Posts Tagged ‘accounting’
When it comes to invoicing, there is a golden rule of business which says “Invoice as soon as possible”. This clearly gets the bill in front of the customer as soon as possible, which in turn helps cash flow as we get the money into our bank accounts as soon as possible. But, sometimes later payments or earlier payments are more prudent.
The three possibilities for invoicing are as follows:
Up Front Invoicing
This option is preferable for both large scale projects, and when we are dealing with a new client. At the start of any project, agreeing as part of the terms of business, an initial up-front payment (say a 50% deposit) means we have money in the bank before work is started. This reduces the risk that we get half way through the project and the customer cancels, goes bust or just does not pay. It also has advantages for very big projects which may take several months in that we don’t have months of no cash coming in, which can lead to all kinds of famine/cash flow problems. Clearly, sometimes asking for money up front can be difficult, but this option does reduce a lot of the payment risks for you.
At End of Work Invoicing
To be honest, this is my general method of invoicing – raising a full and complete invoice once the project has been completed, and including all the quoted work, expenses and other costs. I normally select this method of invoicing because I am not so good at asking for the money upfront (a case of do as say, not as I do ), plus I balance this off by the fact I have a reasonable amount of cash in my company account, plus the customers I have been lucky to land have been bigger name companies.
The third and most surprising option available is to delay the invoicing of the customer. Even once the project is complete and handed over, there may be some situations where you don’t produce an invoice for a few days or even a few weeks. This option is really only advisable for really trusted customers, but it can have a cash flow benefit close to period or year ends. When an invoice is for a large amount, delaying the creation of the invoice for a few weeks can push the payment into the next VAT quarter or next year end, which then delays when the VAT has to be repaid, or when the corporation tax appears on the profits. I am currently sitting of 3 or 4 large invoices which I will be sending out at the end of January, once I have completed my year end accounts – thus delaying the payment of a few hundred pounds of corporation tax by 12 months or so.
At the end of January, I carried out my companies year end. Using the small business accounting package (Freeagent), I was able to complete my year end accounts in less than an hour, and passed the figures to my accountant for sign off and submission. Job done! Then once everything was complete in my year end, I did some detailed year end analysis, looking for trends, costs which could be reduced, small profits which could be nurtured in the new financial year, and any other changes that I could make for the better.
Once my analysis was complete, I then did something which I have never done before – I fired 4 customers!
You see, by using the timesheet analysis in Freeagent and comparing the time spent on the customer against the revenue they had brought in, I worked out that these 4 customers were costing me money to support them. The effort of support, answering emails, quoting for new work (work which was never taken up) and other day to day maintenance did not meet the invoices I raised against them. Put it another way, each of these 4 customers was a drain on my company.
Worst than that though – not only were these 4 customers costing me money to support them, but they were actually taking up the most expensive commodity I had – time. Every moment that I spent on their maintenance, was hours and days which I could not spend on new or more profitable customers.
So one at a time, I called up the principle contact for each of the customers, and as I say, I fired them. In a nutshell, I said “Sorry to trouble you, but I have been going through our records and it appears we haven’t done any real business in the last year or so. It also appears we are spending a lot of time providing free maintenance for you in the way of emails and other support, so I regret that we have reached the point we need to terminate our relationship”. Yes, I know – fairly heartless right??
The effect of the conversations was as follows:
One customer got really upset. They was some name calling, they hung up on me, and I have never heard from them again.
The next two customers said they understood, they could see my point. They said that their finances did not allow for any new purchases, so there was nothing they could do. They asked for a hand over meeting (which I provided free of charge), and they were happy to call it a day.
The final customer of the four was shocked. He didn’t realise that his staff called on my company so much, and was very apologetic. He asked for a figure to provide the support to them for a year, and promptly raised a purchase order. They remain a customer – and I now get paid to answer their query emails, to raise quotes and attend meetings with them.
But the point is, by removing the non-profitable customers from my customer pool, my company has gained some 180 hours or so of extra time a year which can be directed to profitable customers and projects, with no impact on my balance sheet. Now you can say that maybe I should have held on to them until a new customer came along to replace them, but then where would the 180 hours come from to allow me to deal with the new customers?
