Financial management glossary

Contents 1 Working capital 2 Working capital turnover rate 3 Profit and loss account 4 Balance sheet 5 Monthly 'flash' profit & loss report 6 Key performance indicators (KPI's) 7 Project resource plan 8 Fee forecasting 9 Cashflow forecasting 10 Credit Control

[edit] Working capital

• Working capital is the everyday working money available to run the business.

• Current assets - current liabilities = working capital.
• The amount of working capital required can be reduced by accelerating the rate at which money circulates through the business (for example prompt billing).

[edit] Working capital turnover rate

• Total annual fee income / average value working capital = working capital turnover rate.

[edit] Profit and loss account

• Annual statement of income and expenditure that shows if a company has made an overall gain on trading performance.

[edit] Balance sheet

• A picture of the business as it stands, providing a statement of total assets and liabilities at a given point in time (usually the year end).

[edit] Monthly 'flash' profit & loss report

Actual vs budget information based on:

• Net Income (after paying others) (work in progress not included).
• Resources.
• Overheads.
• Gives an indication which area might be responsible for a loss or profit.
• Useful over a longer period of time to spot trends and blips.

[edit] Key performance indicators (KPI's)

Profit/ loss based KPI's:

• Profit per fee earner / partner.
• Turnover per fee earner / partner.
• Break even rate.
• Overhead rate.

Liquidity KPI's (liquid assets=cash):

• Analyses ability to pay bills as they become due.
• Current ratio = current assets (including work in progress) / current liabilities.

• Quick ratio (acid test) - quick assets (cash+bank balance+debts) / current liabilities'
• Ratios over 1 are deemed satisfactory. The higher the better.

Financial Performance plan:

• Sstablish costs for employing the employee / number of working hours = cost rate per hour.

[edit] Project resource plan

• Shows hours of each grade of person required monthly.
• Hours translated into cost x by rate per hour of each grade.
• Projected fees vs projected cost - plotted on graph.
• Compare projected with actual to monitor performance.
• Share information to give a sense of involvement and responsibility. This will allow them to align their actions with the best interests of the company.

[edit] Fee forecasting

Fee forecasting is crucial to running a business as it allows the future financial position to be assessed and ensures that records of potential fees are maintained.

Captive fee forecasting:

• Fees are agreed, fully documented, contractually binding and scheduled for current projects.
• An indicator of how busy a company is likely to be in short to medium term.
• Avoid the cliff edge - when a project is delivered fees reduce so it is important to win more work to maintain cash-flow through fees.

Future possible fee forecasting:

• All possible fees hoped to be earned. Anything but certain.
• Quantify probability of winning them with a success probability factor %.
• The aim is to attempt to predict the medium to long term.

Resources forecast:

• Establish whether the right number of people are available to deliver the work lined up in the captive fees forecast.
• Keep a rolling weekly forecast of people required vs people available.
• Plan for flexibility so there is always some resource available for general work.
• It is most efficient to use those with recent experience on similar projects to achieve good results quickly.

[edit] Cashflow forecasting

• Cashflow = total money in and out of a business affecting liquidity.
• The most accurate way of predicting the financial health of a company in the short - medium term.
• Gives an idea of when cash shortage problems may be approaching.
• Rolling 6 monthly.
• If seeking a loan / overdraft, a 2/3 year forecast may be needed.

Inflows:

• Fees.
• VAT collection.
• Opening balance.

Outflows:

• Payroll.
• PAYE/ NI.
• Rent.
• PII.
• Office supplies.

[edit] Credit Control

• Good organisation is the key to good credit control.
• Invoice for fees in a regular and determined way.
• Chase up when they are not paid on time.
• Agree payment terms.
• Keep a record of all correspondence regarding fees.

Late payments:

• Logged in aged debtor report - all outstanding payments and for how long.
• Understand clients payment systems.
• Outstanding invoices should be chased

1. Remind them of agreed terms in invoices.
2. If over due send reminder email with copy of invoice.
3. Further 1 or 2 weeks… phone call.
4. Last resort: Dispute resolution.