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Raising finance for your clients ' and yourself! By Richard Joseph

25th Jul 2006
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Richard Joseph, honorary secretary of the London Society of Chartered Accountants, argues how practitioners offering advice to clients on raising business finance can prove mutually beneficial.

For smaller practices, the usual run of accounts preparation and tax compliance work is not only getting increasingly boring, it's also becoming somewhat less profitable. Technology and software saves a lot of time, which, in general, is good for profitability, but you can't get away with charging the same fee for a quarter of the time spent indefinitely. Clients are becoming savvier, and will know that if they give you a decently entered up backup from Quickbooks or Sage, then you will be doing a lot less work than when they gave you a set of handwritten books, or even a set of disjointed spreadsheet files. Clients are even printing out their own accounts, and asking me to just "tidy them up and sort the tax out" ' for which they expect a much lower fee, and not without some justification.

So is this a real problem for smaller practitioners? Not really - in my opinion, if basic preparation and compliance work is going to become more of a 'turnkey' operation, based on gathering and inputting data, (whether by you or the client) then our own hard won expertise and experience is not being fully utilised. We should be looking to provide the sort of advice and services that are not simple box filling exercises. The most likely situation is to help clients either raise finance for new ventures, or to re-finance an existing business.

This is familiar territory for most of us, and we will all be conversant with the usual sources of business finance, - business development loans, Small Firms Loan Guarantee scheme (much more attractive following the changes in the Graham Review), invoice factoring or discounting and venture capital introduction.

However, the one key element that is required whichever source of finance is sought is an adequate and well-produced business plan. Many readers will have seen the TV show 'Dragons Den' and the vapid, soggy presentations put to the Dragons for some otherwise quite good looking projects. This is where we can really help our clients, and provide a service which is not only genuinely valuable to them, but will be seen as such, and can therefore be suitably charged for. Again, as experienced accountants, we will know the elements of a business plan, but how often do we really sit down and produce one? For smaller loans, banks tend to ask clients to simply fill in a simple cash flow chart ' more box ticking. But the real service to the client is to actually construct a decent business financial model, typically on a monthly basis, and over a two or three year period.

When I have done this with clients at my practice, it is amazing how much can emerge, - usually that the amount of finance being asked for is much too low. Here are a few examples of how this can occur:

1) Clients who are buying and selling goods, typically in retail situations, tend to estimate for the first year how much they are likely to sell, and therefore budget for the purchase costs of the goods potentially sold. Spreadsheet models will probably have percentage sale margins built in, so you can see what it will cost to buy the goods required for a given level of sales, at a given margin. But in my experience, two elements are almost always overlooked.

Firstly, the client forgets that on day one he has no stock, but at day 365 he will have probably quite a lot of stock, typically enough for one or two month's sales at least. He will also need a fair amount of stock very early on in addition to the goods actually sold, - but the models still only show purchases for the month of the actual cost of sales made. No allowance is made in the cashflow for the cost of stocking up both initially and cumulatively throughout the year. In year one, you are typically buying, (and therefore paying for!) not one year's purchases, but 13 or 14 months' purchases.

Secondly, because purchase levels are geared to sales, if you re-adjust your sales forecast, (for your break-even forecast, say, compared to your "optimistic" forecast) then, if the model doesn't sell the goods, - it doesn't buy them either! Not true in the real world, - if sales drop there is always quite a lag, when you find yourself with more stock than you thought, - (and which has to be paid for.) Both of these factors are rarely adequately covered in the production of a trading and cash flow model, particularly when prepared for (or by!) smaller clients.

2) Although most financial modelling software, whether simple spreadsheet based, or bespoke software based, deals with the time lag between payment and incurrence of income or costs, one has to be brutally realistic in assessing this. If you estimate that all sales will be paid for within 30 days, - how true is that likely to be? You are relying on that to actually happen without fail ' what if it turns out to be say, 40 days on average, which is quite likely. A small shift in recovering debts can have a disastrous effect on cash flow, and this must be considered.

3) Other issues which can cause problems include:
a) Realistically assessing the proprietor's own requirement for drawings. When he tells you he is not planning to take anything out of the business for the first year, - challenge him on it. What arrangements has he made to support himself? If it checks out, put it clearly in the written part of the business plan, - but does it apply to year two and three? If not, make sure a realistic drawing level is brought in for those years.
b) Making sure taxes are considered. If it's a limited company, then approximately 21 months after it starts, there will be corporation tax to pay if the company has made any profits, and this should be factored into the year two model. Don't forget, the £10k zero percent band disappeared as at 1st April 2006. Similarly VAT can have quite an effect on cash flow, - sometimes positively, but if rent is being paid, check if it includes VAT, - if it does, cash flow will be affected, and this again is often overlooked, even though all other input VAT is accounted for on the model. When assessing salary costs, employer's NI must be included.

Finally, a business plan is not just about numbers. We accountants tend to forget that the bit that gets read first is the introduction and explanation of what the proposal is all about. Make that count! Provide good punchy text which really sells the basic idea, the marketing strategies, the expertise and experience of the client and his associates, the opportunities for expansion, the management information systems you'll be using, (and which should be supplied and managed by you!) And also the risks and rewards available. Get the reader of the plan to be enthused and interested well before he gets to ploughing through the forecasts and models.

There is a fair amount of help out there on the net for new business and their advisors.

Helping new clients to get up and running, or existing clients to progress is the area which accountants should be really pushing as our "unique selling point". The government's obsession with online filing for everything will certainly have the effect of standardising accounts and tax submissions to the point that a greater part of the process will be achievable by lower levels of staff. This means that qualified and senior staff should have more time to provide the higher value services of business development and other consultancies, such as, say, expert witness work. There's more to life than boring old "Tax'n'Accounts".

Richard Joseph is the principal practitioner of Richard Joseph & Co based in Edgware, north London. He has run his practice for around 25 years, and specialises in helping new businesses to establish themselves and develop. Richard was the Chairman of the London Society of Chartered Accountants in 2000-2001, and is now the honorary secretary of the Society. He is also one of the ICAEW's "Support Members", a group of Chartered Accountants chosen by the ICAEW to act as ad hoc counsellors to CA's who may have problems of a personal or professional nature. Richard can be contacted on 020 8952 5407.


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