I am also in the process of firing a pet personal project – a project which I spend a little time on yet doesn’t generate any revenue or return. It’s not easy because I have invested time, money and effort into this project, but it’s important not to get emotionally attached to customers or projects. If they are not working. Much better just to cut the ties and move onto something which is more fulfilling, responsive and ultimately profitable.
Don’t you think?
As regular readers of this blog will know, I am massive fan of business automation. Any tool, technique or process that I can use which makes doing business easier makes me happy – the more automated my processes, the less time I spend on them and the more time I have for doing productive (chargeable) work.
One of the newest tools I have found is called Watchy (or Watchyapp if you use the twitter tag). Watchy is another Freeagent bolt-on web based application, and deals with timesheet reporting. Whilst Freeagent itself allows the recording of time spent on projects (and subsequent billing to customers for the time and associated expenses), it does not provide any form of customer portal to view the timesheets. That’s where Watchy comes in.
Once connected to the Freeagent system, Watchy will connect to your Freeagent account on a regular basis and will pull in timesheet and invoice details and then organise the information into project views. You can then create customer accounts so that customers can login to their own dashboard to view invoices, expenses and time spent on their project.
Watchy is still in beta development, so there is currently restricted access to beta testers, but full public access is scheduled for the next few weeks. They are also busy making amendments, changes and improvements, so I am sure this will develop to become the perfect customer time and billing portal as the product evolves and matures. I hope this will include timesheet authorisation and different reporting views.
Whenever I read any business book, one of the things that will always be mentioned (normally in bold, underlined and sometimes with its own chapter) is that cashflow is the life and death of any business. It doesn’t matter if you are a contractor, a freelancer, a small business owner or a multi-national, if you don’t have a revenue stream from happy customers ready to pay their invoices, sooner or later your bank balance will dwindle away and your business will fail.
So it’s critical that you know in advance when your business bank account is looking good, and when it needs attention – either in the form of a reduction in costs, or raising of more invoices.
I am a great fan of the FreeAgent accounts, invoicing and payroll system – it does almost everything I need to deal with business money matters quickly and easily from quotes, to invoices, to payments through to taxes – both company and personal. However, it does not do cashflow forecasting (Freeagent prefers to concentrate on getting the accounting right). So it’s good to see that an independent company has created a separate, but integrated web application called Float which deals with the missing cash flow forecasts.
Float links with Freeagent accounts and pulls in the account transactions, scheduled bills and invoices generated. Once in Float, transactions can be set to one-offs or reoccurring (monthly, quarterly, yearly, etc). Float pulls in both income and expenditure transactions, and can match new transactions against the scheduled events. Using the current state of the Freeagent accounts, and the predefined reoccurring or scheduled transactions, Float will then produce some nice cash flow forecast models via charts, monthly tables and yearly projections – perfect for spotting time periods which need attention or which period of time is best to make that large asset purchase.
Float is currently in beta test mode, with development still ongoing, but they are accepting testers and beta users. If you are a Freeagent user (and I will always recommend it to any small business), Float looks like it is going to be the perfect cashflow control and analysis tool to bolt on to the accounts service.
When you are busy working to generate money for your small business, it’s all too easy to let the admin side of things slide. Over time, it’s easy for your companies recurring costs to mount up, for direct debit payments to increase, and the value of the items you pay for on a regular basis reduce in value whilst the money leaving your company bank account stays the same.
It is therefore a good idea to have regular reviews of your company costs during the year. Yearly reviews will work, although I review all my costs at the end of every quarter. An event sits in my electronic diary which reoccurs every 3 months, and prompts me to take an hour off and review my costs.
I do this by:
- Reviewing bank transactions via a P&L report (any accounts system such as Freeagent makes this a breeze), to look for any spending which is getting out of hand (in my case, normally take away meals whilst I am busy over a hot keyboard)
- Use on-line banking, check standing order payments and direct debits, cancel any that are no longer value, and check that each is getting value for money
- Look at cash spending (via expenses and credit card purchases) to make sure they are valid and not too extravagant
- Look at regular payments by any form, to see if there are cheaper options available (for items such as mobile phone contracts, insurance, hosting, broadband costs, etc)
Any money saved means an increase in profit. It is well worth the effort.
