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2.2 Controlling Finance 2.2(a) Business banking
(i) Choose and run a business account
A good relationship with your bank is essential to the success of your business. Before you can develop a productive relationship, it's vital to invest time choosing the right bank.
The services offered by banks differ greatly and so do the fees they charge. Some banks have special teams who deal with business accounts. They also have very useful information for start-up businesses. Many banks offer special deals to new starters in business.
The set of highlights described below explains how to choose and manage your business bank account.
* Choose the right bank
* Choose a business bank account
* Benefits of online banking
* Checklist: moving to online banking
* Open a business bank account
* Run a business account
* Be aware of bank charges
(ii) Transferring business accounts between banks
It's easy to stay with the bank you chose when you started up in business - but switching your business account could help you get a better deal.
Increased competition between banks trying to attract small business customers, together with the development of telephone and Internet banking, means there's a range of attractive packages available.
Moving your account should be more straightforward than before, with the agreement of many major clearing banks to make the process easier.
If you've had a business bank account for some time, are you sure you're getting a good deal? If you're not, how do you go about negotiating a better package with your bank or changing accounts?
The set of highlights described below answers these questions and is aimed at any business with a business bank account.
* Advantages and disadvantages of switching bank accounts
* Comparing different bank accounts
* Negotiate improved terms with your existing bank
* Make your business attractive to other banks
* How to switch banks successfully
* Use different banks for different services
(iii) Foreign currency and exchange risks
If your business exports or imports goods or services, you need to consider how you will protect yourself against changes in the exchange rate. A tiny variation in the rate could cost your business thousands of pounds.
You'll also need to decide how to make and receive payments in foreign currencies.
The set of highlights described below is aimed at businesses that regularly deal with foreign customers. It explains how to price goods or services, how to combat the risk of exchange rate changes and the practicalities of dealing in foreign currencies.
* Foreign currency issues when importing or exporting
* Identify foreign exchange risks
* Forward foreign exchange contracts
* Opening foreign currency accounts
* Opening an account with a bank overseas
* Buying currency options
* Foreign currency transactions and your bookkeeping
(iv) Debit and credit cards for your business
Making purchases with plastic cards is a convenient and flexible option for many businesses.
The different types of card available - from debit and credit to charge and purchasing cards - mean small-business owners don't have to carry large amounts of cash or a company cheque-book and staff purchases can be effectively managed through the use of company credit cards.
Cards are widely accepted around the world and can help you keep close track of your expenditure. But with such a wide variety of cards on the market it can be hard to decide which is the best for you.
The set of highlights described below sets out the advantages and disadvantages of using company or corporate credit and debit cards and gives advice on how to choose the right card for your business.
* Types of card available
* Business benefits of debit and credit cards
* Drawbacks of debit and credit cards
* Choosing a card provider
* Risks of financing a business with a personal credit card
(v) Accepting debit and credit cards
Accepting payment by credit and debit cards is the norm for many businesses - particularly those selling to consumers. Cards are a convenient and flexible way for customers to pay and they are essential for telephone and online sales.
Accepting card payments has a number of advantages for businesses, from opening new sales channels to reducing the need to hold cash. However you should check on transaction costs and balance these against the increased revenue you may gain by accepting cards. You also need to put precautions in place, as card payments can expose you to an increased risk of fraud.
The set of highlights described below outlines the advantages of accepting credit and debit cards in your business. It explains the steps involved in setting up the necessary systems and the actions you can take to avoid fraud.
* The advantages and disadvantages of accepting payment by card
* Types of plastic card you could accept
* Accepting card payments: the key steps to take
* Set up a merchant account
* How does the card payment process work?
* The cost of accepting payment by card
* Your liability for disputed card payments
* Safeguards against fraudulent card payments
(vi) Accepting online payments
For many small businesses, accepting payments online provides some major benefits. Customers increasingly expect this facility and it can improve your cash flow significantly.
It's easy to accept cheques or invoices for your online sales and to process payments in the traditional way. However, because buyers often use the Internet for a speedy service, most sales are paid for with credit and debit cards. To accept cards online, you will have to make special banking arrangements.
Online payments using cards are "card-not-present" or CNP transactions. There are higher risks of fraud with this type of payment and banks require you to operate within a well-defined set of rules and accept a higher level of commercial risk than a conventional swiped card transaction in a shop.
The set of highlights described below will help you to understand these requirements and look at the options available for taking advantage of online payments.
