Here at Pyramis, we believe that your financial records should be there to help you and your business. Yes, the priority is to get the records right for the tax man, but ultimately, as your business gets older, matures and grows, the numbers become a certain source of truth about the state of your business.
So how equipped do you feel to find, analyse and use your reports for your decision-making process?
This month we thought we’d look at some of these reports with you…
The 3 Key Reports
When starting anywhere with your reports, there are three key ones, each of which has very different information in them.
These reports are your Profit & Loss (or Income Statement), your Balance Sheet (or Statement of Financial Position) and your Cash Flow Forecast.
Now if you have been keeping up with some of our previous posts, you’ll probably be sick to death of us discussing the Cash Flow Forecast, however this is still the highest on the priority list to master. It is a pretty safe bet that if you master managing the Cash for the 12-18mths ahead; you have got some key foundations in place to keep the business healthy. You can request our FREE Cash Flow resource here.
Next on the to do list are the Profit & Loss and the Balance Sheet Reports, so what are they and what do they tell you?
If you have ever heard of your bookkeeper or accountant talk about double entry bookkeeping, these are the key reports that the system produces. All that effort in allocating your transactions to a particular accounting category, ultimately ends up on either the Profit & Loss or the Balance Sheet. So all transactions end up in one of these two reports.
Profit & Loss Report
The crucial point of the Profit & Loss (P&L) Report is to determine just that, have you made a profit or a loss. It looks at how well the business is performing.
Key things to note:
What can you do with a P&L report?
The balance sheet shows what the business owns (assets) and owes (liabilities) at a point in time. The key point of the Balance Sheet (BS) Report is to determine how healthy your business is and what position it’s in. The best way I have heard it explained is that it is like a photograph in time of all your assets, liabilities, reserves and capital/equity.
Let’s break down some of that terminology:
Assets = Items that you own or control that help create a benefit for you in your business
For example, a cake baking business could buy an oven that will help to bake cakes to sell.
Assets can also be the cash in your bank account.
Liabilities = Items that you owe to others in the short or long term
For example, that Start Up Loan you may have got when setting up; or the invoices owed to your suppliers; or amounts you owe in tax to HMRC.
Capital/Equity = The money owners have put in to the business
Or the funds from shareholders when they bought their shares.
Reserves = This is a blanket term for value generated by the business while trading
For example, profits or increase because of a revaluation of assets, less what’s been paid out to owners.
Overall, the Balance Sheet shows whether there are more assets in the business than liabilities and tells you if you are solvent at the time the report is created.
Key things to note:
What can you do with a balance sheet report?
Management Reports vs Financial Statements
I think it is just worth mentioning that there are degrees of pernickety when preparing financial reports, and so the aim for business owners that want to get a lot closer to their numbers is to develop a sensible reporting structure that tells them about their business. Something that can be used weekly, fortnightly, monthly or quarterly, makes sense year on year and has enough detail to help decision making.
This firmly fits into the ‘Management Accounting’ and ‘Management Reporting’ aspects of financial reporting. These are internal documents/reports, solely used for managing the business and are usually not shared outside the organisation. It therefore has more freedom than those your accountants might prepare that at the end of the year, we often refer to these as ‘Financial Statements’.
Financial Statements are more formal, follow accounting principles and standards as set out by the relevant authorities. Here in the UK, we are concerned with satisfying Companies House and use a certain set of standards applied based on the classification of your business size. It is really important for accountants to follow these standards as this is what makes the published accounts a level playing field, especially for parties outside the organisation. They want to be able to compare performance, knowing the same rules are applied.
E.g. If you wanted to know which supermarket was doing better and who you wanted to buy stocks in, you want to be able to compare the key players with each other and compare like with like.
Here at Pyramis we love to make the management accounts and the financial statements talk to each other. So our aim is to help you develop management reporting that works for you as a business owner, but that also feeds smoothly into the financial statements and any other external reporting you need to do, so that there are no surprises when your year end statutory accounts are prepared.
How to create these reports?
