Having recently read Mark Bradley's LJN Blog (http://www.landscapejuicenetwork.com/profiles/blogs/the-seven-biggest-mistakes-i) on the Seven Biggest Mistakes last week during enforced downtime, got me thinking back to my financial & business training.
Mark purports you need at 15%-20% of sales income as working capital at bank (ie cash at hand) to enable a business to survive and try to grow. With anything less the 'financial books' suggests you may be overtrading and run the risk of not meeting bills etc on time or have to juggle monies around.
It's a challenging concept and position with delayed payments, rising prices, payment of supplier invoices, salaries, fuel, insurances, VAT, PAYE, Corp Tax, rates etc totally screwing up the best planned cashflow projection.
I'm not suggesting anyone lay bare their financials, but ratios can be calculated that reflects accurately for most sizes of business that have similar set ups.
So, some questions aimed at those that run a VAT based business, with employees, vehicle, Yard/Unit/Storage costs (need at least a 1/4's figures - but watch for any large one off payments);
- what's your current ratio (ie average cleared cash at bank as a percentage of turnover) ?
- does this cause you any real problems?
- what other key financial ratios are you aware of or monitor?
To kick off, our ratio is, on average 12.1% over the last year. It causes us little problems, but we do not lay out ,000's on materials in advance for jobs etc.
Another & final question - who would like to spend more time on what makes a business tick, grow and become sucessful - perhaps we can set up a group to discuss such topics ?
Happy to go PM with anyone.....
*******Topic continued @ http://www.landscapejuicenetwork.com/group/keyobjectivesprivategroup
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Rowly, didn't mean to be 'restrictive' in my post, just trying to say (badly..) that it only works when compared against similar businesses.
So, we could always look at concepts like this against some simple categories;
- Sole Trader/Sole employee with vehicle & tools
- Sole Trader/with employees with vehicle, tools and Yard
- Sole Trader/with employees with vehicle, tools and Yard, Vat Reg
- Ltd Company/Sole employee/Director with vehicles & tools
- Ltd Company/with employees with vehicle, tools and Yard
- Ltd Company/with employees with vehicle, tools and Yard, Vat Reg
Perhaps we could build a table showing other key financial indicators and allow people to dip in and meaure themselves against it.
That way it might give you the initiative to go off and investigate why you are better/worse and then set some business objectives.
I want it be done via ratios etc that way people will not feel awkward/threatened/compromised and will share such information based upon real figures....
Welcome any other ideas or guidance....
We would however be very keen to have some input when we are up and running properly, and perhaps put a suppliers angle on things.
As a business we will have two ways of getting paid, thanks to our recent negotiations.
We will be Vat registered, and have a "Yard", Nursery, but will not run our own vehicles or have Employees in year one.
That will be usefall to know
steve
Further to my last question, if your percentage does not include tax money/ vat, what does this percentage help pay for?
At this moment in time my ratio is 13%.
Usually 18- 20% in summer.
Lower than I would like but have had a few unexpected expenses.
This does not include Tax money as this is put away in a seperate account.
I will try and collect and get definitions of key ratios and try and set up in an Excel sheet and allow people to come in dump their ratios in, perhaps generate some graphs etc
ROWLY HILL said:
I'll look to research further, set up a LJN group, set a multisheet excel workbook and take it from there...
Steve Wilkinson said:
I pay for things like fuel, running costs out of my wages i pay myself. Is this the wrong way to do it?
Also as you said above, it must be different for wach type of business on this forum.
EG. sole trader, limited co. Whether you employ, and whether you have have high running costs, eg. loans.
Gary RK said:
The money i used for the ratio is spare money so to speak.
Steve Wilkinson said:
If using an Accounts package, get a copy of your Balance Sheet.
Derive Working Capital = Current Total Assets - Current Total Liabilities
Total may be called Net Assets/Equity)
Then express this as a ratio against the Turnover/Sales Income from your TP&L
ie your WorkCap is 19,000 and your Turnover is £100K, your ratio would be 19%
A much rougher guide is as stated average cash in bank against Turnover.
Interesting; using Balance Sheet method changes ours to 16%
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