Need to manage your Money Better?

Cash flow is the fuel your business needs to keep running smoothly. Here are a few techniques you may want to consider to improve your operation.

1. Budget cash flow.
Create a cash flow budget to make sure you can pay expenses; it allows you to be proactive in monitoring revenues and expenses. Include sales/revenue forecasts, receivables, and outflows including costs of goods, debt payments and operating expenses.

2. Understand sensitivities.
It is important to know which items impact cash flow most among price, volume, costs or overheads. Cost of goods is a key component but may be difficult to change. At the same time competitive pressures may prevent a price increase.

3. Credit.
Effective credit policies are a key component to successful cash flow management. Early payment can be encouraged through discounts on early payment or penalties for late payment. Careful monitoring of late payments is important so they do not become write-offs or tie up working capital.

4. Payables.
Review payables regularly to maintain obligations. An aging schedule will show you how much you owe and whether anything is past due.

5. Reduce costs
Review operations for ways to reduce expenses. When business volume accelerates consider hiring contract or part-time staff before committing to full time employees.

Good luck with your review and improving your cash management. Your banker will appreciate your efforts and this can have a positive impact on the banks impression of your business and the professional management approach.

Crisis Management

Unplanned events can have a devastating effect on small businesses. Crises such as fire, damage to stock, illness of key staff or IT system failure could all make it difficult or even impossible to carry out your normal day-to-day activities.
At worst, this could see you losing important customers - and even going out of business altogether.

But with good planning you can take steps to minimize the potential impact of a disaster - and ideally prevent it happening in the first place. Here are a few ideas to consider:

1. Plan
It's essential to plan thoroughly to protect yourself from the impact of potential crises since you may lack the resources to cope easily in a crisis.
Failure to plan could be disastrous. At best you risk losing customers while you're getting your business back on its feet. At worst your business may never recover.
As part of the planning process you should:
             -    identify potential crises that might affect you
             -    determine how you intend to minimize the risks of these disasters occurring
             -    set out how you'll react if a disaster occurs in a business continuity plan
             -    test the plan regularly

2. Assess the impact
You need to analyse the probability and consequences of crises that could affect your business. This involves:
- assessing the likelihood of a particular crisis occurring - and its possible frequency
- determining its possible impact on your operations

This kind of analysis should help you to identify which business functions are essential to day-to-day business operations. You're likely to conclude that certain roles within the business - while necessary in normal circumstances - aren't absolutely critical in a disaster scenario.

3. Minimize the Potential Damage
Once you've identified the key risks your business faces take steps to protect your business functions against them.
Premises:
Good electrical and gas safety could help protect premises against fire. Installing fire and burglar alarms also makes sense.
Think what you would do in an emergency if your premises couldn't be used. You might consider an arrangement with another local business to share premises temporarily if a crisis affected either of you.
Equipment/machinery:
If you use vital pieces of equipment, you may want to cover them with maintenance plans guaranteeing a fast emergency call-out.
IT and communications
Installing anti-virus software, backing up data and ensuring the right maintenance agreements are in place can all help protect your IT systems. You might also consider backing up your data offsite on a secure server.
Printing out copies of your customer database can be a good way of ensuring you can still contact customers if your IT system fails.
People:
Try to ensure you're not dependent on a few staff for key skills by getting them to train other people.
Consider whether you could get temporary cover from a recruitment agency if illness left you without several key members of staff. And take health and safety seriously to reduce the risk of staff injuries.
Insurance:
Insurance forms a central part of an effective risk-management strategy.

4. Continuity
You should draw up a business continuity plan setting out how you will cope if a crisis does occur.
             It should detail:
- the key business functions you need to get operating as quickly as possible and the resources you'll need to do so
- the roles of individuals in the emergency
Making the most of the first hour after an emergency occurs is essential in minimizing the impact. As a result, your plan needs to explain the immediate actions to be taken.

These are some steps that can be taken to ensure that damage from any crisis is minimized. Proper planning can be critical to survival.

This week’s blog is written by Federica Nazzani, President, Capital Assist (Valuation) Inc. The blog provides a continuation to last week’s article providing some of the optional methods for valuing your business.

This is the second part of a two part article on the topic.


Making Sense of Valuation
By Federica Nazzani

Approaches to value
There are three general approaches to valuing a business and/or asset, namely the cost, earnings, and market approach.  The approach adopted will be determined having regard to factors specific to the company including profitability and the risks related to the operations of the company as well as industry and economic conditions.
  
Cost approach
The cost approach is (i) the sum of the costs required to replicate the asset or (ii) the book value of the assets and liabilities of the business.  The cost approach may be appropriate where the value of the business interest does not include intangible value and the earnings potential of the asset does not exceed its cost.  This approach does not consider competitive strengths and weaknesses, potential for earnings growth or risk associated with achieving the earnings of the business and therefore, requires significantly less judgment than alternative approaches.  This approach most often results in relatively lower valuation.

Earnings approach
The basis of the earnings and/or cash flow approach is the future economic benefits derived from the business and/or commercial exploitation of the asset, taking into account the risks associated with achieving those benefits.  Most important to a purchaser of a business and/or asset is the ability to generate future earnings and cash flows and satisfy an investor’s expected return on investment.  It is determined by applying an appropriate capitalization/discount rate to a selected stream of historic and/or prospective earnings or cash flows.  The more aggressive the cash flows or earnings assumptions, the higher the capitalization/discount rate for achieving those projections.
A variation of the earnings approach, most often adopted in corporate finance, is the discounted cash flow technique (“DCF”).  DCF is calculated as the present value of future cash flow expectations.  It is applied in various situations where a business is in start-up or growth phase or forecast to experience a change in operations (i.e. merger, divestiture, etc.), or in instances where the business has a finite life.  The preparation of a detailed financial forecast will require a detailed review of the historic performance, internal operations and relationships between revenues and costs, and an analysis of the external competitive environment (i.e. trends of competitors and industry as a whole).

Market approach
Value determined based on the market approach is often based on the use and analysis of comparable transactions in the marketplace.  These transactions are a good indication of the prices paid in the marketplace for similar assets and/or business interests.  However, certain transactions do not provide a direct means of determining value as it is often difficult to find comparable assets and/or business interests and public disclosure of transaction information is frequently not available.

Understand the basics 
The valuation exercise is best described as “an art, not a science”.  This is correlated to the level of judgment that is required in supporting value.  Arriving at a valuation or the worth of a business and/or asset will require an understanding of the basics including a defined and supportable business model, thorough assessment of the future operations and relative risks, and a clear understanding of the competition and industry trends.

Please contact Federica for more information on this important topic. She can be reached as follows:

Federica Nazzani
President
Capital Assist (Valuation) Inc.
Tel: 226.347.8100
Email: fnazzani@capitalassist.ca