Using an accounts package such as Xero or Quickbooks makes reporting very easy as these reports are built into the system and can be accessed within a few clicks.
Another benefit of accounts software is that as the data is all cleanly entered, so changing the reporting to different time periods, altering the format or the level of detail is also fairly simple to do.
It also allows you to quickly compare previous periods or look for trends over time.
And the biggest benefit is that you should be able to export these reports into a spreadsheet format, which then allows you to convert that into graphical formats or apply calculations to gain metrics on the values.
What do you do if you don’t currently have an accounts package?
Well, the answer depends on how comfortable you are already with financial reports…
Ultimately you can build them yourself from your prime book-keeping records and may need to do a bit of online learning to work out what categories you have and where they go on the reporting structure, however that might not be everyone’s cup of tea!
If you have an accountant, it may be worth asking them if they can help provide these more regularly, or even help you set them up, and ask how much that might be as a regular service.
Alternatively, here at Pyramis Solutions, we offer ‘Working Sessions’ for such a task, we can sit down with you to help create a template for you to continue working with over the coming months or years.
We would recommend that as soon as it’s feasible, move over to an accounts package. With Making Tax Digital becoming more prevalent and packages becoming even more automated and useful for business owners, it can save pounds in your time and it is less likely to have those awful spreadsheet errors.
As a Xero partner, we know that their basic package is becoming much more suitable for a lot more businesses, so may be worth having a look.
Other Useful Reports & Metrics
We could talk about useful reporting all day, but here is a snapshot of some other useful reporting elements that would be worth looking at:
You Get Out What You Put In
Ultimately, your reporting can only be as accurate or as up to date as the information being put into it. So another Pyramis passion is encouraging clients to keep up to date with their books so you’ve got better data for working with!
With the news of another lock down days away, Alison, over in our sister company, Pyramis Accountancy, has quickly pulled together some information which we hope will help.
The new JSS (Job Support Scheme) was supposed to be coming in from this month. However instead, the ‘old’ JRS (furlough) scheme is being extended.
Key points are:
• The basics are the same as the original furlough scheme
• Furloughed employees would receive 80% of their gross salary up to a maximum of £2,500
• Employers can choose to top up the wage to 100% salary
• Employers will need to cover the cost of related national insurance and pension
• Part time furlough is available, where employers will pay for any hours worked by the employees
• To be eligible employees must have been on payroll by 30th October 2020
• It’s not clear yet what ‘usual’ wage level the JRS will be based on
• The government will confirm shortly when claims can first be made in respect of employee wage
costs during November, but there will be no gap in eligibility for support between the previously
announced end-date of CJRS and this extension
• The JSS will not start until the JRS has finished
Support for Self-Employed Workers
Originally there were to be two further grants for self-employed workers, covering the periods November 2020 – January 2021 and February 2021 – April 2021. The first of these is now to be at 40% of average wages (instead of 20% as previously stated).
There’s further information here, which will be updated as details develop: https://www.gov.uk/government/publications/self-employment-income-support-scheme-grant-extension/self-employment-income-support-scheme-grant-extension
Key points are:
To be eligible individuals (and partnerships) must:
Links to other support:
You can find a lot of information here:
We were certainly hoping this would not become a reality, but it looks as though a ‘second wave’ is upon us and new measures to help curb the COVID crisis are coming in thick and fast.
Your business may only just be recovering from the impact of the last six months, and now we are all facing the uncertainty of the next six.
We hope that you have found some value in our Cash and Cash Flow information over the last month. Our free mini course is still available, you can go here to find out more information and to request the resources.
After speaking to Business owners, it’s clear that we have all experienced the crisis differently, some have experienced growth, and sadly, some have been completely devastated by the pandemic.
Wherever you are, it’s more important than ever to put contingency plans in place.
For those that are still trading and pushing ahead, now is a good time to tighten up on some financial tools and good practice to help navigate these coming months.
Some places to start are:
Although the next few months are critical, it’s important to monitor the medium and long term as well - think about what can you do now that with give you a return in a few months?
