Accountants who
actually get business.

As a new business or a small business, it can sometimes be tricky to work out how to assess the performance of the company. There are a number of great Key Performance Indicators (KPI) that can help to track how well things are going, not just profit, but one thing that you should never lose sight of is the cash. Many small businesses, and in fact many large businesses, fail because of access to cash and not lack of profit.

When you have money everyone wants to lend you more, but when money is tight, it's amazing how quickly the loan and credit offers dry up. Once you start getting a reputation for poor payment history or your credit rating falls, you can find that credit terms from suppliers disappear quickly. You can rarely rely on your customers to pay quicker to help you when cash is tight and if you try invoice factoring or similar, it can prove costly. So it is worth keeping on top of cash. In many small businesses, it is more important to monitor the cash than any other metric. Forecasting cash is imperative, whether you are FTSE listed or a small local business just starting out.

The actual process of forecasting cash can be daunting and is very difficult to get right, but having a forecast will help you to see the points in the month and the year when things start to get tricky. That could mean that you delay a purchase by a month, or choose a monthly payment option on your insurance renewal and avoid an awkward conversation with HMRC about an unpaid tax bill.

For many businesses you can have a reasonable thirteen week cash forecast without even having a reasonable forecast for the overall business. That is because a lot of what happens in the next few weeks in your bank balance has already been set by the events of the weeks before and the terms you've agreed with your customers and suppliers.

The key areas for a functional cash forecast are what you already know — current outstanding invoices and customer accounts; and what you don't know yet — future bills and sales. For anything that you already know about, it should be fairly easy to produce a reasonably automated process that sets out the expected cash impact, based on past experience and contractual terms. You simply take your debtor and creditor ledgers by due date and use them to schedule out when you expect to receive or pay the cash. It is always worth being a little bit more cautious about when the money will come in from your customers than when it will go out — you can only control one of them.

The tricky part is the expected future transactions. For staff costs it might be quite easy if you are mostly salaried, but if there is overtime and hourly rates then you need to think about how busy your business is going to be and put together a reasonable estimate — or plump for the pessimistic view. If you have a forecast or budget for your business, that should be the basis for your cash projection, but don't forget that the timing in the cash forecast will not match the timing in the P&L.

Don't be afraid to adjust the budget if you are now operating at a different level to what had been projected previously. The cash impact of the budget then needs to be broken out depending on how it will impact cash: cash sales v credit sales, cash purchases v credit purchases, big one offs v regular payments. You also need to consider the impact of non-cash items — your budget may include depreciation, which has no place in a cash forecast.

With your actuals spread out over the next few weeks and your budget cash impact scheduled out in the same way, it should now be simple enough to put the two together and see what the answer comes out as.

Recently I heard that new business start-ups have increased by 25% in the last year compared to the year before, which is very exciting news as it means there are more people deciding to take the plunge and try to forge their own path.

Unfortunately, 20% of businesses fail in their first year and 60% don't make it past year three. So more than half of those exciting projects won't make it to year four.

Having had lots of conversations with business owners throughout my career, one thing that I have noticed is that many of the people brave or crazy enough to start out on their own are doing so because they've had an idea which they can't stop thinking about. They are generally focussed on the idea, the delivery, the marketing and the excitement of getting started. They are often not that focussed on the admin, the accounts, the tax or the financial management — especially cash flow.

A lot of the time, the idea of having to sort out these areas, which they've not had much involvement with before, is too daunting for them to even consider. So they don't. They put their head in the sand and ignore the brown envelopes that come from Companies House and HMRC. The problem with this approach is that the issues don't go away — they get bigger.

It's ok. Stay calm. Accountants are not scary people.

There are lots of accountants who will happily have a call with no fees and no strings attached, so you can run through where you are and they can point out some key risks for you to consider.

Here are some things to do as soon as you can:

• Speak to an accountant!
• Make sure you are keeping proper records — track all of your income and expenses
• Xero, QuickBooks and other systems are available to help you but all cost money — if you want something free, check out Bokio
• Track your mileage — it may not all be claimable but if you don't track it, you can't claim it
• Get a bank account for the business and put everything through it (sole trader: best practice; limited company: legal requirement)
• Get your bank linked to your bookkeeping software — they all link up now and it makes everything easier
• Start thinking about what you want from the business: income, growth, a project to sell on, or something else
• Understand when your reporting and tax returns are due — this depends on whether you are a sole trader or limited company
• Register with HMRC if you have to — check gov.uk for guidance on self-assessment

Accountants don't have to cost much. You can probably afford one. But can you afford not to have one?

