow. That’s why it’s important to keep your A/R as low as possible by invoicing customers promptly, setting realistic payment terms, and following up on late payments and delinquent accounts.

3 -Inventory

Another key factor in cash flow is your inventory. You need to have enough inventory on hand to meet customer demand, but you don’t want to carry too much excess stock that will tie up your cash. Inventory planning is critical alongside cash management.

4 – Accounts Payable

Your accounts payable (A/P or debtors) is the total amount you owe to suppliers for products or services that have been delivered. The sooner you pay your A/P, the less interest you’ll pay on those bills. However, it’s also important to spread payment dates out if possible so that you can keep cash in your account for as long as possible.

That’s why it’s important to maintain a good working relationship with your suppliers and negotiate favourable payment terms whenever possible.

5 – Current vs Non-Current

Your assets and liabilities are classified as either “current” or “non-current” depending on how long they’re expected to be outstanding.

Current assets are things like cash, accounts receivable, and inventory that you expect to convert into cash within one year. Current liabilities are bills that are due within one year, such as accounts payable and short-term loans.

Non-current assets are things like real estate and equipment that you expect to use for more than one year. Non-current liabilities are debts that will be paid over a period longer than one year, such as mortgages and long-term loans.

6 – Cash Flow Statement

A cash flow statement is simply a report showing your operating, investing, and financing activities during an accounting period. You can think of it like a cheque book register (from times gone by), where your cash inflows from sales and other sources are recorded on the left side of the statement, while outflows for expenses are recorded on the right.

For example, let’s say you took in £50,000 of revenue during April but had business expenses totalling £40,000 that same month. That would leave a net cash flow of £10,000 for the month.

You can create a cash flow statement in any number of ways, but the easiest way is to use accounting software like Xero or Freeagent.
Summary

As a small business owner, it’s essential to have a clear handle on your cash flow. If you need more cash, it’s easier to stay afloat.

One of the best ways to improve your cash flow is by reducing accounts receivable and minimising inventory levels. You should set realistic payment terms with customers so they pay their bills more quickly while managing your suppliers for better payment terms as well. A strong working relationship with your partners can go a long way.

As previously stated, cash is the lifeblood of all businesses, so don’t neglect it. If in doubt, it’s always best to seek a professional to help you maximise your available funds and create a strategy to ensure your long-term success https://logicalbi.com/

The importance of bookkeeping for all businesses

Pauline Healey — Mon, 05 Dec 2022 08:43:33 +0000

Whilst it’s an unusual topic for an outsourced finance director to talk about, the importance of accurate bookkeeping for all business should not be underestimated. Bookkeeping is the fundamental foundation of all financial reporting. The saying goes, ‘Garbage in, garbage out’ and that’s never truer than when you are talking about business accounts.

Without accurate and timely bookkeeping, it’s easy for business owners to make the wrong decisions which could have potentially costly consequences.

The importance of bookkeeping that is accurate and timely

When incorrect information is added to your business accounts or data is incomplete, you may not know:

The true profits of the organisation
What to reserve for tax throughout the year
Your directors loan balance which could give rise to penalties if it goes into debit
If you can withdraw dividends (must be from available retained profits otherwise it will be ‘ultra vires’ or illegal)
If you are operating with optimum tax-efficiency
If you have the correct balances for HMRC return
Whether debts are being collected on time
If you are incurring fines or interest on late payments

Accurate and timely bookkeeping is the underlying process that keeps the cash cycle moving in your business. If you have delays in invoicing your suppliers, this leads to significant lag in collecting revenues which in turn puts your business on a riskier footing than it needs to be. Bookkeeping recognises such issues.

Ensure correct tax payments

You are also ensuring correct tax payment, no one wants to overpay tax! With timely checks of sales and purchases you can ensure you are not duplicating sales or missing VAT purchases which could push up your tax payments.

It’s also vital to check and reconcile your bank statements to your accounting software balances quarterly as a minimum. These checks can quickly pick up missing or inaccurate data which, if left uncorrected, could lead to you paying more tax than necessary.

Historic costs provide for robust forecasts and timely decision making. Your business relies so heavily on correct data that without it, you’ll be unable to make even the simplest decisions without wondering if you are doing the right thing. In addition, if your books are always in disarray, this can have a detrimental impact on your physical and mental wellbeing because you are constantly worried about whether you can make the payroll this month or you are going to hit your sales targets.

Business KPIs are meaningless without good bookkeeping

When it comes to more sophisticated management reporting, many companies create a set of key performance indicators (KPIs) which are used to report on the health of the business and the progress towards stated targets. These KPIs might be high level numbers such as Net Profit or Capital Employed or they may be more complex such as Avoided Cost or Inventory Turnover which helps the business to see exactly where changes might be needed. Bookkeeping data feeds into every financial report you create, and decisions made on invalid numbers can have wide-reaching implications.

Business Decision Mistakes

Incorrect or incomplete numbers could lead to decision-making mistakes. When invoices and receipts are incorrectly coded or missing from data, you might make invalid decisions such as removing a product from your catalogue due to inadequate sales performance when the sales have been incorrectly attributed. You might decide to declare a dividend that’s too high if expenses are missing from your books and haven’t been properly accrued. So, the importance of bookkeeping cannot be overstated.

Although Logical BI focus is outsourced finance director support, our team also support Limited Companies with bespoke annual accounting packages at competitive prices, which can include all your bookkeeping support. If you need help with your data entry bookkeeping or want a review of your current processes, why not book a business booster consultancy hour.