Through the first wave I saw a lot of businesses investing in technology, branding, online content and passive income streams, all intending to add value down the line. This could be something to consider.
Asking the Hard Question - Is My Business Profitable?
We may face some tough times ahead whilst still trying to rebuild from the first wave. I suspect an enormous question for many businesses is how do we stay viable or even profitable?
A common problem I have seen is business owners putting in 50 or 60+ hours a week but ultimately only taking home less than minimum wage. This may be acceptable in exceptional times, but it is not sustainable in the long term and suggests that your business may not be profitable in the future.
So, how do you know if and how to get to breakeven or when is the business no longer viable?
We are not really the experts at business recovery (in the content of insolvency), ultimately, there are other professionals to assist when it has become that serious. But we can help you before that stage, by giving you tools to check where you are now and predict where you may be in the future.
This way you can be proactive about the way ahead, and, if the numbers don’t add up, make those tough decisions.
We feel one of the best ways to gain control, develop clarity and ultimately be confident in your decisions ahead is to develop a Financial Forecast or Model.
So, What is Modelling and Forecasting?
Forecasting is the act of preparing your reports/tools for the future, often using the best guess approach to the numbers in it.
As we don’t have a crystal ball, we can’t predict the future, but we can learn from the past and make predictions based on the data in front of us.
Ultimately we are guessing, but the point is to get better at guessing and to use targets to drive your performance to achieve the results you want.
So when you prepare a business plan, forecast, projection or model, you are taking all the information, strategic objectives and actions to guess what financial results you will end up with over the next 1, 2, 5 or even 10 years.
Personally, I’m fascinated at how ‘big data’ and ‘data’ are making it into financial roles. Data analysis has always been there, but I recently attended a digital conference that emphasised the role of data scientists within business and how accountants are going to be key translators for utilising that data to come to a single truth about the performance of a business. This could ultimately save a lot of time, energy and money further down the line.
One way to inform your forecast or model is to start regularly using your Management Accounts within your business.
What Are Your Management Accounts?
Management accounts are a wide, encompassing term but basically, they are the internal financial report prepared for your Management to decide about the direction of the business.
They can take many forms because they are an internal document, as opposed to the set of accounts prepared by accountants at the end of the year which have strict accounting standards that determine how those should be prepared, classified, presented and reported to the authorities.
For both your Forecast and your Management Accounts, you want to keep a consistent format throughout. This keeps information comparable and easy to follow between the two.
So the key thing here is what information do you need so you can decide what the next steps are for your business?
Dr Stephen Covey’s quote, ‘Begin with the end in mind’ has always stuck with me.
When building the format of your Management Accounts, you need to think about what format and level of detail are going to best help you work with your numbers, so you need to have ‘the end in mind’ for your format.
This is such a wide area that it’s too much to go into here, we can do this in a future Blog Post or we can help you with in a working session, you can find more details here.
When to Start?
As a busy business owner, you most probably wear several hats. Your time and energy are precious, I get that, but ultimately, you want to do this as soon as you can!
Depending on your systems in place, who you have to help you, what stage your business is at, what’s on the horizon and how savvy you are with the financial tools, it will affect how much you do.
If your time is limited and you want to keep it simple, a good starting point is a 12-month rolling Cash Flow Forecast. If you are managing the cash in your business and taking measures to never go negative, it is a fantastic safety net to stay out of trouble.
If you are a business that receives any external funding, whether it’s a big project grant, investor income or loan, then you probably had to prepare a Forecast to secure funding. You can convert that into a tool you regularly check-in with monthly, so update the actuals and monitor that the forward-looking projections look right at this point in time.
If you didn’t, then I would suggest that this is something that gets put in place fast, as now you have other people involved in how well you manage ‘their’ money.
The rest of the time, it depends on how fast-paced your business is and how often you need to make big purchases or financing decisions? Checking the numbers beforehand as a sanity check is a good habit to develop.
How Long Should My Model/Forecast Be?
As with many things about Management Accounting, this depends on your business and what you need to stay on top of it.
