Vans United’s guide to Finance within a small business
Within this guide we ask you the questions that you need to be able to answer so that you can keep your business in good financial health. These are the basics of business accountancy but we believe are the critical areas to focus on to guarantee success.
‘What is my break even point?’
Know your break even point. With this calculated you have your first financial target - to cover all of the costs incurred by the business. The target to make profit is the second target - and the one that you are really interested in.
Break-even analysis uses information from the income statement and cash flow statements to calculate the level of sales needed to cover all of your fixed and variable costs.
‘What are my fixed and variable costs?’
Fixed costs are costs that you’d have regardless of the level of sales of products for example rent, insurance, maintenance, etc. Variable costs, on the other hand are directly linked to the level of sales of products/services (e.g. sales commissions, delivery costs etc.). Break-even analysis can help you when projecting when you’ll make a profit, deciding how much to charge for a product, setting a sales goal, etc.
Managing your cash flow
Cash flow management can be the most important financial statement for a new business. The purpose of managing your cash flow is simple: to make sure that you have enough cash to pay current bills. You can do this by examining a cash flow statement and cash flow projection. Basically, the cash flow statement includes total cash received minus total cash spent. Your cash received can be generated from your sales forecast - which will underpin your whole business strategy.
Sales forecasting/targets
This is all about knowing the total size of the market; knowing who your customers are and how many you can target with your product/services. What are your competitors are doing and what share of the market do they have? Based on such research you should be able to realistically define your sales potential and then put a tangible plan in place.
What is ‘realistic’? Base your initial sales figures on potential customers that you believe are ‘warm leads’ and then work on a steady rate of sales growth that you can handle in terms of operation. Depending on your total overheads (fixed and variable costs) versus your profit levels your break even point will come hopefully earlier rather than later . this depends on the size and scope of your business.
Value added tax (VAT)Most goods and services attract VAT at 17.5%. Once your business exceeds £60,000 turnover then you must be VAT registered. Value added tax (VAT) is effectively a charge on consumer spending which applies to the value added to a product or service at each stage of its production and distribution. VAT is collected in stages by VAT registered firms. The consumer pays the full amount of the tax but at each stage up to that point firms handling the goods pay input tax to their suppliers and collect output tax from their customers. Firms pay the net VAT collected to Customs and Excise. So in summary this is how to approach VAT:
- Your business buys supplies at a price inclusive of input tax.
- You sell products/services at a price inclusive output tax.
- Deduct the input tax from the output tax and pay the difference to Customs and Excise (or receive a refund if the input tax exceeds the output tax).
- At the end of each accounting period, you will need to complete a one page form for Customs and Excise. This must be returned along with the sum owed, within a month of the end of the accounting period (you are given an extra week if you pay electronically).
