07801199671

Category: Managing Business Finance

How much should you budget to spend on marketing?

Posted on by Susie Kevern

How do you keep control of marketing spend in a growing business? How much should your business be spending on marketing? Is it an investment in the future or just a cost?

Marketing spend is a difficult sell to accountants – there is no way of guaranteeing that it will deliver sufficient sales to cover the cost nevermind grow the business in the long run. It’s easy to argue this is frivolous spending, especially if times are tight.

But without marketing/ branding/ advertising activity there is a serious chance that sales won’t be maintained at a profitable level (or grow to get there) jeopardising the work that everyone else is doing. So yes, marketing is a necessary business investment.

So in the real world how much budget do you allocate to marketing; 2%? 5%? 10%?! and what’s the best way to spend it?

First, I would hark back to earlier posts about creating a cost conscious culture: everyone in the business can have an impact so good communication is vital. Take time to explain the goals to the team and show how they can play their part.

When the main budget is being constructed it’s not uncommon for marketing to be “given” a set amount of budget each month, regardless of future plans. This reflects the fact that ongoing marketing is essential, but wouldn’t it be better to look at the marketing plan and work out a cost of that?

Working in isolation risks creating plans that promise great things, both in terms of the budgeted profit and new prospects, but then fails to deliver. Setting out on to achieve goals when you know you can’t afford the resources that are needed is going to result in missed targets and it is easy to see this as a bad plan rather than a missed opportunity.

So how do you budget for a successful marketing effort?

Obviously it depends on what you want to achieve; doubling sales is likely to be much more demanding that maintaining current sales. But also it depends on the customers you’re trying to reach and the platforms you’re planning to use, so really there is no right answer!

So back to collaboration between the teams at the planning stage:

Focus on quality rather than quantity. That’s about reaching the right customers, and looking at specific activity rather than straight sales increases. Working on multiple fronts at the same time can be costly (and exhausting!) and there will be specific timescales for different offerings (advertising Christmas party bookings in January?).

The other key factor is that success depends on what you measure. It is important to understand what good results for your business will look like, so identify a return on investment at the outset. That doesn’t have to be in money terms (sales gained vs cash spent), why not look at other measures (views, enquiries, recognition, footfall) instead? Once you’ve identified your measure, you need to collect data to measure it – to review and work out if the expected results are being delivered.

As I’ve said before a budget should be a living document; constantly under review. When you’ve got some data, you can check the results against what you expected, and if necessary change the plan.

At this point you can update your forecast with better information to make see the implications of the changes to both profit and cashflow. This allows you to understand what you’re spending, remember why, and keep control of marketing spend in your business.

Creating a Cost Conscious Culture

Posted on by Susie Kevern

What’s the most effective way of controlling spending in your business? Previously I have talked about whether or not a budget is an effective tool to control spending and concluded that it’s not. A budget is a tool for building an overview of strategy and assessing potential changes, not for controlling behaviour.

I had originally been planning to post about Zero Based Budgeting. This is a planning process where every cost has to be examined and justified before being allowed into the budget. But personally I find this time consuming and really not that rewarding so it’s difficult to get enthusiastic about it!

So instead I’ve been thinking about how it’s stupid to hope that you can control spending behaviour with a policy. Take lockdown rules as an example: the Government could have just set out the rules and hoped that the population would obey, and probably had minimal success. Instead they have relentlessly evangelised about the why behind their policy – to include all of the potential “decision makers” in their vision.

In any business the same needs to happen to successfully achieve the objectives, whether they be brand building or cost cutting. So how might you go ahead making this happen?

You need to involve the whole team, whether they have spending power or not, to build a “cost conscious” culture.

Ultimately you could say this starts with hiring the right people who understand the responsibility of spending wisely, but in the shorter term what about setting out a framework for decision making:

  • Is this spend really necessary?
  • Does it provide good value for money, especially compared to a cheaper alternative?
  • Does this create value? That’s in terms of something the customer values, not just something we like!
  • Does this achieve the goals we are working towards? So a higher cost could be an acceptable trade off for recyclable supplies, reduced carbon emissions, etc.