In business (including small business), there are a few basic principles. Firstly, ways of making money; there are only a few ways of making money:
- Provide a service for which there is a demand from people who cannot or will not perform that service themselves (a service industry)
- Purchase items or services at a low value, and sell them at higher value (trading or dealing)
- Locate natural resources, extract the resources and resell (mining and exploration)
- Take individual items and resources, combine these into new items with more value than the component parts (manufacturing)
- Provide goods or services for a value, take the money, but never deliver (illegal)
Any and all business falls into one or more of the above. As a freelancer or contractor, we normally fall into the service area. Although for authors and software designers, if could be argued that this is really manufacturing (the resources are our time and effort).
The 2nd and less obvious but equally important business principle is the monitoring of the 1st principle. Heads of corporations never really run businesses, they spend all of their time monitoring (and fighting) with the 1st principle. That’s all they do, day in, and day out. As contractors and freelancers, we don’t have to spend so long on the monitoring aspect, but we still need to have the methods of monitoring.
For manufacturers, heads of industry, managers of multi nationals and Managing Directors of listed companies up and down the country, they spend their day controlling the numbers and monitoring the first principle. The numbers they monitor may be the share price, the company value, the bank balance, the order book, the turnover, the cost of parts, the resale value, discounts and profit. All will have their metrics they watch day by day, hour by hour. These metrics are the company Key Performance Indicators. Where an indicator goes red (or however it is displayed to them), they change supplier, negotiate discounts, raise prices, hire or fire.
As small business owners, we also need our measures, metrics and Key Performance indicators. Whilst they won’t be as grand as a share price, they need to be monitored, controlled and tweaked as required. Typical measures and KPI’s for a small business will include:
- Company Bank Balance – is it growing, shrinking, staying the same
- Invoices generated
- Outstanding Payments
- Cash Flow
- Spending (a credit card is useful for this) – is it getting out of hand
- Likely sales in the future (sales pipeline)
- Yearly/Quarterly/Monthly Profit and Loss (are we spending too much, generating too little)
- Stock on hand (if we deal in any type of physical items)
All of these indicators tell us a story about our small business. By monitoring these on a regular basis, it tells us if we need to cut down on our spending, look for new customers, raise our day rate, look for expenses to reduce (such as changing for a cheaper supplier) or chase outstanding payments.
Of course, depending on your systems for tracking your bank balance, invoices, payments, receipts, cash and P&L, this can take 5 minutes, or it can take a lot longer. Systems such as FreeAgent help contractors and freelancers do all of this monitoring as part of their everyday processes. BUT, regardless of the system you use, monitoring of your business is a critical business process.
Do you know what you hourly or daily cost is? By that, I mean have you calculated what you need to charge per hour or day so that come the time to invoice, you make a profit rather than a loss? The calculation is fairly easy to do – add up all your freelancing or contracting expenses (including cash expenses, taxes, corporation taxes, PAYE taxes, national insurance, salaries etc) for a month or year, and divide by the number of workable days in the time period. Don’t forget to remove weekends, bank holidays and personal holiday days. That is your daily cost. Divide this number by 7.5 or 8, and you get your hourly cost.
In the UK, the number of workable days should be around 232 days a year, calculated as 52 weeks multiplied by 5 days (equals 260) minus 8 public holidays minus 20 personal holidays.
Now this daily or hourly cost has two uses.
Firstly, it allows you to decide if you can afford to accept a contract or a freelance assignment. If the rate is below your cost, you will lose money, although at a lot slower rate than if you are not working at all.
The other hidden advantage is to look at all the activities you do every day, and work out if it is worth you doing them. For every task that you perform, whether it’s doing some cleaning, documentation, development, design, project management, accounting or so on, there will be somebody else who can do that task. If you find yourself overworked, and there is somebody else who can do the task and they charge less than your cost rate (and you have other chargeable work to be getting on with), it actually makes more sense to pay that somebody else to do that task.
Clearly, you will want to vet that person, and ensure that the quality they produce is up to the quality that you would want; otherwise this can lead you to correcting the problem thus removing the benefit.