* Online payment jargon
* Selecting the best online payment option
* Setting up a merchant account
* Find a bank to process your online payments
* Checklist: applying for an internet merchant account
* Using a payment-processing company
* Selling through an online shopping mall
2.2(b) Financial planning
(i) Balance sheets: the basics
A balance sheet is a financial statement at a given point in time. It provides a snapshot summary of what a business owns or is owed - assets - and what it owes - liabilities - at a particular date.
The balance sheet shows how the business is being funded and how those funds are being used.
The balance sheet is used in three ways:
* For reporting purposes as part of a limited company's annual accounts
* To help you and other interested parties such as investors, creditors or shareholders to assess the worth of your business at a given moment
* As a tool to help you analyze and improve the management of your business
The set of highlights described below explains who needs to produce balance sheets and when, the different elements within them and how to use the information from a balance sheet to assess and manage business performance.
* Balance sheet reporting - who, when and where?
* Contents of the balance sheet
* Interpreting balance sheet figures
* Relationship between balance sheet and profit and loss account
* Compare balance sheets to assess business performance
* Use accounting ratios to assess business performance
* Accounting periods
(ii) Budgeting and business planning
Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.
The set of highlights described below outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.
* Planning for business success
* What to include in your annual plan
* Budgets and business planning
* Creating a budget
* Key steps in drawing up a budget
* What your budget should cover
* Use your budget to measure performance
* Review your budget regularly
(iii) Financial and management accounts: the basics
The accounting needs of your business will vary according to its size, type and sector. As the business owner, it's your responsibility to make sure your business keeps accurate records and accounts.
There are two types of accounting information - financial accounts and management accounts.
Financial accounts describe the performance of your business and have to be filed at Companies House - or Companies Registry for businesses in Northern Ireland. Management accounts are aimed at helping you to plan your business and make decisions about key areas such as sales, margins and stock.
The set of highlights described below will explain the basics of both types of accounts and what they should include. It outlines your financial accounting obligations as well as how management accounting can help you run your business more effectively.
* Financial accounts
* Filing financial accounts
* Management accounts
* Uses of management accounting
* Analytical accounting tools
(iv) Set up a basic record-keeping system
Whatever kind of business you run, you are required by law to keep financial records relating to it.
But there are a number of business benefits to be gained from keeping records. It saves you time, and therefore money, whenever you need figures to back you up. You can be confident that you're only paying the tax you owe. It also helps you keep up to date with how much you owe and how much you are owed.
The set of highlights described below shows you how to meet your legal obligations and set up a basic system that works for you.
* What should my system include?
* The cash book/spreadsheet
* The sales ledger/spreadsheet
* The purchase ledger/spreadsheet
* The wages book/spreadsheet
* Computerizing financial records
(v) Set up a simple profit and loss account for your business
A profit and loss account is a summary of business transactions for a given period - normally 12 months. By deducting total expenditure from total income, it shows on the "bottom line" whether your business made a profit or loss at the end of that period.
A profit and loss account is produced primarily for business purposes - to show owners, shareholders or potential investors how the business is performing. But most of the information is also used by HM Revenue & Customs to work out your tax bill.
The set of highlights described below tells you about the basic financial records you need to keep to enable you to report your profit or loss each year. The information should help you decide whether you need the services of an accountant or bookkeeper, or whether you can do it yourself.
* Do all businesses have to produce formal profit and loss accounts?
* Profit reporting: how, when and where?
* Keeping accurate records
* Business income: sales
* Business income: other
* Recording business expenditure
* Cost of sales
* Business expenses
* Cost of equipment
* Profit and loss accounting periods and financial years
(vi) Cash-flow management: the basics
Cash is the oxygen that enables a business to survive and prosper and is the primary indicator of business health. While a business can survive for a short time without sales or profits, without cash it will die. For this reason the inflow and outflow of cash need careful monitoring and management.
The set of highlights described below looks at the key elements of cash-flow and at how effective cash-flow management will help protect the financial security of your business. It outlines the steps that you can take when dealing with your customers, suppliers and stakeholders to improve cash-flow. It also highlights common cash-flow problems and how to avoid them.
* What is cash?
* Cash inflows and cash outflows
* The principles of cash-flow forecasting
* Manage income and expenditure
* Cash-flow problems and how to avoid them
* Using your cash-flow forecast as a business tool
* Cash management in action
* Refinements to a simple cash-flow forecast
(vii) Identify potential cash-flow problems
Identifying potential cash-flow problems before they happen can help to prevent disasters in business.
Many people draw up forecasts and plans but then fail to study them properly and look out for any danger signs, or compare the forecast with actual figures as they become available.
Of course, the earlier you identify potential problems, the sooner you can take action to avoid them.
