Up and Running Feedback

5. Up and running

Why do I need to keep books?

Once you are up and running, you will need to control the day-to-day management of your business. No business can succeed without a methodical approach to financial housekeeping. You need an effective bookkeeping and accounting system because of the tax laws, but it will also give you the following information whenever you need it:

  • Cash position
  • Profits
  • Overheads
  • Variable costs
  • Debtors
  • Creditors
  • How much working capital you have
  • Stock levels.

    What is bookkeeping?

    There is nothing mysterious about it. It is just a filing system for figures, which help to show how well your business is doing.

    But why keep books? To satisfy the tax authorities? To keep your accountant happy at the end of the year? Yes, but your books are much more important than that. Without them, you can't hope to stay on top of your everyday business life.

    What books should I keep?

    It is important that the records you keep should be permanent and long lasting. The following are some of the books you should always consider keeping:

    Cash Book

    This is used to record the business's income and expenditure. The more detailed the record the better, and remember to have columns for VAT under both income and expenditure. The end- of-month totals and the difference between the bank columns is your bank balance at any time. It should match your bank statement when it arrives. Remember that your bank statement will usually be behind your record. It will not include your most recent transactions.

    If you give your customers credit, or you get credit from your suppliers, you will need to record the transactions in Sales and Purchase Day Books. You must transfer the figures to your Cash Book when you make or receive payments.

    Sales Day Book

    This shows who owes you money. You have sold goods to a customer and sent them an invoice. Make sure you keep a copy of the invoice. You can use it to write up your Sales Day Book. If you decide to offer a discount for early payment, you must add another column. When you have written up the invoice you can file it, usually in a ring binder. Give your invoices a number and keep them in the right order. This will make them easier to use. When the bill is paid, make a record of it in the invoice file and transfer the paid invoice into a permanent file.

    Purchase Day Book

    This shows the money you owe. You have been supplied with goods and you may have a credit period before you need to pay.

    As in your Sales Day Book, record your transactions immediately. Don't let them build up. File the incoming invoices in a ring binder, in the order that you get them. Also, set up a diary system to make sure you pay the invoices on time.

    Petty Cash Account

    This is where you record all of your minor spending, such as postage and small office supplies. Take the float out of your bank account and enter it into your main Cash Book. You now have a petty cash account. Always replace the cash taken out with a receipt that shows exactly how it was spent. If VAT is included in the receipts, you might want a more lasting record.

    It is a good idea to have a separate book, which shows any spending from petty cash and has a column for VAT paid. Make sure that whoever controls the petty cash, balances it regularly and that someone else checks it once a month.

    Other records

    Your accountant can also give you advice about other record-keeping tasks, such as inventories, stock records and 'replenishment' systems. If your business grows and needs a more sophisticated system, you may need a computer and appropriate software. If so, make sure it suits your needs. Talk to your accountant first.

    How do I monitor my performance?

    Once your systems are in place and you have made your Business Plan and financial forecasts, you need to monitor your performance. You should use the information you have gathered to compare your actual figures against your projections. They will hardly ever match exactly. But if there is a significant difference, you need to find the reason and decide what to do about it.

    There are many reasons why variances occur between forecasts and actual performance. These reasons could include:

  • Using more materials than estimated.
       This will reduce the gross profit margin.
  • Suppliers increasing price of materials.
       Again results in a gross profit margin reduction.
  • Customer buying less.
       This will reduce sales and so gross profit as well as
       perhaps increasing stock levels.
  • Customers took longer to pay than anticipated.
  • Production may have fallen behind schedule.
  • Interest higher than predicted
       Perhaps because the overdraft used is larger than originally expected.

    Debtors and creditors

    Slow payment is a big problem for small businesses. It is also one of the main reasons why businesses fail. If your customers do not pay on time, you may be late paying your own creditors. This usually increases your overdraft. Then you will have to pay extra interest, which will cut into your projected net profit. This is a simple enough circle of events, and a vicious one.

    Always try to negotiate the best possible terms for your business, but be careful not to put off either your customers or suppliers. Once you have agreed terms, they must be kept to. To help you keep control, it is useful to look at your debtors and creditors on an 'aged' basis. That is to say, 'How long ago should they have paid or been paid?'