Communicating this allows the whole team to play their part in making spending effective, which really helps people stay motivated in uncertain times.

Similarly, communicating with the team how the business makes profit and/ or generates cash enables everyone to focus on directing efforts to make more.

That could be focussing sales & marketing efforts on the right activities that deliver good quality leads. Or focussing on sales that bring in better profit margins.

But equally it could be focusing on selling to customers who pay on time. Or structuring deals so that the business is not paying for supplies now that customers will not pay for for several more months.

While spending can’t be controlled by capturing a number on paper in a budget, this highlights the importance of having good information about your business.

Knowing how profit margins compare between products and customers, how long customers actually take to pay and having a picture of the current financial performance allows you to assess the effects of changes.

You can’t always make the right decision because you can’t be certain about the future but you can make better decisions.

If you feel you need better financial information to help your business grow successfully then contact me for a free, confidential chat, or have a look at other advice I’ve published about making your budget more effective.

Budgeting for real life

Posted on by Susie Kevern

Budgeting for real life is a never ending challenge: most likely you’ll be wrong, the only uncertainty is by how much. But, as I’ve talked about before, it is an exercise worth persevering with.

An effective budget is a vital tool for building a successful business. Putting one together is no small task however it shouldn’t be viewed as a once a year job. In real life new opportunities or challenges rarely come along with perfect timing so that you get notice just before you create your budget.

Would you turn down a golden opportunity just because there was no spend allocated to it in your budget? That’s like saying would you pass up a sale because you’ve already hit your target?!

To manage a business effectively you need to stay flexible and reflect what’s going on in real life. If your budget is a work in progress then it can be an useful tool to refer to when you’ve got decisions to make. You can answer the “what if” questions and see how a single choice fits in to the bigger picture.

Numbers are good that way – word descriptions are subjective, but numbers (obviously chosen with care and consideration) give a more objective interpretation of the likely effects of a decision.

So how do you make this happen?

First, the key report you need is one that marries actual financial performance so far with the budget for the rest of the year. Then you need to keep updating it with both new actual results and amended forecasts that reflect your ever improving understanding of what the future holds.

Then, when a new opportunity crops up, there are two questions to ask:

1. How good is this opportunity?
Does it advance the business towards its strategic goals? Does it deliver profit and/ or additional cash? Does it deliver other non financial goals (reducing carbon emissions, improving resilience, etc)?

2. Do we have the necessary capacity?
This is both in terms of the financial capacity to invest in a new venture and capacity within the organisation to manage the workload that it will entail.

Available capacity changes as it is continually influenced by current performance so having a reliable, up to date picture of how the business is performing as the year goes along is crucial.

Maybe this sounds like a lot of work, but it’s what management accountants love! If you want to review how well financial planning works in your business then get in touch.

Better business budgeting: making a more effective plan

Posted on by Susie Kevern

Did you work out a budget for this year, as per normal? Have you thrown it out yet?!

It’s easy not to bother at the moment; the last few years have shown how little certainty we really have when we try to plan ahead and the last 12 months have made it clear that that’s not changing anytime soon.

So why bother with a budget?

In my experience making your own predictions of how sales and costs are going to pan out during the year gives you the background to make order out of chaos. What is the coming year likely to look like? What needs to happen to do to keep all those plates spinning and what power do you have to influence it?

Budgets were first developed in the early 20th Century as a way of keeping financial control on a business. The thinking was that analysis enabled business managers to control spending. But is a budget an effective tool to limit spending or grow sales? I think we would all agree that the 21st Century view is that it NO.

First of all, there are three distinct ideas wrapped up in a budget; strategy analysis, target setting and resource allocation, and that’s where I’d say the theory starts to fall apart. You can’t balance the best case outcome and the worst case outcome in one document without reaching a hopeless compromise.

Strategy Analysis
It’s easy to think of a budget as a plan for the year, but actually it’s more of a description, in numbers, of what you expect your plan to deliver.

