Key strategies and operating plans

So far in the budgeting and planning process we have set our business objectives, looked at market opportunities and examined our own resources. The next step is to decide what resources to commit to what market and business tasks. Key strategies are areas of action that are vital to the success of the business. The market strategies define exactly what products services you plan to offer to which specific customer group(s). The financial strategies explain the sources of funds and the...

Present value

Just as the future value of an investment can be calculated using compounding, so the present value of cash coming in during the years ahead can be calculated using discounting. We have already seen the heart of the present value equation. In full, using the same symbols as for compound interest, it is The basic requirement of any present-value calculation is that you have some idea of what percentage profit you want from an investment. That is not usually a very difficult problem. If you have...

Combined ratios

No one would use a single ratio to decide whether one vehicle was a better or worse buy than another. MPG, MPH, annual depreciation percentage and residual value proportion are just a handful of the ratios that would need to be reviewed. So it is with a business. These combinations of ratios can be used to form an opinion on the financial state of affairs at any one time. The best known of these combination ratios is the Altman Z-Score (www.creditguru.com CalcAltZ.shtml), which uses a combined...

The Companies Act 2006

The behaviour of companies and their officers is governed by the Companies Acts, a patchwork of legislation started in the Victorian era with the Joint Stock Companies Act of 1844, the Limited Liability Act of 1855 and scores of further pieces of legislation in 1967, 1980 and 1981 that were eventually consolidated into a single act, the Companies Act 1985. That act was itself added to in the decades that followed, but it became apparent that a legislative framework that sought to regulate the...

The cash flow statement

There is a saying in business that profit is vanity and cash flow is sanity. Both are necessary, but in the short term - and often that is all that matters to a new business as it struggles to get a foothold in the shifting sands of trading - cash flow is life or death. One of the characteristics that most new or small businesses have in common is a tendency to change their size and shape quickly. In the early months and years customers are few, and each new customer (or particularly big order)...

Discounted cash flow

Neither the ARCE nor the payback method for evaluating capital investment projects is wholly satisfactory. They provide neither a sound technique for deciding whether or not to invest, nor a technique to help choose between competing projects. They fail for the reasons already described, but they also fail for a more fundamental reason. The businessperson's gut feeling that timing is important is perhaps more true than he or she thinks. No one is going to invest a pound today, unless he or she...

Internal rate of return

One important piece of information has not been provided by either the net present value or the profitability index. A capital investment proposal may have a satisfactory net present value, that is a positive one, at our cut-off interest rate. It may also come out ahead of other choices in the profitability index ranking, but we still do not know exactly what rate of return we can expect to get. This is important information for three main reasons. First, it allows us to compare new investment...

Using business planning software

There are a number of free software packages that will help you through the process of writing your business plan. The ones listed below include some useful resources, spreadsheets and tips that may speed up the process but are not substitutes for finding out the basic facts about your market, customers and competitors BizPlanit.com (www.bizplanit.com free.html) has free resources, including free business plan information, advice, articles, links and resources, a free monthly newsletter, and...

Supplier credit

Once you have established creditworthiness, it may be possible to take advantage of trade credit extended by suppliers. This usually takes the form of allowing you anything from seven days to three months from receiving the goods before you have to pay for them. Even if you are allowed time to pay for goods and services, you will have to weigh carefully the benefit of taking this credit against the cost of losing any cash discounts offered. For example, if you are offered a 2.5 per cent...

Using a local exchange trading scheme LETS

Local exchange trading allows anyone who joins a scheme to offer skills or services, such as plumbing, gardening or the use of a photocopier, to other members. A price is agreed in whatever notional currency has been adopted, but no money changes hands. The system is more ambitious than straight barter. The provider receives a credit on his or her account kept by a local organiser, and a debit is marked up against the user. The person in credit can then set this against other services. The...

Saved 83 million

But money isn't everything, and although we made impressive savings for the businesses that switched to us last year, the reason that they stay is our business banking gives them much more through our entrepreneurial approach. Our range of innovative products along with competitive rates have helped us secure the Business Moneyfacts 'Best Overall Business Bank' award for the last 3 years running 2006-2008 . Get in touch, or visit any Bank of Scotland or Halifax branch and we'll show you how...

The ground rules concepts and conventions

Accounting is certainly not an exact science. Even the most enthusiastic member of the profession would not make that claim. As we have already seen, there is considerable scope for interpretation and educated guesswork. Obviously, if this were to go on unbridled no one inside or outside the business would place any reliance on the figures, so certain ground rules have been laid down by the profession to help get a level of consistency into accounting information. 1. Money measurement. In...

Account

You may by now be concerned about the financial situation at High Note as revealed in the preceding chapter. After all the business has sold 60,000 worth of goods that it only paid 30,000 for, so it has a substantial profit margin to play with. Whilst 39,108 has been paid to suppliers, only 30,000 of goods at cost have been sold, meaning that 9,108 worth of instruments, sheet music and CDs are still in our stock. A similar situation exists with sales. We have billed for 60,000 but only been...