Financial Guide for SMEs - SSWM · 2018. 2. 12. · 5 Financial Guide for SMEs Small and medium enterprises (SMEs) are often driven by the passion to achieve the owners’ desired

FinancialGuide for SMEs

First published in 2011

Printed by Percetakan Jiwabaru Sdn BhdLot 14, No 2, Jalan P/8 Kawasan MIEL FASA 2,Bandar Baru Bangi, 43650 Bangi Selangor Darul Ehsan

SME Corporation Malaysia Level 6, SME 1, Block B,Lot E, Jalan Stesen Sentral 2,Kuala Lumpur Sentral50470 Kuala LumpurGeneral Line : 03-2775 6000Fax Line : 03-2775 6001Info Line: 1-300-30-6000Website : www.smecorp.gov.my

1

Financial Guide for SMEs

This Guide has been adopted from the Australian version entitled “Achieving Financial Success” (formerly known as the Financial Survival Guide) prepared by Jan Barned (CPA, FFTP), with the assistance of CPA Australia and Small Business Victoria. Ms. Barned who is the principal of Financial Management Trainer (www.fmtrainer.com.au), has worked in the fi nance industry internationally and in Australia for over twenty years. SME Corporation Malaysia and CPA Australia have been granted the copyright to reproduce the Guide and to modify the content to suit the Malaysian context. The Guide will be a useful reference for entrepreneurs on fi nancial management which is a key success factor to any SME business, particularly for new entrepreneurs with little fi nancial background.

About the Guide

Copyright Notice

Copyright 2011 SME Corporation Malaysia and CPA Australia. All rights reserved. Subject to Copyright Act 1987 (Malaysia) and Copyright Act 1968 (Australia).

No part of this publication, including the contents, trademarks and trade names may be reproduced, stored in a retrieval system or transmitted in any form by any means including in websites, for commercial or non-commercial means without prior written permission of SME Corporation Malaysia and CPA Australia. Application for these uses shall be made directly to the Chief Executive Offi cer of SME Corporation Malaysia.

In reproducing or quoting the contents, acknowledgement of source is required.

Disclaimer

Whilst every effort has been made to ensure the accuracy of the information contained in this book, both SME Corporation Malaysia and CPA Australia accept no responsibility for any errors and / or inaccuracies it may contain, or for any loss, fi nancial or otherwise sustained by any person using information extracted from this book. All information and specifi cation are current at the time of preparation and are subject to change as may be required.

No part of this Product is intended to be treated as advice, whether legal or professional. You should not act solely on the basis of the information contained in the Product as parts may be generalised and may apply differently to different people and circumstances. Furthermore, as laws change frequently, all users are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law.

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.................................................................................5......................................................................6

.....................................9.......................11

.................................................................12.......................................................................16

......................................................19...23

......................................................................23.....................................................................25

..................................................................26..............................................................27............................................................28

....................................................................31..........................................................32

..........................................................................33........36

...........................37.............................................39

............................................................39..................................................................43

..........................................................45.................................................47

...............................................................49..........................................54

..................................................58..........................................................60

...................64

IntroductionGlossary of Terms

Section I : Business Finance Basics Chapter 1: Understanding Financial Statements Income Statement Balance Sheet Statement of Cash Flows Chapter 2: Assessing the Financial Health of Your Business Liquidity Ratios Solvency Ratios Profi tability Ratios Management Ratios Balance Sheet Ratios Chapter 3: Budgeting Profi t and Loss Budget Assumptions Monitoring and Managing Your Profi t and Loss Budget

Section II : Improving Business Finances Chapter 4: Maintaining Profi tability Profi tability Measures Discounting Sales Expense Management Chapter 5: Improving Cash Flow Managing Inventory Managing Payments to Suppliers Managing Work-in-progress Managing Receivables Working Capital Cycle – Cash Conversion Rate

Table of Contents

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............................................67........................................................67

.............................69..................................................71

.................................79.................................81

.............................................................................81....................................91

.........................................93..103

........................................103.......................................................104............................................................106...........................................................109

..............................................109

..........................................................111...............................................112

...................................................119....................................................121

.......................................121.............................................134

.................................139.........................................................140