The set of highlights described below outlines the benefits of keeping an eye on the figures and identifies the market conditions that need to be monitored. It also stresses the importance of forging good relationships with banks and other lenders and provides tips on how to read the signs that a customer is in financial trouble.
* Keep business forecasts up-to-date
* Be aware of changing market conditions
* Your relationship with banks and other lenders
* Signs of customers in trouble: hard evidence
* Signs of customers in trouble: soft evidence
(viii) Advice for seasonal businesses
Many businesses do the majority of their trade during a short period each year. Examples include retailers selling Christmas accessories and businesses in the tourist and farming sectors. The challenges faced by seasonal businesses are unique.
The set of highlights described below outlines a range of advice for seasonal businesses. It starts with cash-flow planning - a concern for every business, but a particular problem for seasonal businesses managing a short burst of revenue which must meet their liabilities throughout the year. It also covers financing for seasonal businesses, as well as recruitment options, diversification and tax and benefits issues.
* Plan your cash-flow
* How seasonal businesses can manage cash-flow
* Find the best financing deals
* Getting the right staffing levels
* Boost your business all year round
* Make the best use of quieter periods
* Tax and benefits issues for seasonal businesses
(ix) Avoid the problems of overtrading
Overtrading is an imbalance between the work that a business takes on and its capacity to do the work.
It happens when a business takes on work, but does not have enough current assets, or working capital, to meet the resulting demands.
This is particularly common in young, rapidly expanding businesses. It can be extremely serious, even fatal to the organization, so it's worth taking time to understand how to prevent it happening to your business.
The set of highlights described below explains what overtrading is, how it can occur and how to avoid it.
* What is overtrading?
* Matching sales and production cycles
* Assessing your cash needs: assets and liabilities
* Assessing your cash needs: creditors and debtors
* Avoid the problems of overtrading: debts
* Avoid the problems of overtrading: assets
* An example of overtrading
* An example of avoiding overtrading
(x) Manage your suppliers
A supplier is defined as the person or organization that provides a product or service to another business. Finding a reliable and competitively priced supplier is vital to the success of your business.
The terms that you negotiate with your supplier need to be based on:
* The way that you pay them - overdraft, commercial bill paid for by bank, foreign currency
* Potential costs - administration, taxation, transport, general payments and transactions
* Possible risks - late payment to supplier, or faulty, late or undelivered goods
The set of highlights described below explains how to build strong business relationships with your suppliers, through good negotiation, collaboration, management and performance review skills.
* Get quality service from your suppliers
* Building good relationships with suppliers
* How you can help your key suppliers
* Use technology to improve efficiency
* Service level agreements
* Review your suppliers' performance
* Ending supplier contracts
(xi) Invoicing and payment terms
Getting your invoicing system and payment terms right can be key to a healthy cash-flow. If everyone understands how much they need to pay and when they must settle up, customers are more likely to pay you on time.
The set of highlights described below outlines the information you are required by law to include in an invoice and what terms and conditions it should cover. It also explains how to pitch payment terms to customers and explains some of the commonly used invoice payment terms.
* Requirements for an invoice
* Setting terms and conditions
* Setting suitable payment terms for your customers
* Commonly used invoice payment terms and their meanings
(xii) Identify which VAT scheme your business is eligible to use
Businesses normally account for VAT when they invoice their customers and when they are invoiced by their suppliers.
HM Revenue & Customs (HMRC) operates a number of VAT accounting schemes that allow businesses to either:
* Dramatically reduce the amount of time and effort they spend administering VAT
* Only account for VAT when they are actually paid by their customers
Use an interactive tool to see if there is a VAT accounting scheme that can help your business. That tool is not a substitute for professional advice. You may also want to:
* discuss the options with HMRC National Advice Service
* Take advice from an accountant
* Which VAT scheme is right for my business?
(xiii) Assess the health of your business
This interactive tool helps you analyze key areas of your business' finance and administration with the aim of avoiding failure. It can help you work out whether your business could be in trouble, and shows how external business advisers can provide help and expertise.
If you identify and tackle any problems early, you will markedly increase the chances of your business surviving and being a success.
There is a tool that can only highlight where your business could encounter difficulties. Its conclusion should be used as an indicator only and should be discussed with professional business advisers.
Important:
* How healthy is my business?