Life very rarely goes to plan, but understanding what the world will look like if your business strategy plays out allows you to check you’ve got the right strategy. Will your growth plans deliver the anticipated results? Can you declare the dividends that you are expecting to pay?

A budget allows you to check you’re heading in the right direction.

Target setting
Targets are usually about sales, but regardless of subject a target is always something you want to achieve (or will be a challenge).

If a budget is going to be reliable you’re going to want to keep your sales figures realistic. But how motivating is a sales target that is safe and achievable?

While right at the moment keeping up with last year’s sales may be a challenge in itself, a good sales team will always be aiming for bigger and better.

Yes, the figure used in a budget needs to be “expected” sales, but target setting should be handled separately. There is no real compromise between achievable and motivating.

Resource Allocation
Overhead costs often feature in a budget as a consequence: an uncontrollable add on (or actually a deduction) from sales: staffing costs £x, marketing costs are the same as last year, the insurance cost has increased so something else has to be reduced to keep the balance.

This is not financial control!

First of all there will be interdependencies – controlling cost may mean you haven’t got the capacity to fulfil new sales orders, etc. So the staffing budget needs to be detailed and reflect the strategy.

Marketing spend, and lots of the other costs need to be planned and matched to specific activities (drivers) rather than just using last year’s figure, or a plain percentage of sales. Marketing in particular is a topic for another post, but my message is that this is the time to stop and think about how the bills added up last year and choose what you want to do this year, not simply repeat ad infinitum.

So effective budgeting needs to balance these three competing features. There are other ways that your budget can become more effective though:

Communication
With all of this planning it is important that creating a budget is always a two way process. This is another flaw in the original theory of budgeting. It’s easy for finance to pick a number and run with it, but the people who are talking to suppliers are the ones with the real information. A successful budget involves integrating the plans and barriers for all departments and decision makers.

Challenge
One of the problems with budgeting like this is that sometimes the budget will show a loss on the bottom line, which can be difficult to accept.

The reality of growing a business is that you continually invest in growth so there may not always be a rosy profit available. It’s important not to distort the predictions simply to make the budget look more reassuring. It takes action to change the numbers, it won’t work the other way round. This is where a cashflow forecast is important; in the short term profit is less important than cash and if previous investments are paying off there may be scope to stomach a loss this year.

Review
It’s easy to create a budget at the beginning of the year and leave it at that. But the real power of a budget is to compare real life to what you expected would happen, and work out what action you need to take as a result.

In addition to this there are no rules about how regularly you should review/ update it. It is worth keeping it up to date. If you started last year with monthly sales of £40,000 and in March half your customers closed for several months a comparison between budget and actual sales would not have told you anything about the effectiveness of your subsequent actions.

I like to review budgets at least quarterly to make sure the information is up to date, but its not unheard of to review them several times in a quarter as the facts change.

Good information is the key to making good decisions. Cash is always my first priority, but a well thought out budget is the source of the information you need to make your cashflow forecast and keep your business going, and growing successfully.

Look out for more blogs here talking about how budgets can make your business more effective, and if you would like help reviewing your current budget then get in touch.

Practical advice for micro business

Posted on by Susie Kevern

It can be difficult to get practical advice for micro business, especially when you’re on a budget. 

In an effort to share good advice and help every business thrive despite the current restrictions the team at North Devon’s Business Action magazine has developed a “Business Activist” feature. I’m delighted to have been asked to chip in with some answers to readers’ questions regarding business finances, and so it makes sense to share that advice here too.

All of the advisers who have joined the team are happy to give general advice to businesses who contact them, so if there is a burning question that you’ve never found the right person to ask then you can call me, or email your question to ask@business-action.co.uk

Question 1 (Autumn 2020): Can my micro business benefit from automating our accounts?
It depends what you mean by automating. Usually this means adding programs to cloud accounts software (Xero, QuickBooks, etc) to save time processing bills and invoices; what’s not to love about that? But getting value for money and for the time you spend is crucial.

I like to keep things simple; your time costs money but in a startup/ micro business you will always be directly responsible for making sure all the bills get paid. Whatever you do it is vital that you know what’s likely to happen in the bank account. What bills do you need to pay and when do you expect customers to pay you?

