How would you like to know you can take on that new employee you’ve wanted? and find £25,000 hidden in your processes?
So, you really need a new employee to assist in an important area of your business, but don’t know if you can afford to make the decision. Can you do it from your own resources, or do you need to find some money from a loan to cover the cost, or do you just do nothing!
It’s a question that many business people ask themselves every day. Here are 5 steps to help you make a more informed decision.
1. Review your sales, what’s on order, what repeat business do you have, when will you bill those sales – try to look forward at least 6 months, but preferably 12 months. i.e. create a sales forecast (Make sure your forecast is realistic and Challenge each number)!
2. Build a profit and loss forecast, which, in simple terms is:
a. what you raise sales invoices for each month, less what you receive in purchase invoices
b. what you pay yourself and employees
c. any leases or rents
d. other costs.
Build into this forecast the new cost you’d like to incur. Remember, although you maybe looking to recruit at a cost of £36k salary, this cost is £3k per month.
3. Build a Cashflow Forecast, which is based on when you get your money in from your customers and when you expect to pay out for all your costs. Look at this by month.
Look first at the starting position, i.e.:
a. how much money is in the bank
b. what you are currently owed
c. when you will get paid
d. what you owe
e. when you’ll need to pay
f. Don’t forget corporation tax, VAT and PAYE.
Do this on a monthly basis, using opening bank balance plus expected money in, minus expected payments, to see what you expect to have in the bank at the end of the month, rolling the closing number each month to be the opening balance of the next month.
4. Review Headroom, this means how much money you want to keep in the bank, to allow a cushion for the unexpected. For example, do you want to keep enough to cover 3 months, 6 months or 1 year of all monthly operating costs in the bank.
5. Compare Headroom to cashflow at each month end. When you have the cashflow, how do the closing balances compare to what you want to keep as a cushion.
If your forecast shows you always have more in the bank than your cushion, then you know that you can afford to take on that member of staff; if not, you many need to try to get a loan, or defer a decision until your forecast improves.
What are the Benefits of this approach?
a. You’ll have a better understanding of how your business functions, and how much money/profit your business makes.
b. You’ll have a better understanding of your processes and whether they really give you the information you require
c. You will also be able to identify cash issues early and do something about it
Finally, you may find that £25,000 that you thought had been paid but hadn’t, when you work to get the opening position right; something I did with a recent client!
Phoenix consult has created a 5 Minute diagnostic to look at 4 key areas and to provide you with an objective assessment of your business. It’s FREE so give it a go at: https://phoenix-consult.co.uk/diagnostic/