When building this, questions to ask are:
The length of your Model will depend on what you want to achieve, but typical durations are 1 - 3 years.
It is worth noting, the longer the time period, the more uncertainty there will be in your numbers, after all, we can only guess or set a target for what will happen 3 years from now.
I’m not sure many business owners planned for a Pandemic and its after-effects of this magnitude!
What Tools Can I Use?
First, what budget do you have to invest in setting up a Forecast?
Are we talking just your time, a consultants time, a one-off project fee or possibly a monthly ongoing fee?
If you have a budget, I would highly recommend investing in a piece of software that integrates with your accounts.
Yes, the initial setup may take a little more of your time to get in the system however you get that time back when you’re updating it (because of integration) and flexibility with scenario planning (through the software tools) which ultimately means you can test out scenarios on your model without affecting your base budget.
If this is not possible to begin with, then a low-cost option is using a spreadsheet. These are often included in your office applications suite or open-source online.
Just remember to keep it as simple as you can as finding a formula error in a huge spreadsheet can be a nightmare and is a time stealer.
One tip, most accounting platforms allow you to export your reports as a PDF, if you line up your format from the accountancy platform to your model, updating your actuals becomes a whole load easier with hopefully a simple ‘copy & paste’ or two.
If you are a Xero user, have you found the ‘Budget Manager’ feature? This is a great way to model your Profit & Loss over a two-year period and then can be extracted from your reports section with a few clicks, it’s a great time saver.
You’ve Built Your Model – What’s Next?
This is where the value really comes in.
I previously mentioned a great way to use your model is if you have a big decision to make which will have a financial impact. By referencing your model beforehand, you can see if you can afford it, when you can afford it, and how might the return on investment impact your results.
You can then decide whether the financials stack up.
If you are using a spreadsheet for your model, and are looking at a scenario or one-off decision, it is worth taking a copy of your forecast before amending it, so that if you decide not to go ahead you haven’t got to reverse all your entries on the original spreadsheet.
Another great use of your Forecast comes down to good housekeeping. If you check in with your forecast or management accounts monthly, you can see if you are on track to achieve those targets you set.
By being proactive with your results, you can plan ahead, look at whether you can extract more profit at the end of the year and have a good guess and what your tax liability may be and start planning to put that aside now.
You also can spot problems earlier enough to do something about them. If you can see that there is a potential problem on the horizon, say in 6-12mths, then taking action now will help avoid difficulties down the line. Maybe you reduce spending commitments; put that needed purchase on finance as opposed to paying outright; or put off hiring until sales reach a certain level.
Finding yourself surprised by a problem makes it a lot harder to find a solution. It’s always better to be proactive than reactive, which may make solving your problem more costly or demotivating; like having to pay for an expensive loan because the bank won’t offer you a good/decent deal, or having to make surprise staffing cuts which can be devastating.
By having some of these simple tools in your business you will gain more clarity and control and feel more confident in both the business direction and your decisions.
One of the most important parts of keeping your business in business is making sure you have enough cash in the bank to continue trading.
This may seem obvious, but in practice a surprising number of businesses do not do this and run into trouble.
The accountants call this ‘liquidity’ and remaining ‘solvent’.
It looks as though we will continue to feel the effects of the COVID pandemic in our small business community for some time to come. However, the beauty of 20:20 hindsight is we can take several lessons.
One area we want to help with is around CASH MANAGEMENT.
During the pandemic, we created a mini Cash Flow series that walked you through how to create and maintain a Cash Flow Forecast. You can still order this here and it will remain free during 2020 as part of our COVID Support.
So, where do you start?
We find that a good place for a business to start is to ask yourself:
How about some Tips?
#1 Create and USE a Cash Flow Forecast
A cash flow forecast aims to predict the way your money moves in and out of your business.
Often you will create the forecast as part of your planning process or for funding applications, but the actual value comes from using your forecast regularly.
By staying on top of your forecast, continually updating it with the actuals and adjusting and extending your forecast at least once a month, you will gain some control over your numbers. This is especially useful when looking to choose whether to invest in that course or marketing campaign.