........................................................................140

Chapter 6 : Managing Cash Flow Cash and Profi t Cash Flow Drivers in Your Business Cash Flow Forecasting

Section III Chapter 7 : Debt, Equity or Internal Funds? Comparing Debt Finance, Equity Investment and Internal Funds Deciding Between Debt and Equity Understanding the Debt Financing Options : Long-term versus Short-term Chapter 8 : Transactional Banking to Suit Business Needs Transactional Banking Products Merchant Facilities Transactional Fees Chapter 9 : Trade Financing Foreign Currency Payments Alternative Methods to Manage Foreign Currency Payments International Trade Finance

Section IV : Managing Lenders Chapter 10 : Applying For a Loan Preparing for a Loan Application Details of the Loan Required Presentation of the Loan Application The Role of Advisers Conclusion

: Financing Your Business


4


Chapter 11 : Refi nancing Your Debt How Refi nancing Works? Benefi ts of Refi nancing Common Dangers in Refi nancing Switching Banks Chapter 12 : Managing Your Banking Relationships Annual Review Continuing Relationships Managing Diffi culties

Section V : Better Business Financial Management Chapter 13 : Financial Controls Benefi ts of Financial Controls Financial Controls Checklist

Appendix

Acknowledgement

.......................................143 ..........................................144............................................145

..................................146................................................................148

.................153..................................................................153

...................................................154.........................................................155

.......157.......................................................159

...........................................160..........................................161

.................................................................................168

.................................................................181


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Small and medium enterprises (SMEs) are often driven by the passion to achieve the owners’ desired outcomes. They may want to see a business grow from the start, be keen to enter into an industry that provides great challenge, or be motivated by personal reasons such as wanting to turn a hobby into a business or develop a long-term retirement plan. Whatever their reasons, many SME owners do not have formal fi nancial management training (that is they are not an accountant or bookkeeper) and usually have limited resources to pay for such services.

For the success of any business, good fi nancial management is necessary. Good fi nancial management will go a long way to ensure that all the available business resources are used effi ciently and effectively to provide optimum return.

This Guide has been designed to help SMEs to develop the fi nancial management skills that are essential for business success. Presented in easy-to-understand language, this Guide discusses the key fi nancial aspects that SMEs should focus on to ensure that good fi nancial management is in place. The areas discussed in the Guide address the fi nancial aspects that a business should consider and understand as part of good fi nancial management. If these practices are implemented early, the business would benefi t from strong fi nancial management and the owner would be equipped with the fi nancial tools to operate and grow a successful business.

It should be noted that some of the areas may not be relevant for all businesses. For instance, if you are providing a service, discussion on inventory management will not be relevant. Also, you have to keep in mind the type of industry that you are in when considering good fi nancial management. For example, if you run a café, you would probably be reviewing inventory levels every week; however, a small retail toy shop may only do an inventory count once a year.

This Guide has fi ve sections, each with a number of chapters to further elaborate on the key topics. There are hints and tips along the way to help you focus on the important messages and these are summarised in the Appendix for easy reference.

Introduction


6


Accrual Accounting

Accounting Entry

Accounting Period

Asset

Break-even

Budget

Capital Expenditure

Cash Accounting

Cash Conversion Rate

Cash Flow

Cost of Goods Sold(COGS)

Recognising income and expenses when they occur rather than when they are received or paid for

Basic recording of business transactions as debits and credits

A period for which fi nancial statements are prepared (normally monthly and then annually)

Anything having a commercial value that is owned by the business

Amount (in either units or value), that the business needs to achieve before a profi t is generated

A fi nancial plan for a business (allocating money that the business forecasts it will receive and spend); typically done once a year

Amount of money that is allocated or spent on assets

Accounting for transactions as they are received or paid

Overall number of days to convert a trade from the cash outfl ow at the beginning of the working capital cycle to cash received at the end of the cycle

Flow of cash into and out of the business

Total cost of all goods sold during the period

Glossary of Terms

As with any topic, there is a wealth of jargon and terminology associated with fi nancial management. It is helpful for you to understand these terms when reading fi nancial statements or when talking to fi nance professionals such as bank managers. This will make you feel more confi dent and comfortable. The most basic and useful of these terms are set out below.