2.2(c) Debt recovery
(i) Debt factoring and invoice discounting: the basics
Debt factoring involves selling your invoices to a third party. In return they will process the invoices and allow you to draw loans against the money owed to your business. Essentially, these companies provide a debt collection and ledger management service. It is commonly used by businesses to improve cash-flow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies. Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over the administration of your sales ledger. As well as providing finance, which is probably the main attraction, it offers valuable support services and credit insurance. The set of highlights described below gives information on how debt factoring and invoice discounting work, the advantages and disadvantages, different types of factoring and invoice discounting, the cost, and how to choose a factor or discounter. * How debt factoring works
* Advantages and disadvantages of factoring
* What makes a business suitable for factoring? * Recourse factoring and non-recourse factoring * Invoice discounting
* The cost of factoring and invoice discounting * Export factoring
* How to choose a factor
(ii) Getting paid on time
Ensuring that customers pay their bills on time can be difficult. It's a serious issue - late or non-payment of debts can cause cash-flow problems - and could even force you out of business. It is better for your cash-flow if you can get your customers to pay in full in advance. If this is not possible, you should request a deposit which could be calculated to meet the initial costs of fulfilling an order or service. If a customer will only deal with you by paying invoices in arrears, there are several steps you can take to ensure you get paid on time. For example, you could offer discounts for early payments and charge debtors interest on late payments. Before dealing with any customers, make sure you set out clear terms and conditions. To encourage prompt payment there is a statutory right under the Late Payment of Commercial Debts (Interest) Act 1998 to charge debtors interest on late payment if you wish. You can also claim reasonable debt-recovery costs. But there are a number of things you can do to persuade customers to pay on time before going down this route - setting out clear terms and conditions and offering discounts for early payment, for example. The set of highlights described below will help you tighten up your credit management procedures and it outlines the range of legal steps you can take to get customers to pay. * Get your terms and conditions right
* Credit checking potential customers
* Reducing late payment risks
* When to use factoring and invoice discounting * Your right to claim interest on late payments * Should I charge interest on late payments? * Debt recovery costs and unfair contract terms * Using a debt collection agency
* Should I take court action?
(iii) Getting paid when selling overseas
Timely payment is essential for the survival of your business, especially when you're trading overseas. Financing your export activities can place a strain on your cash-flow, so it's crucial to keep control of the payment arrangements you make with customers and use proper credit control procedures. Taking legal action to recover unpaid debts might be expensive or even impossible. Ensuring you get paid for overseas sales is a combination of assessing risk, settling on acceptable payment terms and methods and considering insurance to protect yourself against problems. The set of highlights described below will help you make an informed decision on credit terms, methods of payment and credit control procedures. It also discusses credit insurance issues to consider as part of your overseas sales strategy. * Research overseas customers' and markets' creditworthiness * Payment terms for overseas customers * Receiving payments from overseas customers * Assess the risk level for overseas payments * Managing your overseas customers' payment performance * Insurance against non-payment by overseas customers (iv) Recover debt through court
Taking legal action to reclaim debt should be a last resort, and often the threat is enough to make your customers pay you. However, if your usual ways of recovering debt have failed, there are things to consider before beginning the legal process. The county court offers three processes for settling disputes depending on the amount of money involved. The small claims process - part of the county court system - is an inexpensive and straightforward way of settling disputes over smaller amounts of up to £5,000. Claims over £5,000 should go through either the fast track process (up to £15,000) or the multi-track process (above £15,000). However, a county court judge may also refer cases involving larger sums to the small claims process - or you can request this with your debtor's agreement. The set of highlights described below will help you decide if court action is right for you and explain the steps you need to take. * Deciding whether to make a claim
* Choosing the right legal route
* Using solicitors and debt recovery agents
* How to make a court claim
* After a claim has been issued and served
* A contested court case
* The right to recover interest
* Enforcing the judgment
* Winding up and bankruptcy petitions
(v) Avoid insolvency
A business is insolvent if it doesn't have enough assets to cover its debts, or it is unable to pay its debts as and when they are due. If you monitor your business' actual performance against the budget and the cash-flow forecast regularly, this will give you an early warning of potential problems. You can then take action to avoid insolvency. The set of highlights described below provides information on how to reduce the risk of insolvency by suggesting actions to take and sources of advice to approach. It also describes possible outcomes of insolvency for different types of business. * Improve cash-flow
* Negotiate with creditors
* Reduce overheads
* Importance of advice when avoiding insolvency * Possible outcomes for limited companies
* Insolvency outcomes for partnerships and sole traders (vi) Recover your debts
Getting your debtors to pay their bills can be a difficult and time-consuming activity. But it's something all businesses have to confront from time to time. There is also a tool helps to lay out all the options available to you. It helps you to understand: * Where you are in the debt recovery process * What you can do next
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