Creating a New Business

Running the Business

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 The Flow of Money
Obtain capital:
Own capital, share capital,
loans

Buy assets:
Retained Fixed &
profit current
Net Sales
profit

Operating profit

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 The Flow of Money
Obtain capital:
Own capital, share capital,
loans
Withdrawals
or dividends
Money Buy assets:
Retained Taxation leaving the Fixed &
profit business current
Net Loan Day-to-day
Sales
profit interest & operating
other non- costs
routine
costs

Operating profit

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Customer Credit Control

Choose credit customers and set credit limits:

• Trade references
• Bank references
• Published information

• Sales visits
• Credit checks

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Customer Credit Control

Speed up payments:
• Invoice promptly
• Ask for part payment
• Make payment terms clear in advance
(including reservation of title)
• Offer prompt payment discounts
• Produce regular aged debtor listing
• Chase-up by phone
• Send statements
• Consider factoring (Collection agents)

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Customer Credit Control

If all else fails:

• With-hold supplies
• Try reclaiming goods
• Consider using debt collectors
• Take legal action

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Creditor Control

• Agree best possible credit terms with

suppliers and stick to them
• Don’t pay early
• Establish key suppliers and make
certain they are paid on time
• If there are problems :
- Work with creditors (eg agree part
payments)
- Keep the bank informed
- Remember that non-payment of tax is
the most likely debt that will lead to
liquidation
Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns
 Stock Control

• Monitor stock levels closely

• Only buy what is needed now
• Buy in small quantities
• Buy at the beginning of the month
• If possible, only make to order
• Keep proper records of stock
(opening, new purchased, used/
sold, closing)

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Financial Drivers

• Sales Daily/weekly/monthly
• Cash Daily/weekly/monthly
• Profit Margins Monthly
• Margin of Safety or Breakeven Monthly
• Debtors or Stock Turnover Monthly
• Productivity Monthly

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Costs, Volume and Revenue
Cost or revenue M
£

Break-even point

A B
Fixed costs

L X Y Output volume
Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns
 Profit–Volume Chart

Profit
£
Break-even point
A
Output
volume
Loss
£
B

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Contribution Analysis

1. Breakeven point (£ sales)

=
Fixed costs
Contribution margin (%)

2. Margin of safety (%)

=
Actual sales - Breakeven sales
Actual sales
Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns
 Breakeven Example

Sales £1000
Variable costs 600
Contribution £ 400 40%
Fixed costs 400
Profit £ 0
Breakeven point = FC
% contribution
400 = £1000
0.40
Margin of safety = 1000 – 1000 = 0
1000
Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns
 Breakeven Example 2

Sales £100
Variable costs 40
Contribution £ 60 60%
Fixed costs 30
Profit £ 30

Breakeven point = 30 = £50

0.60

Margin of safety = £(100-50) = 50%

£100

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Breaking Even Analysis

• Calculating the BEP for a new project is a very

clear and understandable way of demonstrating
the volume of sales that is necessary to make the
project viable.

• The BEP can also be written as a formula:

Number of units of output at BEP = Fixed costs / (Sales

revenue per unit – Variable costs per unit)

Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns

 Examples

• Calculate the break-even point for a newspaper

vendor. He buys in newspapers at 20p each and
sells them for 50p each. His fixed costs are £60 a
day including the rate he pays to the local council.
How many newspapers must he sell each day to
break-even?

• A large business has fixed costs of £250,000 per

week. Its average sales revenue per item is £2, and
its variable costs are on average 50p per item. How
many items does it need to sell to break-even?

16
Chapter 9 Entrepreneurship & Small Business (3rd edition), Paul Burns
 Survival - Common Mistakes Leading to Failure
Invest too much in assets
Inadequate equity
Overtrading
Wrong mix of finance
Forget tax
Take too much from the business
Overlook working capital need
Inadequate bank arrangements
Confuse profit with cash
Needs of customers neglected
Over-dependent on few customers
Don’t get paid
Select unhealthy customers
Lack of proper inventory management
Organise time badly
Chapter 9
Attempt too much too soon
Neglect basic systems
Stick too rigidly to plan
Inadequate contractual terms
Fall out with partners
Forget salary
Under-price
Forget overheads
Don’t talk to funders
Grow too quick
Poor receivables management
Neglect supply quality
Entrepreneurship & Small Business (3rd edition), Paul Burns