7


Creditors

Current Assets

Current Liabilities

Depreciation

Drawings

Equity

Expenses

Financial Ratio

Financial Statements

Forecasting

Inventory

Intangibles

Liability

Gross Margin

Mark-up

Amount of money that the business owes the suppliers

Assets that are likely to be turned into cash within a 12-month period

Liabilities that are due within a 12-month period

Writing-off of a portion of a fi xed asset’s value in a fi nancial period

Where the owner of the business takes something of monetary value permanently out of the business (can be in the form of cash or other assets)

Amount that the business owes the owner

Costs associated with earning the business income

Method by which the business can measure the fi nancial health and compare their business operations to similar businesses in the same industry

Record of the fi nancial performance and health of a business for a given period

Process of predicting the future fi nancial performance of a business

Stock that a business holds to sell

Assets that do not have a physical form e.g. patents, goodwill etc.

Amount of money that the business owes its external stakeholders

Profi t from sales before deducting overheads

Percentage by which the sales price exceeds the cost


8


Owners’ Equity

Overheads

Profi t

Purchase Order

Receivables

Revenue

Retained Profi t

Reserves

Working Capital

Work-in-progress

Amount of capital contributed to form the business or added later

Costs that are not directly associated with the products or services sold by the business

Income minus expenses

A commercial document issued by a buyer to a seller, indicating the type, quantity and agreed prices for products or services the seller will provide to the buyer

Amount that are owed to a business (sometimes referred to as debtors)

Income that the business earns from its operations

Profi ts that have not been distributed to the owners

Retained profi ts that are held for a specifi c purpose or the result of revaluation of assets

Excess of current assets over current liabilities

Where an order has been taken from the customer and the business is in the process of “working” to complete the order


9


Keeping the book for your business can provide valuable information to enable you not only to prepare the fi nancial statements, but also to gain a better understanding on the fi nancial position of your business and have insights into how to improve business operations. Good fi nancial systems will assist in monitoring the fi nancial situation, managing the fi nancial position and measuring the success of your business.

In this fi rst section, we will look at the three key fi nancial statements and discuss on how you can use this information to improve business operations through ratio analysis and to prepare an operating budget.

Section I : Business Finance Basics

Implementing good fi nancial practices in

your business will provide

sound fi nancial information that can

identify current issues and be used

to plan for the successful fi nancial

future of your business


10


Chapter 1Understanding Financial

Statements


11


• Income Statement;

• Balance Sheet; and

• Statement of Cash Flows.

The fi nancial statements record the performance of your business and allow you and others to diagnose the strengths and weaknesses of your business by providing a written summary of the fi nancial activities for a given period. To proactively manage your business, you should plan to generate these fi nancial statements on a monthly basis, review the results and analyse for improvement. Let’s look at the financial statements and see how they can assist in monitoring your businesses fi nancial performance.

Financial statements provide information on how the business is operating fi nancially

and why. Ensuring that these statements are produced regularly will provide fi nancial informat ion for

continuous improvement of

business operations

Please note that this chapter is not designed to assist you with the preparation of fi nancial statements but to familiarise you with what they look like and how they can be used to benefi t your business.

Every business requires some assets to be able to run the operations and ultimately make a profi t. This could be as simple as having cash in the bank, but is more likely to be a number of assets, such as inventory (only unsold inventory is an asset), offi ce equipment and perhaps even commercial premises. Since all of these items need to be paid for when starting up a business, the owners will need to invest their own money or borrow from a lender (e.g. bank) or investor.

There are three fi nancial statements that record fi nancial information of a business, which are:

Understanding Financial Statements


12


The income statement is a summary of income and expenses for a business over a specific period. It should be prepared at regular intervals (usually monthly and at fi nancial year-end) to show the results of operations for a given period. Profi t or loss is calculated in the following way:

Only those businesses that have goods

(products) to sell will use the calculation of

cost of goods sold

Income Statement

Sales

Sales Discounts / Sales

Commissions

Net Sales

Gross Profi t

Net Profi t

Expenses(Fixed & Variable)

Cost of Goods SoldOpening Inventory

Inventory Purchase

Inventory available for sale

Closing Inventory

Less

Less

Less

Equals

Equals

Equals

Equals

Less

Plus

HINT

Calculating the cost of goods sold varies

depending on whether the business is retail, whole sale, manufacturing or a service business. In retail and wholesale business,

computing the cost of goods sold during the

reporting period involves beginning and ending inventories including

purchases made during the period.