Support from basic bookkeeping to sophisticated reporting

Your business can benefit from outsourced FD support to provide deeper insight into what’s driving productivity and profitability, what’s causing the biggest issues and how to resolve them, but this can only happen if your bookkeeping is accurate and up to date. Logical BI can provide outsourced management reporting support and facilitate a robust bookkeeping service to help you create the best decision-making foundation for your company. Call 01772 287400 or email hello@logicalbi.com to talk about the importance of bookkeeping for your business.

Why not connect with Logical BI on LinkedIn

How much should I charge for my services?

Pauline Healey — Thu, 30 Sep 2021 10:51:22 +0000

Or, “What prices should I charge for my goods or services?”

This is a simple question, and one that the majority of business owners will ask, and the answer changing over time.

Pricing is the money charged to a customer in exchange of goods or services. The price you charge for your goods or services is one of the most important decisions you will make for your business.

The price of your service is very important as it determines what income your business will generate and also how your customers will perceive your service. Many may ask “how much does it cost”, but price and cost are two different things.

The price is what your customer will pay, the cost is what your business will pay to create the service or purchase the goods from the factory or distribution channel.

Your customers view, or perception of your price differs based on the type of good or service they purchase and the amount of value or need they attach to the purchase; what is that purchase worth to your customer?

Price should never be considered in isolation, because you also need to know your cost and the value created for your customer;

The PRICE is your payment, your financial reward for the exchange of your goods or services
The COST is the amount you spend on producing you’re your goods or services
The VALUE is your customer’s perception of what they believe the goods or services are to them

How should I calculate my price?

There are two basic methods of pricing your goods or services; cost plus and value based, as you enter the market you may be unsure which method to use.

Cost plus pricing is simply the COST of creating or purchasing your goods or services PLUS the amount of money you need to cover your fixed overheads and your own income. Calculating the PLUS amount correctly is important.

You need to forecast ALL your costs of your business plus your own income desires (drawings, salary and/or dividends) and divide my your realistic minimum number of ‘unit’ sales over the same period of the cost calculation.

If you need help with forecasting your business costs and/or minimum price point business planning packages are available (link).

Value based pricing is focused on the price you believe customers are willing to purchase your goods or services, based on the benefits you provide to your customers.

As with cost plus pricing, you need to forecast your costs and realistic minimum number of sales as your LOWEST price to ensure that your business is profitable, if you price above your minimum. What you charge above that price will be determined on your customers perception of what they are purchasing.

If you are undercutting most of your competitors prices will you be perceived as lower quality? Will higher prices provide the perception of greater quality or premium value?

Should I increase my prices to create more profit?

Simply increasing prices may not increase overall profits, if prices rise but your potential customers perception of the price is greater than the value you add, sales will decline as less purchases are made. However, if your prices are too low are you throwing away potential profit?

Profit is sales less all costs. It is overly simplistic to think that increasing prices increases profits. It would be true if there were no general business overheads, but if the volume or ‘units’ of sales decrease, the overheads will be greater per sale. These fixed overheads may include insurance, office rental, and administration which are not directly linked to each individual sale.

Fixed overhead costs are absorbed across the total sales of the business, for example if fixed costs were £1,000 per month and sales were 100 ‘units’ per month, for each sale £10 of costs need to be absorbed. If a price rise reduced the sale to 50 ‘units’ per month, for each sale £20 of costs need to be absorbed. Has your price increase more than captured this increase in fixed overheads per unit sale?

Scenario modelling can provide estimations against various prices, costs, volumes and relating profits. All our business forecast planning packages https://logicalbi.com/business-planning-packages/ provide scenario modelling to enable you to compare alternative costs or revenue side by side.

By communicating the benefits you or your goods provide to your customer, by marketing and/or strengthening customer relationships you could retain your higher value customers whilst some others drop off but the overall price increase provides for a greater profit return for less customers, which means less work.

More profit but less work is the BEST WIN for all!

What is the Difference Between an Accountant and a CFO?

chris.healey — Sat, 03 Oct 2020 12:05:00 +0000

I’m frequently asked this question, here’s my take on it.

Whilst Chief Financial Officers (CFO’s) and accountants may overlap in some of their skills, especially in smaller businesses, they generally spend their time on different tasks. Both roles are essential to a company’s success, complementing each other with expert eyes on both the past and the future.

An accountant manages the company’s transactions, books and records.
A CFO manages the company’s future financial success.

An accountant is largely reactive because they advise the company on what has already happened.
A CFO is largely proactive because they advise the company on what needs to happen.

An accountant takes care of the collection, recording, analysis and presentation of financials to the company.
A CFO takes care of the planning, budgeting, maximising company returns and limiting risk to the company.

An accountant has a compliance approach to their business.
A CFO has a commercial approach to theirs.

An accountant plans and delivers tax savings for the company.
A CFO plans and delivers opportunities to maximise profits and cash for the company.

As a virtual, part-time CFO I do not compete with your accounting staff. I harness their experience to support your company’s growth and performance.

I provide an external perspective and opinion, from an unbiased position backed by my knowledge and industry experience.

With flexible packages to suit your business needs, you can tap into expertise as and when you need it, providing industry experience and knowledge to support your business to grow and prosper.

Are you ready to tap into CFO support? Contact me to find out more about our services and packages to suit your business.

* Accounting services are also available as a bolt-on to CFO support.