So accurate records are most important. You can do this on a spreadsheet, especially if you are not VAT registered. Actually a simple spreadsheet can be the best tool even when you have an accounts system as well.

What you may not realise is that now most accounts software will automate a number of tasks for you. It can link directly to your bank, offering huge time savings on copying details from a statement as well as helping you keep track of which customers have paid. In addition to this you can set up repeating invoices, send customer statements and see summaries of outstanding bills as well as much more to save you time and help you stay on top of your finances.

This is usually enough for most micro businesses; good value for both the money and time involved.

Question 2 (December 2020): Should I register my business for VAT?

If your sales come to more than £85,000 in any 12 month period you must register for VAT. But if sales are less than this the answer is very specific to what kind of business you’re in:

  • Who are your customers? Business customers can reclaim VAT on their purchases so adding VAT to your sales will not make any difference to them. Consumers on the other hand cannot reclaim VAT so it will increase your price by 20%. This is often crucial to your profitability, especially if some of your competitors may not have to charge VAT.
  • What do you sell? VAT on essential items is charged at 0%. So if you sell food or drink (not hot food or alcoholic drinks), books, newspapers, childrens’ clothes and some other products VAT will make no difference to the price.
  • What do you buy? If you already pay VAT on your purchases you may be better off if you can reclaim VAT. If your costs are mostly wages then you may not be.

If you think registering for VAT is right for your business then really you need an accountant’s advice. Keeping good records is essential, along with making sure you know the deadlines for reporting and paying HMRC.

Question 3 (February 2021): Can preparing a budget revive enthusiasm in our business after being closed due to Coronavirus?”

This is a dreadful time everyone, but especially for businesses who are reliant on customer footfall for their sales. Sometimes it feels like the pandemic might never end. But it will end, and this is a the perfect time to make plans for what you want your business to look like when it does.

In the short term it’s vital that you keep on top of bills that are due and make sure you have enough money in the bank. A budget is a great tool for that forward planning and gives you the information you need to make proactive decisions and have up front discussions with landlords and suppliers so you stay in control.

There’s more to it though; creating a budget and planning a vision for the future can be uplifting. It takes your attention away from current problems and focuses you on the future.

While you’re closed you have an opportunity to think about what you really want from your business; is what you’ve got now the business that you dreamt of? Would you make changes? What would it take to make this happen?

The future may seem a long way off right now, but this is a perfect time to plan.

Question 4: (April 2021): A roundup of questions about giving credit to customers

When you’re selling to another business they often expect not to have to pay straightaway. But allowing customers credit has a cost and can be a risk to your business, so what should you think about before you go ahead?

Q: Do I have to offer customers credit? No! It’s important to understand what works for you, not just what you think is expected. A cashflow forecast is essential here, it will help you see the impact of delays in getting paid.

Q: What about discounts? Some firms offer a small discount for prompt payment. If you include the cost of offering credit in your prices you can afford to give something away for quicker payment. It’s also worth remembering that some customers prefer a direct debit option as this reduces their admin burden while giving you more security.

Q: I’m worried if I don’t get paid now I might not get paid at all! You need to work out how much credit you feel comfortable giving. The best plan is to start small and look to build a relationship:
* make sure you have all the details you need for new customers: the right names and phone numbers
* ask for references from current suppliers and make sure you follow them up
* keep your book keeping up to date so that you know how much you are owed
* send statements and reminders BEFORE the payment is due
Most importantly speak to your customers regularly; check they have your invoices and know when they are due.

Handled well, offering credit can help you grow your business. But make sure you operate good credit control: a friendly phone call doesn’t cause offence and can build valuable business connections.

There’ll be more answers coming soon, but if you have a question of your own then you can contact me or email it to ask@business-action.co.uk

Find out more about how I help businesses here

Get more information from your accounts

Posted on by Susie Kevern

Why is it that all year end accounts look the same? Does that reflect the information that readers need?

Accounting regulations are massively complicated and I am not disputing the need for that; it is important to make sure that any two sets of accounts can be compared with each other and take the same perspective.