    Useful calculations

    You need to monitor how well your business is doing and keep track of performance. You can spot changes by using the following quick calculations:

    Gross profit margin.
    This shows the difference between value of sales and variable costs as a percentage:

    Gross profit x 100 = %
       Sales

    Net profit as a percentage of sales
    This ratio shows what percentage of each sale is being converted into profit:

    Net profit x 100 = %
        Sales

    Rate of stock turnover
    This calculates how quickly stock is being used:

    Cost of stock sold
    Average stock at cost

    Net working capital (current assets - current liabilities) as % of sales
    This is used to calculate how well assets have been utilised to create the sales:

    Net working capital x 100 = %       Sales

    Quick ratio
    This calculation shows whether it would be easy to sell your business using only assets that could be quickly sold or realised. It also shows whether your business can pay debts as they are due. Your debtors should only be trade debts from which you will receive payment within a few months. In this calculation, do not include any stock unless you can sell it quickly for cash.

          Debtors
    Current liabilities

    How Can I Get The Best From My Employees ?

    There are a number of ways in which you could recruit new employees:

  • Advertising locally or in special papers.
  • Write to colleges and schools for candidates.
  • The Job Centre, The Job Club, the local Careers Office (if you are looking for a teenager)
  • An employment agency

    Job Centres and Careers Offices give their services free, but an employment agency could cost you as much as 20% of the employee's first year's salary.

    Training

    Training is necessary to make sure that staff know why and how a job has to be done. It can also make them more efficient and help increase productivity. (Investing wisely in staff and training really does pay off in the long run!)

    Personal approach

    The better you treat your employees, the better they will treat you. If you are well-mannered, punctual and committed, they probably will be too. Show them that they are valued, encourage their interest in the business and ask them for suggestions.

    Have confidence in your workforce and allow them to get on with the job. Checking everything they do creates resentment and not much else. All good managers are able to delegate. In fact, there is an argument that says that good delegation is really what management is all about.

    You could also set targets and give bonuses. This way, you will encourage your employees to work harder. As a result, you will increase productivity and waste less time.

    Payment - you must always pay wages on time and at competitive rates.

    Show appreciation - praise for a job well done is a real incentive. But try not to be over-friendly. This is difficult when you are working one-to-one, but it might reduce your authority and it will be difficult to take a firm line if you ever need to.

    It is important that you care, and show you care, if someone is often late or idle. There is usually a hidden cause. Try to get to the heart of the matter, but don't pry. If you find out what the problem is, deal with it as soon as possible. Positive action will give you a positive response and your employee may try to improve. Try to encourage employees to be open with problems so that they are willing to discuss them with you.

    Administration

    Broadly speaking, your relationship with your employees depends on your personal approach. But administration is what you actually do. Of course, they are often difficult to keep separate.

    Maintaining accurate and up-to-date staff details is a prerequisite to all your dealings with employees. Apart from confidential personal details, records should also be kept of complaints, reviews and appraisals.

    Employing people

    When employing people there are a number of issues to address:

  • Determine the exact skills needed, working hours and the wage you will offer.
  • Work out a simple application form for candidates to fill in before you see them.
  • When interviewing, give candidates exact written details of the job. You can learn more this way and it helps to structure the interview.
  • Sleep on it.
  • Sleep on it for a bit longer after telling the candidates when you will make the decision.
  • Once you have decided, draw up the contract.
  • Include a clause that will let you end the contract after a trial period.
  • It is against the law to discriminate against candidates because of their disability, race, colour, nationality, ethnic origins, sex or marital status.
  • Make sure you are working within health and safety regulations. Contact the Health and Safety Executive for information about safety standards and to arrange a site visit by one of their officers.
  • Do you know your own rights and your employees' rights concerning trade unions?
  • Do you know the rules about dismissing an employee?
  • You cannot sack someone on the spot unless you have a very good case.
  • You must take tax and National Insurance contributions from your employees' wages and send the money to your local Tax Office, following instructions the Inland Revenue will give you.