In manufacturing, it involves fi nished goods

inventories, plus raw materials inventories,

work-in-progress inventories, direct labour,

and direct factory overhead costs.

In the case of a service business, the revenue is being derived from the activities of individuals rather than the sale of a product. Hence, the calculation of cost of

goods sold is a smaller task due to the low level of

materials used to earn the income.


13


Adam has decided to start his own business and has been doing some research. He will sell computer bag to computer manufacturers. He is going to leave his job and has saved some money to help him go through the start-up phase. He has decided that in the fi rst year, he is going to focus on getting the business established, so he believes that a small profi t (before interest and tax) of RM5,000 should be achievable. His research has shown that the expenses to set up and operate the business will be approximately RM15,600 for the year.

Case Study – Adam’s Computer Bags

From this information, Adam can see that he will need at least RM20,600 to cover the operating expenses and achieve his profi t goal. Adam’s research has also highlighted that it is reasonable to expect to sell at least 1,000 bags in the fi rst year. Adam has negotiated with a supplier to provide the bags for the cost price of RM31.20 each. Now we can work out according to Adam’s estimates, how much sales need to be made to reach the profi t goal.

Minimum selling price (RM51,800 divided by the1,000 bags that he will sell) equals to RM51.80 per bag.

Adam thinks that he will be able to sell the bag for RM52.00 each. So, at the end of the fi rst year, if all goes according to the plan, his income statement would look like this:

Profi t

Profi t

RM5,000

RM5,000

plus operating expenses

plus operating expenses

(cost of goods sold)

to achieve his targeted profi t

RM15,600

RM15,600

Total cash needed

Plus cost of 1,000 bags

Adam will need a total of

RM20,600

RM31,200

RM51,800


14


Revenue Sales Total Sales Cost of Goods Sold (COGS) Opening Inventory Inventory Purchases Less Closing Inventory Total Cost of Goods Sold Gross Profi t

Expenses Advertising Bank Service Charges Insurance Payroll Professional Fees (Legal, Accounting) Utilities & Telephone Others: Computer Software Total Expenses

Net Profi t Before Tax

52,00052,000

- 34,320

3,120

31,200

20,800

500120500

13,000

200800

48015,600

5,200

RMRM

RMRMRM

RM

RM

RMRMRMRM

RMRM

RMRM

RM

Adam’s Computer BagsIncome Statement

For the Year Ending Year One

(1,000 bags @ RM52 each)

(See details on the next page)


15


Towards the end of the year, Adam managed to purchase 100 more bags on credit from his supplier for an order in the new year. This leaves him with RM3,120 of inventory on hand at the end of the year. Calculation for Adam’s Cost of Goods Sold

Opening inventory Nil

Plus inventory purchased during the year RM34,320

Equals inventory available for sale RM34,320

Less inventory on hand at the end of RM 3,120 the year

Cost of goods sold RM31,200

For a service business, the income statement will usually not have a calculation of cost of goods sold. In some instances, where labour costs can be directly attributed to sales, you may consider including these costs as the cost of goods (services) sold.

(1,100 bags @ RM 31.20 each)

(100 bags @ RM 31.20 each)

Regularly (monthly) produce profi t and loss information and compare against activities in the previous months to ensure that your profi t

expectations are being met

TIP


16


The balance sheet refl ects the fi nancial health of a business at a given time (usually the end of a month or fi nancial year). It lists in detail the various assets that the business owns, the liabilities and the value of the shareholders’ equity or net worth of the business:

• Assets are the items of value owned by the business;• Liabilities are the amount of money owed to external stakeholders of the business; and• Shareholders‘ equity or shareholders’ fund is the amount that the business owes the owner.

Balance Sheet

AssetsRM 54,820

AssetsRM 54,820

Shareholders’ Equity

RM 45,200

Shareholders’ Equity

RM 45,200

Liabilities RM 9,620

Liabilities RM 9,620

Fundedthrough:

Minus Equals

This diagramme shows how the balance sheet

works. The business requires assets to operate and these

assets will be funded from the equity in the business, the profi t from the operations

of the business or by borrowing money

from external parties.