The same thing happens with accounting software: when you set up software from scratch you get a basic, blank set of accounting codes that is a best estimate of what most businesses need.

In both cases the one size fits all approach is fine when it comes to working out the bottom line profit, when you’re simply deducting all costs from total income. But it’s totally insufficient if you want to use your accounts to provide information to manage your business with.

What sort of information might you need?

  • What about income: are you happy to lump all sales together, or would it be useful to compare revenue from different types of sales?
  • How about splitting sales by product type or customer location?
  • And what about your costs? You don’t want to over complicate things, but typically the objective is to separate the costs associated with delivering the product or service from the general costs of running your business.

This lets you measure how things are changing and provides answers to questions like “how come are we busier now but not making any more money?”

How about looking at

  • A comparison of your sales mix (spread of sales by product type),
  • a comparison of margin per customer,
  • the resulting change in percentage gross profit made on sales each month as a result

With a little planning and some organisation you can set up the accounts so that they give you simple m information that you can use to work out what actions to take.

If you want to develop this idea further, what about adding in some comparisons with non financial figures? Working out production wages per working day, or sales per hour worked?

How do you work within the structure? Do you add new codes for things you want to measure, or do you just squeeze them into the existing structure?

At the end of the day, while there is a legal duty to keep accurate accounting records are you in business to create data for the accounts, or are they there to provide you with information?

Take a look at my post about what goes into good management information here to find out more.

Good management accounts

Posted on by Susie Kevern

Financial Direction is about using good management accounts to improve profits and cashflow. That’s a pretty big claim, so what do I really mean?

Xero produces management reports for you (other software packages are available). They look very similar to the accounts you get at the end of the tax year, but the value comes from looking at them on a more regular basis – usually monthly – and in more detail.

Unfortunately just printing out the reports can give misleading results. Think about:

Are your accounts up to date? This sounds simple, but isn’t as common as you’d think.
Timing: if you deduct a whole year’s insurance costs from just one month’s sales your results may be skewed disastrously. This is where stock counts come in and also prepayments (spreading an invoice over several months) and accruals (estimates of costs not yet invoiced.

Once you have accurate and reliable accounts you can choose whatever figures you want to shed light on what’s going on “under the hood” in your business: really, the sky’s the limit.

Just to start with you need:

  • The right level of detail: maybe you want to bundle all office costs together but how about separating staff costs between office staff and production workers?
  • A profitable history is reassuring, but it’s the future that really matters. A forecast will show you where the risks are.
  • Then you need some KPIs that show how healthy the business is simply and speedily:
          • Financial: debtor day, profit margins, growth rates
          • Non financial: customer numbers, spend per customer, open orders
          • Variances: how this month compares to last month, or to forecast
        Good management accounts should give you information to identify the actions required to steer the business towards your objectives and track the results.

What makes good management accounts?

Posted on by Susie Kevern

Usually management accounts look very similar to the set of accounts that you get at the end of the tax year, but on a more regular basis – usually monthly – and in more detail.

Most cloud accounting software produces all these reports, so surely that’s enough? In some ways, yes it is, but there are two things to remember:

First: “rubbish in, rubbish out”. Simply printing out a snapshot of the accounts is unreliable. To improve the quality of the information you need to:

1. Make sure you have enough detail to see what’s going on – “Administrative costs” is good enough for the year end accounts, but does it help you see where the costs have built up?
2. Check all the sales and purchase costs have been included (and the accounts are up to date). this sounds simple, but isn’t as common as you’d think.
3. Think about making sure that only costs associated with this month are included – if you deduct a whole year’s insurance costs from one month’s sales your results may be skewed disastrously.
4. This is where stock counts come in, but also prepayments (spreading an invoice over several months) and accruals (estimates of costs not yet invoiced).

This creates accurate and reliable accounts. The second thing to remember is that there are no rules as to what you need to show in management accounts. The real benefits come from shedding light on what’s going on “under the hood” in your business.

