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TitlePractical Financial Management: A Guide to Budgets, Balance Sheets and Business Finance
File Size5.8 MB
Total Pages225
Table of Contents
Part 1 Assembling financial data
1 Keeping the books
	The accounts you have to keep
	Getting some help
2 The cash flow statement
	Why cash is king
	The structure of the cash flow statement
	Avoiding overtrading
	Estimating start-up cash requirements
	Cash flow spreadsheet tools
3 The profit-and-loss account
	The difference between profit and cash
	Structuring the profit-and-loss account
	Dealing with debtors and creditors
	Handling depreciation
	Cost of goods sold
	Profit and loss for a service business
	Profit-and-loss spreadsheet tool
4 The balance sheet
	A personal experience
	The public picture
	The structure of the business balance sheet
	The ground rules, concepts and conventions
	Accounting for stock
	Methods of depreciation
	The capital register
	Preparing a package of accounts
	Balance sheet and other online tools
Part 2 Understanding the figures
5 Funding strategies,safety and performance
	Debt vs equity
	Using your own resources
	Borrowing money
	Getting an investor
	Going public
	Free money
6 Using ratios
	Levels of profit
	Working capital relationships
	Return on investment (ROI)
	Market tests
	Combined ratios
	Getting company accounts
	Ratio analysis spreadsheets
7 Costs, volume, pricing and profit decisions
	Adding up the costs
	The components of cost
	Break-even point
	Margin of safety
	Costing to meet profit objectives
	Costing for special orders
	Real-time internet pricing strategies
	Costing for business start-up
	Costing to identify unprofitable products and services
	Getting help with break-even
8 Improving performance
	Pricing for profit
	Reducing costs
	Squeezing working capital
	The profit-improvement programme
Part 3 Figuring out the future
9 Revenue budgets
	Budgeting for a business
	Timescale and detail
	Market appreciation
	Forecasting sales
	Resources appreciation
	Key strategies and operating plans
	Setting the budget
	Budget guidelines
	Monitoring performance
	Flexing the budget
	Seasonality and trends
	Cash and capital budgets
	Building a budget model
10 Capital budgets
	Average return on capital employed(ARCE)
	Payback period
	Discounted cash flow
	Present value
	The profitability index
	Internal rate of return
	Risk and sensitivity analysis
	Dealing with inflation
	Appraising investments
	Some general factors in investment decisions
	Online capital budgeting calculator
11 Preparing a business plan
	Why you need a business plan
	Contents of the plan
	Tips on communicating the plan
Part 4 Dealing with regulatory authorities
12 Computing taxes
	Sole traders and partnerships
	Company taxation
	Which structure is best?
	Minimizing taxes
	Dealing with employment taxes
	Value added tax (VAT)
	Surviving a tax investigation
	Help and advice with tax matters
	Finding a low-tax country
13 Alternative legal structures
	Their impact on financial procedures
	Sole traders
	Partnerships and limited partnerships
	Limited companies
	Help and advice on business ownership matters
14 Directors’ roles and responsibilities
	Directors’ duties
	The Companies Act 2006
	Holding board meetings
	Appointing a company secretary
	Taking on auditors
	Wrongful trading and other misdemeanours
	Dealing with business failure
	Non-executive directors
Index of advertisers
Document Text Contents
Page 2



Practical Management-Small Business prelims:Practical Financial Management 25/6/08 14:20 Page

Page 112

In the preceding chapters we have seen how business controls can be devel-
oped. These can be used to monitor performance against the fundamental
objectives of profitability, and the business’s capacity to survive. So far we
have taken certain decisions for granted and ignored how to cost the product or
service we are marketing, and, indeed, how to set the selling price. These deci-
sions are clearly very important if you want to be sure of making a profit.

Adding up the costs

At first glance the problem is simple. You just add up all the costs and charge a
bit more. The more you charge above your costs, provided the customers will
keep on buying, the more profit you make.

Unfortunately as soon as you start to do the sums the problem gets a little
more complex. For a start, not all costs have the same characteristics. Some
costs, for example, do not change however much you sell. If you are running a
shop, the rent and rates are relatively constant figures, completely independent
of the volume of your sales. On the other hand, the cost of the products sold
from the shop is completely dependent on volume. The more you sell, the more
it costs you to buy in stock.

Rent and rates for shop 2,500
Cost of 1,000 units of volume of product 1,000

Total costs 3,500


Costs, volume, pricing
and profit decisions

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84 Understanding the figures

You can’t really add up those two types of costs until you have made an
assumption about volume – how much you plan to sell.

Look at the simple example above. Until we decide to buy, and we hope sell,
1,000 units of our product, we cannot total the costs.

With the volume hypothesised we can arrive at a cost per unit of product of:

Now, provided we sell out all the above at £3.70, we shall always be profitable.
But will we? Suppose we do not sell all the 1,000 units, what then? With a sell-
ing price of £4.50 we could, in theory, make a profit of £1,000 if we sell all
1,000 units. That is a total sales revenue of £4,500, minus total costs of £3,500.
But if we only sell 500 units, our total revenue drops to £2,250 and we actually
lose £1,250* (total revenue £2,250 – total costs £3,500). So at one level of sales
a selling price of £4.50 is satisfactory, and at another it is a disaster.

