Lucy and Lucy – Co-Founders of
Barfoot + Duggan
Emma Lanman – Founder of
Bridget Harris – Founder of
Tess Alshibaya – Founder of
Watch out for “over-trading” as well as “over-eating” at Christmas!
Did you know that over-eating Christmas lunch can add up to well over 6,000 calories… at least you can work this off with a brisk walk (about 12 hours at 6mph!) But over-trading can be permanently disastrous for your business. Over-trading is where a business takes on too many orders, which despite being profitable, the business just hasn’t got the Working Capital to finance. What is working capital? Basically it’s the cash that should be in your bank account but at the moment it’s in someone else’s! It’s the money tied up with your customers who haven’t paid yet (known as debtors) plus the money tied up in stock on the shelves of your business (that hasn’t been sold to customers) less what you owe your suppliers (creditors) because that cash is still in your bank account. It’s a really important financial management concept to be totally comfortable with – you need to be aware and manage your working capital requirements. These requirements will grow as the business grows – it’s a problem that won’t go away and ironically the more successful you are the more working capital you will need. At its simplest managing working capital is about three things: 1. Getting your customers to pay quicker 2. Ordering sensible amounts of stock 3. Negotiating favourable payment terms with suppliers…. easier said than done when you are a new business Here are my top tips: – When negotiating price, link it with payment terms as in “I will accept your proposal if you pay within X days or pay a deposit” – Get deposits on order – it is not unusual in creative businesses to get 50% on order to cover materials – If you are doing a big contract, break it down into stages and milestones, which trigger interim payments – If you are working for big companies make sure you get a Purchase Order number. This confirms the work is authorised. – With a new customer you are offering credit terms to, as well as doing background checks (useful site duedil.com) make sure you follow their invoicing procedures to the letter. And ring up and check they have the invoice and are happy with it. – Can you include a subscription element to your business model? i.e. customers pay monthly for a regular delivery or service. – This is not immediately obvious and a bit counter-intuitive because by ordering more you can get a better price… in the early days, my advice is to manage for cash rather than profitability so order smaller quantities. Yes you end up paying more but you reduce the amount of cash tied up. Plus you are less flexible if you have bought lots of stock. – The key word here is negotiate. Just stringing your suppliers along is not sustainable in the longer term. – Get to know your suppliers so you can understand what is important to them – there may be ways you can help them over and above just buying from them. – They may be interested for example in a long term commitment or a regular buying commitment that helps them plan and give you better payment terms in exchange – If your suppliers are bigger companies they may be a source of finance for you – they may be interested to do a more formal collaboration. To reduce the risk of over-trading and running out of working capital, keep your financial forecasts up to date and especially your cash flow. Review them regularly if you sense you are running out of Working Capital. There are some good new online forecasting tools to help you like Float and Brixx If your forecasts show you do need more working capital historically it was the banks that funded working capital with overdrafts – however these are much harder to get now. An alternative is the new online invoice discounting firms such as Market Invoice – they advance money against your invoices. But like all providers of finance they wont be impressed if you don’t give them enough time to review your case ie if you say you need the money next week… Enjoy the festive period – count the calories to avoid over-eating and use the time to identify your potential working capital needs in 2017 to avoid over-trading.
Pitch deck checklist to secure Cash!