Things like:
Financial metrics: debtor days (a comparison of how long customers take before paying), ratios splitting sales between different products or services, etc
Non financial metrics: customer numbers, spend per customer, active orders, etc
Variances: how this month compares to last month, or to forecast
Forward plans: a radar highlighting where problems should be expected, and an idea of liabilities (tax bills) in future.

Good management accounts should give you the information you need to identify the actions to take to steer the business towards the objectives that you want and they help you track the results of those strategies as well as the unintended consequences.

This is not about having reams and reams of paper to look through every month. You need a dashboard that shows the information that you need neatly summarized so that it doesn’t take an expert to find the figure that you want, and clear and unequivocal so that you can make decisions quickly.

If you would like to find out more, or you have a specific issue that you need help with then contact Susie either via the website here or direct on 07801 199671 or susie@poundlane.co.uk

Covid-19 support navigator

Posted on by Susie Kevern

At the time of writing the lockdown has been in force for 6 weeks, and in that time there have been a myriad of support packages (and revisions) announced by the government in an attempt to keep businesses in business. It has been a constant struggle to try to stay up to date.

But no longer: the government has added a “support finder” tool to the Covid-19 resources on the gov.uk website. Take a look at www.gov.uk/business-coronavirus-support-finder

The finder works as a series of questions with ‘yes/no’ and tick-box answers. It doesn’t require any identifying details (name, tax UTR, PAYE reference, etc) so you can investigate the support without creating a history. The questions, and the information you will need to know to answer them are:

1. UK nation in which your business is based
2. Number of employees (more or less than 249)
3. Annual turnover (<£85,000, £85,000 to £45 million, £45 million to £500m) 4. Are you an employer with a PAYE scheme?
5. Are you self-employed?
6. Rateable value of your premises (<£51,000, >£51,000 or N/A)
7. Business sector (retail hospitality & leisure, nurseries, other)
8. Eligibility for Small Business Rate Relief or Rural Rate Relief (on 11 March 2020)
9. Are you due to make an Income Tax Self-Assessment Payment-on-Account on 31 July 2020 (unlike the previous questions, this relates to a personal liability not related to your business)

Your responses to the above questions generates a tailored list of support packages for which your business may be eligible.

For each suggested package, there is a brief description of the measure and eligibility, with a link to take you to the relevant page of GOV.UK for further detail.

Start your search here or take a look at our resources and notes about the various options here

Help with accessing support for small businesses

Posted on by Susie Kevern

In the news recently there have been horror stories about how difficult it’s proving for small businesses to access the government’s CBILS business support scheme. Here we look at how to get the best result in any funding application, and particularly the Covid-19 support.

We are currently supporting a number of businesses with their loan applications so here are our tips on what to include in your application:

1. What support do you need?

The CBILS scheme is actually just government backing for standard bank overdrafts and loan so think carefully about ways to reduce your business spending in order to reduce the potential loan you will need. There is a raft of new measures to consider: furloughing staff, deferring VAT and requesting payment holidays, amongst others.

2. Make your case

The days of bank managers who keep in regular contact with your business are long gone so be prepared to give the bank an introduction to your business; include your last set of accounts, your most recent management accounts and a summary of your recent successes and future plans. Think of this as a sales pitch; make the bank manager want to back you.

3. Outline the effects of the disruption on your business

The bank will want to see the effect on both your profitability and your cashflow, over the next 3-6 months. A cashflow forecast is essential for this – now, more than ever, cash is king. As well as the numbers make sure you explain what changes you expect in words. Every business will feel the effects differently so you can’t expect the bank manager to know this already.

4. What will your business look like after this is over?

Do you expect some of your customers to disappear? Can you capitalise on the changes you’ve been forced to make? Are new markets suddenly open to you? Most importantly you need to extend that cashflow forecast to (ideally) show the bank that you expect your recovery to allow you to repay the loan that you’re applying for.

Finally, remember to state clearly how much money you want to borrow based on the forecasts above.


We have a detailed advice sheet on giving that application your best shot: Government support.
You can find other information and help concerning the government’s support for businesses at this time on our Covid-19 support page