Let me give you a real world example. I could clean my own house for a couple of hours every other day. It would cost me nothing to do so. But if my hourly rate works out at say £40 an hour, and it costs me £7 an hour for a cleaner, I actually make a £33 an hour saving to have the cleaner clean the house (plus they would probably do a better job).
So it’s time to have a look at your costs, and work out if you can boost profits by outsourcing the tasks which somebody else can do cheaper and better.
One of the books that I keep near to hand is the Small Business Handbook. The great thing about this book is that it covers all the elements of a small (IT based) small business, from forming the business through to eventual sale (or closure). It proves itself to be an excellent starting point for those new to setting up a business and good advice for those who think they know what they are doing. Even if you have had a business off the ground for a few years, only the 1st chapter would need to be skipped (but I re-read just to make sure everything was covered).
All the business areas are cover by a step by step approach, and comes complete with a CD in the back cover that provides a lot of useful documents and spreadsheets, such as a template partner agreement, business plan, P&L report, work contract, terms and conditions, etc.
It should be noted that some of the documents provided can be a touch distant from the plain english approach, but they are presented as legal rather than lay persons documents, so perhaps understandable.
I use it a lot for the ‘dip in to’ sections, so can be used as a reference as well as workbook. One of the best parts about the book is the end of chapter summaries, tips and actions plans – it gives you a nice todo list for various areas of a small business, such as expanding or re-thinking marketing.
Whilst it is geared towards a general business, it works well for a small (1 man) business as well. RECOMMENDED!!
If I could recommend any one product to anybody running their own small company, above all others it would be FreeAgent. Freeagent is a web based small business accounting package. But its more than that – it’s an example of how all things should be done.
I first came across Freeagent about 8 months ago when I had a fall out with my small business accountant that I used to my companies accounts. Without going into too much detail, let’s just say we had a disagreement on some aspects of how the accounts were being done, and I was becoming more and more unhappy at the rising costs of doing my accounts.
When I started looking around for alternative accountants, I was originally looking at another normal accountant and actually met with 2 or 3 to talk rates and work I needed them to do. But a few people in the same industry as me started to direct me towards a number of online accounts packages including clearbooks and sage. But the one that stood out for me was freeagent – and I was impressed from the start.
Freeagent provides everything a small company owner could ask for – estimates, invoices, purchasing, bill payments, automatic chasing of late payments, full accounts, payroll, taxes, vat calculations and year end calculations, plus full online book keeping. But the best bit is, you don’t need to know anything about accounts to use it – its just works, straight out of the box. If you need advice or tips (and it’s really not difficult – if I can understand it anybody can), there is a very good support group.
Freeagent does all the things my accountant did, for a fraction of the price. For me, the best bit is that it provides day-by-day view ability of my (small) company’s state of play, from profitability, to outstanding invoices, pending quotes, tax position etc. With my accountant doing my accounts, I only got this picture at the end of every quarter or at the end of the year.
Some of the many features of FreeAgent includes:
* Quotation of Estimates and quotations (from scratch or using a price list)
* Project setup and time tracking
* Expenses (both tracking) and payment
* Converting quotes into invoices (or new invoices from scratch) , including project time and expenses
* Print the invoices, convert to PDF or automatically email them to the customer
* Chase late payments
* Bank account transaction tracking, including download from most banks
* Tax calculations as you go, including PAYE, corporation and VAT
* Automatic submission of VAT to revenue and customs
* Payroll processing and reporting, including PAYE and dividends
* Tracking of multiple accounts, including paypal
* Full accounting reports; balance sheet, P&L, payroll, expenses, transactions, etc
Maybe the best thing about FreeAgent is you dont need to spend a lot of time on it, or know anything about accounting – it steps you through and does everything for you. It is so simple. Its saves me time, it has saved me lots and lots of money, it provides me a clear picture of the state of my company, and its online so other people can access the information at the same time. It’s already as cheap as chips, but if you use this link, you get a further 10% of the fees. Plus you get to try it free for 30 days, so you have nothing to loose and everything to gain.
If you run any sort of small business, take a look – you really won’t regret it!