This very simple example shows that all those decisions are intertwined.
Costs, sales volume, selling prices and profits are all linked together. A decision
taken in any one of these areas has an impact on the other areas.

To understand the relationship between these factors, we need a picture or
model of how they link up. Before we can build up this model, we need some
more information on each of the component parts of cost.

The components of cost

Understanding the behaviour of costs as the trading patterns in a business
change is an area of vital importance to decision makers. It is this ‘dynamic’
nature in every business that makes good costing decisions the key to survival.
The last example showed that if the situation was static and predictable, a profit
was certain, but that if any one component in the equation was not a certainty
(in that example it was volume), then the situation was quite different.

To see how costs behave under changing conditions we first have to identify
the different types of cost.

* The loss may not be as dramatic as that because we may still have the product available to sell later, but if
it is fresh vegetables, for example, we will not. In any event, stored products attract new costs, such as ware-
housing and finance charges.

Total costs ÷ Number of units
= £3,500 ÷ 1,000 = £3.50

Practical Management-Small Business 51-106:Fin Man/Small Busi 6th 43-136 25/6/08 14:31 Page 84

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rate of return 144–45, 148
ratios 59, 76, 78, 80–82

ratio analysis spreadsheets 82
Real Business 150
real-time pricing 94
realization concept 136
receivership 189
redundancy 60, 85
registered office 189
regulatory authorities 20, 159, 162, 164, 166,

168, 172, 174, 176, 178, 180, 182, 186,
188, 190

rent 12, 24, 83, 85, 100, 124
reserves 41, 49
residual value 149
retained earnings 57
revised profit-and-loss accounts 132
risk capital 70, 74
rolling quarterly budget 127
rollover relief 167, see also capital gains
Royal Bank of Canada 155
Royal Bank of Scotland 22–23
running expenses 109

safe margin 166
Sage 13, 31–33
sales analysis 29
sales budget 128, 130
sales commission 85
sales forecast 119, 133

system 104
sales growth 115, 119, 131
sales history 114, 118–19
sales objectives 117
sales projection 119
sales volume 84, 118
security 65, 70, 72, 81, 153
selling price 83–84, 89–91, 93, 95–96, 98,

semi-variable costs 87, see also fixed costs,

variable costs
sensitivity analysis 147
share capital 41, 58, 181
share-option scheme 167
shares 41–42, 69, 70, 72, 79, 80, 93, 114, 124,

157, 180–81, 184

assets 35
bank funding 64
cash injection 42
liabilities 78

Simplex 13
sleeping partner 181

Small Business Advice Service 18
small companies 80, 163, 182, 187, 190
Small Firms Loan Guarantee Scheme 65
Snoop4 Companies 68
sole traders 68, 161–62, 165–66, 179–80,

Solutions Matrix 149
start-up capital 62, 94–95, 114, 118

control 121
markets 72, 79, 80, 93
valuing 74

straight-line method 48, see also depreciation
sum-of-the-digits method 48, see also

supplier credit 68
survival rate 95
sweat equity 61

takeover 41, 72
tax, see also offshore tax planning

accountants 163, 166
authorities 26, 162–64, 166, 173
holidays 176
inspectors 5
investigation 173
liability 78, 161, 163, 166
misdemeanours 173
period 167
position 161, 179
rates 161, 164, 169, 178

change 77
relief 43, 166
residency arrangements 177
year 163

tax-adjusted profits 164
tax-free allowance 166

event 167, 175
profits 163–64, 166–67
salary 167
turnover 169

Taxation and Customs Union 173
TaxationWeb 167
Taxcafe 174
trade credit 16, 68
trade debts 67
true and fair representation 187, see also

turnover 67, 80, 151, 161, 164–65, 169, 187

unit contribution 89
unit cost breakdown 93
unit variable cost 92, 95–96

Index 195

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valuing stock 74
variable costs 85, 87–89, 91–93, 95–98, see

also fixed costs, semi-variable costs
variances 129–30
VAT (Value Added Tax) 5, 13, 16, 161,

168–74, 179
authorities 173
entry rates 169
inspectors 172
number 173
office 172
question-and-answer service 174
return 14, 171–72
thresholds 14, 164

venture capital 70–71

wages 15–17, 20, 35, 40, 124, 164
website 67, 71, 80, 141, 153, 164
what if projections 18
working capital 39, 41, 49, 61, 77–78, 100,

103–04, 117, 124, 148–49 74
writing down allowance 26, see also

wrongful trading 185, 188

Yahoo 82

zero-rated items 169
zero sum game 172
Z-Score 80, see also failure

196 Index

Index of advertisers
Acceptum Business Software 2–4
Bank of Scotland x–xii
Bartercard xiv–xvi
Business Startup Community ii
Energy Saving Trust xxvi–xxvii
Liberty Accounts 9–11
Lloyds TSB Commercial Banking inside front cover, 53–56
Mamut Business Software vi–vii
Microsoft Ltd xviii–xx
Royal Bank of Scotland 21–23
Sage (UK) Ltd 31–33
Wellworking (FastAeron) xxii–xxiii

Practical Management-Small Business 6th 107-196:Fin Man/Small Busi 6th 137-238 25/6/08 14:37 P

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