We all have different reasons for starting our businesses and different goals in the short, medium and long term. A lot of small businesses are there to provide an income that also gives the owner an opportunity to live a lifestyle and do a job that they love — or at least enjoy. What a lot of these small businesses have not considered is the exit, the end point. There will come a day when you can no longer run your business or have no desire to continue doing so.

It is always worth thinking about what the end goal might be. Is this a business that you can pass on to a manager at some point, with you retaining ownership and dividends, or does it depend on you being there? Is the business one that could be expanded — and could you eventually just be a shareholder taking a return and ultimately selling?

If you are going to be able to sell it, what is a realistic return and how will you find a buyer? A lot of companies sell to competitors. Lots of well-run businesses with potential sell to private equity or venture capital funds who invest for growth and then sell again.

For a business that is preparing for sale, it may be necessary to make a few changes to how you run — particularly if it has been more of a lifestyle business. You need to understand what makes your business attractive to a buyer and work to maximise those elements, and minimise any spend on the areas that purchasers don't value.

It is worth understanding how a purchaser will think. A fairly standard approach is to consider the current profit, the trend in that profit, known opportunities to improve the business, and the risks that something might change things for the worse. Once you have an adjusted profit value, that is multiplied by a number. That multiple depends on factors like industry, general economy and risk. A typical multiple for a stable business in a stable industry is 3–5 times profit. A fast-growing business in a trendy market could be 10+. If you are looking at long-term planning, hedge your bets and think about getting a 5+ as a decent outcome.

You also need to be aware of normalised working capital. The working capital of a business is the total of the current assets and liabilities involved in the trade of the business — debtors, creditors and stock primarily. This can have a significant impact on what you actually receive on sale, especially on a "cash free, debt free" basis.

When considering profits, the base figure is generally EBITDA — not statutory profit — adjusted for one-offs to show the true underlying business performance. The period of interest to a buyer is generally around three years. Any changes you make that haven't yet hit a full year of figures may not be fully priced in, which is something to factor into your timing.

Whenever you are buying or selling a business, make sure you involve the right people and go through the process properly. Due diligence can highlight good news as well as bad.

Accountants, lawyers, doctors and other professionals spend years training to be able to do their jobs. That time teaches them all sorts of complex things and also, inexplicably, seems to result in all of them having terrible handwriting.

A side effect of spending so much time studying topics that most people don't come across on a daily basis is that these professionals become de-sensitised to the fact that what they know is not common knowledge. So here's a plain-English guide to the most common terms:

• Accounts — either a category within the numbers, or an informal name for the financial statements.
• Accrual — including costs in the accounts before the cash is paid.
• Amortisation — spreading the cost of intangible (non-physical) assets over their useful life.
• Assets — things you own which you can make money from, sell, or which represent money itself.
• Audit — a formal process where a qualified person reviews the financial statements and confirms whether they are materially correct and give a "true and fair view".
• Balance sheet — a snapshot of the overall financial position of the company at a point in time.
• Cashflow — the movement of cash; also one of the main financial statements, showing how profit movement relates to cash movement.
• Cost of sales — the cost of an item and any associated costs necessary for it to be available for sale.
• Depreciation — the method of allocating the cost of an asset over its useful economic life.
• Double entry accounting — for every entry there is an equal and opposite entry. When you spend cash, you gain an asset.
• EBIT — Earnings Before Interest and Tax. Used to compare businesses regardless of borrowing levels and tax policy.
• EBITDA — Earnings Before Interest, Tax, Depreciation and Amortisation. A favourite of private equity as it shows the true underlying trading performance.
• Financial statements — the formal format for showing financial performance: balance sheet, profit & loss, sometimes a cash flow, and supporting notes.
• Goodwill — the inherent value of something over and above the physical value. The difference between what a business is worth and what you can put a number on.
• Input and output VAT — input VAT is on the stuff you bought; output VAT is on the stuff you sold.
• Inventory — the same as stock: items you have purchased or made that you intend to sell.
• Margin — the difference between sales price and cost. Margin % = margin ÷ sales price. Don't confuse with markup (margin ÷ cost).
• Prepayment — paying cash in advance and moving the accounting impact into a later period so it matches with when you get the benefit.
• Profit and loss (P&L) — a breakdown of the profit earned in the period. (Profit might be negative!)
• Provision — similar to an accrual, but where the outcome isn't yet known. Requires a probable future outflow of cash relating to a past event.
• Working capital — the stuff used in everyday trading: stock, trade debtors and trade creditors. Very useful for understanding whether a company's cash position is higher or lower than it really should be.
• WACC (Weighted Average Cost of Capital) — what it costs a business to have capital, taking into account all sources. Used as the starting point for a discount factor.
• True and fair view — means the information is accurate enough that it won't mislead the users of the financial statements.

Got any others? Send them to us and we'll add them to the list.