#2 Keep your hard-earned cash as long as possible
This could be because of my accountancy training, but I would say you want to keep your valuable asset, YOUR CASH, with you as long as possible.
Don’t get me wrong, this isn’t about hoarding cash like Scrooge McDuck (from my childhood cartoon favourite Ducktails!).
Cash is your tool to achieve your objectives, and therefore some management of that is important for making cash work harder for you.
So we are not saying don’t make purchases that invests in your business or helps achieve a specific goal. What is useful is understanding when to make those purchases and how best to pay for them?
As individuals, we all have credit ratings, and we need to use credit to prove we are good with money before it allows us to make larger purchases on credit.
Well, it’s the same in business too. There is a credit rating/history and depending on your style of business, being able to negotiate credit terms with suppliers or achieving a substantial loan injection can be critical for your next step, so using credit can be important.
Credit also allows you to play with the timing of expenditure. For example, paying for that big purchase between paying staff at the end of the month and collecting your client income at the beginning of the month could cause an entire load of problems. You can use the company credit card, which is then collected by direct debit the following month - that can ensure you can get that bit of kit you need and still pay your staff!
#3 Have systems to manage your payments and income
If you are going to use credit or grant credit to your customers, it is vital to have a way of tracking what’s owed, a plan for when it should be paid, and a way of tracking if the payment hasn’t been made.
Again, like the damage that occurs when you miss a credit card payment or you stay over your overdraft limit, there are consequences. It is exactly the same for your business, and therefore you need to ensure that you stay within agreed terms to avoid financial (and reputational) penalties.
Your Cash Flow Forecast is where you plan the movements in advance, so keeping that up to date is important to ensure you always have the full picture.
The tracking then comes down to your accounting systems. The good news is that most electronic software packages track your invoices and can produce a list of those paid, due and overdue, all at a click of a button, providing the raw data is up to date.
At Pyramis, we recommend you use a weekly payment system, where you exclude those regular invoices paid by direct debit, leaving a schedule of payments each week that you can pay when they are due.
You can use the same process for your customer payments, review who still owes you money each week, filter out the ones that have always been good payers, and check in with your client the week before to see if they are happy with the bill or ask when to expect payment.
Often, late payments are because they forgot or never received the invoice. A gentle follow up is all that’s needed.
We like to use a combination of Xero (for our invoices) and Float (for our long term forecasting). If you want to implement such systems, why not check out both our partner programs and Working Session pages.
Can you ever have too much Cash?
I’m sure many small business owners may agree, it is very rare to be worrying about too much cash in the bank, especially in a growing business. Most spare change gets reinvested quickly.
But it is worth considering - can you have too much cash?
The quick answer is YES!
If your cash is sitting in a no interest or low interest bearing account, depending on how much you need that cash and how soon, you might make it work a little harder for you.
Things you can consider:
The other options mentioned have varying degrees of risk, and you must consider this before taking action. This is especially important with investing or Loans, be prepared to accept that level of risk and potentially lose some or all of your hard earned cash.
If you are thinking about investments or loans and would like an unbiased opinion, then we can work through your options in our working session - where we differ from a bank is we won’t try to sell you anything. We want to enable you to make the best informed decisions to help your business grow.
How much of a Cash Buffer does your Business Need?
The lockdown caused by COVID19 has probably made most of us think about the level of cash in the bank. Those businesses with little in reserve have found themselves in tough situations and have needed to look for external support to stay afloat.
For those that have a seasonal income, maybe COVID hit during the quiet season, which is great, you will totally get the use of a buffer through the quiet times.
But if summer was your season, what do you do to ride out your ‘out of season’ period if you don’t have your buffer cash now?
The reason I mention this is that these things affect how much cash your business needs in the bank and at what point you cross the ‘too much’ cash in the bank point.
It also can help you understand at what point you might seek external funds, even if you have cash now.
To determine how much cash you need, it’s important to consider
Personally, I like the idea of 6 months business costs in the bank as my cash buffer!