It takes a lot of time and effort to get an opportunity to pitch to investors. The pitch deck is a key tool to help secure their interest and recently I’ve seen a number of pitch decks which made some fundamental mistakes. So use this checklist to increase your chances of success. Before starting just a quick word of warning – make sure you do your homework on prospective investors that you’re pitching to. Not only to make sure you know what is interesting to them – their hotspots, but also to make sure that they are bonafide. You don’t want to be sharing confidential information even in a summary form like on a pitch deck with just anybody. So with that … Here are my top tips Tip 1 – Make sure it is very, very clear the pain (or problem) that you are solving and allude to the size of this pain. One of the biggest complaints from investors is not fully understanding what it is you do. Tip 2 – Again explain clearly in a jargon free way how it is that your product or service addresses this problem. Just what are the specific benefits and value the customer will derive from using your product? Tip 3 – I personally think it’s really important to get the team information upfront. Why is it that you are the right people to deliver? As I’m sure you know, fundamentally investors are going to be backing you – that’s why I feel this information needs to go high up (please be aware that with everything I’m saying here there is more than one school of thought – it’s very important that the pitch deck speaks to you as you are going to be the person presenting it). Tip 4 – Markets and marketing is a crucial part of the pitch deck. You have already alluded to the potential size of the market. Now you really need to show you understand the addressable market and your share of this. If you’re not familiar with TAMSAMSOM, have a quick Google. Tip 5 – Marketing is something that investors pay a lot of attention to. No matter how fantastic your product, how are you going to build that bridge between you and your customer so that they know about you? And what is this going to cost – you should know and be able to answer questions on what is called your ‘customer acquisition cost’ i.e. what is it going to cost to get a new customer. This is very relevant when comparing it to the lifetime of the customer and the average spend over that period. Whether you reveal all your marketing metrics e.g. conversion ratios, web traffic estimates etc in your pitch deck or not, you must have them at your fingertips and be prepared to answer detailed questions on them. Tip 6 – There is a temptation to gloss over competition believing that your product or service is unique. This is very rarely the case. Investors will expect to see a clear analysis of the competition and why you feel you have the edge. Tip 7 – The ask $. You may have verbally indicated at the start of your pitch how much money you are looking for. But what a lot of people don’t do is explain clearly what the money is going to be used for. Personally I think the pitch should also include what percentage of the company you are prepared to offer and the implied pre-and post money valuation. Tip 8 – The dreaded financials. Personally I think the worst thing you can do is include a table of steadily increasing sales and profits or even a graph. Investors never really trust spreadsheet forecasts or any thing derived from them. If you are in an early stage business the first key financial milestone is breakeven. So I suggest describing what it looks like – how much web traffic do you need or how many distributors. You can also include in financials details of the unit economics. How much does one product cost to make, what is the selling price and how much is the gross profit? Milestones can also help investors understand your story. What is it you’ve got to do by when to deliver on the plan? Getting money from investors is all about telling them a story – and making that story seem believable! The pitch deck is just one of the tools along with the executive summary and business plan. A key part of making your story believable is to make it clear – never assume any prior knowledge. Just imagine your granny is listening and reading – would she be clear what you are doing? Monster’s advice by Barfoot + Duggan
Balance Sheets – measuring business buoyancy!
If you are trying to get a loan or raise equity finance, one of the first things you will be asked for is a Balance Sheet. However, 80% of people in business have no idea what a balance sheet is. Even Deborah Meaden got it wrong recently on Dragons’ Den when she started explaining how sales would appear in your balance sheet. They don’t! If investors and lenders want to see the Balance Sheet, it makes sense that you at least have an idea of why they want to see it to increase your chances of successfully getting funding. In just three steps I’m going to explain where the balance sheet fits in, what’s in it and what it reveals about your current financial buoyancy. Before we start, here’s a “health” warning – what we are about to cover in one article takes trainee accountants years to get to grips with. So my learning objective for you is just to get a warm feeling… Step 1: Context When you are running a business there are just three things you need to keep track of: income and expenses, cash flow, and what the business owns and owes. Income and expenses are shown in the Profit and Loss report (known as the P&L) and this report shows the profitability and viability of the business i.e. is the business selling more than the costs. The Cash Flow is in a report helpfully called the Cash Flow. This report typically has months along the top, and then sections for money in, money out and the expected balance at the bank. The Cash Flow shows if you are about to run out of cash! Hence it should go at least 9-12 months into the future to give you enough warning if you do need more funding. Bear in mind, money folk hate last minute requests for funding. Finally, what the business owns and owes (the assets and liabilities) are shown in a report called the Balance Sheet. To understand why this report can help keep your business buoyant, lets look at how the balance sheet is laid out. Step 2: Balance Sheet layout The balance sheet would typically be laid out with the following sections: • Fixed Assets – this is equipment that the business owns. • Current Assets – items owned that are expected to turn into cash within the next 12 months e.g. Cash at bank, stocks of raw materials, work in progress and money owed by customers (aka debtors). • Current Liabilities – items that are owed and need paying within the next 12 months e.g. Money owed to suppliers (Trade creditors) and money owed for VAT. • Net Current Assets – this is a sub-total of current assets less current liabilities. • Long term liabilities – items that are owed and which are not due to be repaid in the next 12 months e.g. loans or leasing arrangements. • Shareholders Equity (or ownership) – money owed to the owners (Shareholders), being money that has been invested by them in the business for shares and any unpaid profit. Step 3: What the Balance Sheet shows The Balance Sheet shows three key things at a particular date i.e. the Balance Sheet date. These are: • The Net Current Assets figure shows whether the business can meet its short term liabilities – has the business got enough “readies” aka liquidity to meet the short term bills. • The Long Term Liabilities shows whether the business has over borrowed. Crudely, banks will look at this figure and compare it with what is owed to the owners to assess any increase. Investors will look here to see if the level of borrowing is reasonable. They wont invest if their cash is then used to service or repay borrowings. • And then finally if you look in Current Assets and Current Liabilities you will see the key components of working capital – working capital is money owed by customers (debtors), plus money tied up in stock less what is owed to suppliers (creditors). You will not find these numbers in the Cash Flow or P&L. In summary, the Balance Sheet shows the financial risks facing the business at a particular date – does it have enough liquidity to meet its short term bills (that was the Net Current Assets figure). Has it borrowed too much, and how much cash is tied up in working capital. In short hand you can think of the Balance Sheet showing how buoyant your business is – right now without any bull. So next time you get asked for a balance sheet you will know why. With thanks to Ben Fernmoor who came up with the idea of business buoyancy at my recent British Library workshop. Inevitably, I have taken short cuts in this article – for more support on Balance Sheets, get a Numbers Coach training bundle.
“Thank you for your brilliant jam packed day on finance at LCC. Believe it or not I came home and began sorting things out straight away, as tired as I was. Much to be done! As I mentioned to you I work at the Royal British Society of Sculptors as the Education Projects Manager and organise professional development seminars for sculptors on various aspects around making a living. It would be wonderful if you could lead the seminar on finance coming up.”
“Thank you very much to the connection to your film. It is really very good and I agree with you about the necessity for training people to understand this stuff by taking the mystery out of it. To be honest there are a lot of people who are already supposed to be in business who could use a simple refresher on many of these points.”
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“This enterprise and financial management in cultural production has been an enjoyable and high level learning experience and I feel that the method and techniques related to finance, I learned on the unit helped me to make this business plan much better than if I had tried to develop such a project without the theory.“
“I looked through your videos – they look good and the principle behind it is definitely useful, and I think there could even be an idea of EMCA students viewing them before starting the EMCA finance unit, so could be a great way of getting up to speed.”
“I thought the course was fabulous because I actually understood the basic principles of cash flow, balance sheet and profit and loss. The course was taught in a less formal way than one would in a financial training course which made it easier to understand to learn. Overall, I really liked the course, I found it very helpful and it’s been really great of you to upload all the documents, excel models after each class. I really learned a lot and enjoyed it!”
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“Thanks Johnny! It really was most helpful, thanks for squeezing me in. You have given me a clearer understanding of managing my business’s finances.”
“I’m applying for a small business loan, and have found the Talk Money videos and your handbook really useful; it really did help having started trading and having figures to put into the cash flow to really be able to understand the finances at a different level. Thanks so much… I have an accountant at the moment, but I am trying out Xero and seeing how much of it I can do to keep track of my finances as the day goes by. Because as you say cash is king (or Queen!).”
“I attended your workshop this weekend at the Bread and Butter festival which was great as it left me feeling a lot more confident understanding all the financial documents involved and required for investors. All the best and thank you for the informative lesson!”
“Hi Johnny , Thank you SO much for your help and coming over to see us. I really appreciated your time and all your pearls of wisdom and have plenty to think about to help us take the business to the next level.”
I must admit, I hadn’t honestly given your spreadsheet template the attention it deserved. It’s bloody brilliant. Sorted my p&l, cash flow, balance sheet etc in just an hour or so. Thanks so much!
Business Numbers: What Investors Need You To Know
The Numbers Coach shares more straight-talking knowledge at this event at Business & IP Centre at the British Library
BUSINESS FOR BOHEMIANS SEMINAR
Get on Top of your Finances, with The Idler. If you’re a freelancer or entrepreneur, now is the time to get on top of your accounting systems, financial planning and spreadsheets. Come along to get to grips with the ultimate lowdown.
Forecasting for food: what investors want to see
Johnny led a session as part of Bread & Butter’s ‘Startup Studios’ masterclass events. The attendees were aspiring entrepreneurs and producers in the first 0-18 months of trading.