Remember, if you need a little help from external funding, the earlier you approach the conversation with clarity and control over the costs of the business, the more confident lenders may feel in your ability to look after (their) money and accept the application.
The Power of Float
I know, I bang on ALOT about having a Cash Flow Forecast!
However, I really mean it… it is such a great tool to have for your business!
Upgrading your cash flow to a system like Float has so many benefits.
You can do scenario planning quickly without messing with your original budget.
And you can switch from a broad monthly view of cash levels to daily bank balances with a couple of clicks, all with the original data you have inputted just once.
The major benefit is the reduced need for manual data input, formula, and calculation. This ensures your cash flow is more robust and the formula error message never haunts your forecast again!
We hope this blog has helped you think about your CASH and systems for managing it. If you want more support, then we are always happy to have a chat about how we can help you.
We are excited to be moving into September and the start of a new season. September is often a new start for many, as we still find ourselves using the Academic Year calendar, even in business.
But it feels even more of a new start so this year, post lockdown. It’s a time for a fresh re-set and we are looking forward to supporting businesses in the Pyramis way.
It has been quite a year so far! Back at the first quarter, Pyramis Solutions had big plans, our team expanded, we welcomed Alice, our finance Administrator, Vicky, our marketing and business development support and set up Pyramis Accountancy with Alison. Stephanie moved into the back office to focus on systems and we were just starting to redevelop our website. Then the unprecedented happened.
The country went into lockdown.
Like most businesses, it threw us into a situation we had not planned for. To be honest, no one could see it coming. Once the initial shock subsided Pyramis moved quickly to adapt to the new situation.
I took my office chair home with me and set up my home office. The team were already used to working remotely, so we could adapt quickly to a more enhanced flexible working model. We had already been using Slack for our communications and it was great for enabling us to create different subject channels and keep communication flowing without confusion. As a way of staying in touch, we continued with our weekly scrum meetings via ZOOM and invested in Trello as a tool for our main workflow, project management, and operational procedures.
Luckily, we had completed our photo shoot, with the amazing Jenny Stewart, days before lockdown so we could continue work on the website. Working closely with Paul, from Word Gets Around, we strove to make it what we wanted and we are so happy with the result.
So many businesses were struggling to stay afloat during the pandemic - we wanted to help so we developed and launched our Free Cash Flow Forecast resources which designed to help SMEs gain control, clarity and confidence with their numbers and decision making.
With thanks to Vicky, we got active on our socials! This was something we had been meaning to do for some time and we are now happy to share all of our products, services and news with everyone.
We also paid attention to our internal operations. Stefanie moved into her new role as Operations Coordinator and has been doing an amazing job behind the scenes. With a bigger team in place it was important that everyone understood and reflected the brand so we worked on our core values - these flow through everything we do and we carried on doing what we do best - supporting our existing clients.
We are now happy to be moving back to our office at Future Space for a couple of days a week – I have brought a new chair so I can keep my old one at home… just in case.
This month we are going to be settling into our new roles for two new clients that have opted for an outsourced finance solution to enable their business to grow.
We are excited to be starting the build of the Pyramis Tech brand and website; and are working with Future Space to offer other tenants advisory sessions to help support the community.
Lastly - we wish Alice GOOD LUCK for her upcoming accounting exam! (we know she’s going to do well).
You can stay in touch with us through our social channels.
Check out our updated website here to find out more about the Cash Flow Forecast, our Working Sessions and all of our products and services. You can also book a call - we are always happy to talk through your needs.
A welcome evolution for Pyramis Solutions is well under way, a fresher look, an expanding team and new partner programs available for our clients, all showcased on our brand new website.
I just wanted to take this opportunity to say a quick round of thank you's to Paul Smith at Word Gets Around for the amazing design and implementation of our new website, Jenny Stewart for the amazing Photography we squeezed in just before lockdown and to the Pyramis Solutions team, with a special mention to Vicky, for keeping the project moving forward. Thank you all for your help!
We have plans to bring more content, freebies and events alive over the coming months so please stay connected with us through our socials, sign up for our newsletter or have a look through our services for more information.