The balance sheet can also be illustrated as:

The diagramme above shows that the value of all assets owned by the business less the value owed to external stakeholders (liabilities) will equal the shareholders’ fund of the business – that is, the value of the business after all debts have been paid.

HINT


17


•

•

•

Assets may include cash, inventories, land, buildings, equipment, machinery, furniture, patents and trademarks, as well as money due from individuals or other businesses (known as debtors or receivables).

Liabilities may include funds made available to the business from external stakeholders by way of loans, overdrafts and other credit used to fund the activities of the business including the purchase of capital assets and inventory and for the payment of general business expenses.

Shareholders’ equity (or net worth or capital) is the money put into a business by its owners for use by the business in acquiring assets and paying for the cash requirements of the business.

For assets and liabilities, a further classifi cation is made to assist in monitoring the fi nancial position of a business. These classifi cations are referred to as “current” and “non-current”. Current refers to a period of less than 12 months and non-current is any period greater than 12 months.

The balance sheet will list non-current assets followed by current assets. Non-current assets are assets that will continue to exist in their current form for more than 12 months. These can include furniture and fi ttings, offi ce equipment, company vehicles etc. While current assets will include items that are likely to be turned into cash within a 12-month period such as cash in the bank, monies owed from customers (referred to as receivables), inventories and other assets.

Similarly, the balance sheet will include non-current liabilities followed by current liabilities. Non-current liabilities are all the loans from external stakeholders that do not have to be repaid within the next 12 months. Meanwhile, current liabilities are those monies that must be repaid within 12 months and would typically include bank overdrafts, credit card debt and monies owed to suppliers (referred to as payables). These will be followed by shareholders’ fund or equity.

Balance Sheet Categories

Balance Sheet Classifi cations

TIPA prosperous business will have assets of the business funded by profi ts

rather than being heavily dependent on funding from either external parties (liabilities) or continuous cash injections from the owner (equity)


18


Based on the case study of Adam’s Computer Bags, his balance sheet at the end of year one would look like as follows:

Adam’s Computer BagsBalance Sheet


TOTAL LIABILITIES AND EQUITY RM54,820

0

0

Total Non-Current Assets

Total Current Assets

Total Non-Current Liabilities


19


The statement of cash fl ows is a summary of money coming into, and going out of, the business over a specifi c period. It is also prepared at regular intervals (usually monthly and at fi nancial year-end) to show the sources and utilisation of cash for a given period.

The cash fl ows (in and out) are summarised on the statement into three categories: operating activities, investing activities and fi nancing activities.

Operating activities: These are the day-to-day activities that arise from the selling of goods and services and usually include:

• Receipts from income;• Payments for expenses and employees;• Payments received from customers (receivables);• Payments made to suppliers (payables); and• Inventory movements.

Investing activities: These are the investments in items that will support or promote the future activities of the business. They are the purchase and sale of fi xed assets, investments or other assets and can include items such as:

• Payment for purchase of property, plant and equipment;• Proceeds from the sale of the property, plant and equipment;• Payment for new investments, such as shares or fi xed deposits; and• Proceeds from the sale of investments.

Financing activities: These are the methods by which a business fi nances its operations through borrowings from external stakeholders and equity injections, the repayment of debt or equity, and the payment of dividends. Following are examples of the types of cash fl ow included in fi nancing activities:

• Proceeds from the additional injection of funds into the business from the owners;• Money received from borrowings;• Repayment of borrowings; and• Payment of drawings (payments taken by the owners).

Statement of Cash Flows

Statement of cash fl ows only shows the historical data and differs from a cash fl ow forecast

HINT


20


• Cash receipts are less than cash payments (i.e. you are running out of money);• Net operating cash fl ow is an “outfl ow” i.e. it is negative; and• Net operating cash fl ow is less than profi t after tax (i.e. you are spending more than you earn).

As mentioned earlier, the statement of cash fl ows can be a useful tool to measure the fi nancial health of a business and can provide helpful warning signals. Three potential warning signs which, in combination, can indicate the potential for a business failure are:

Use the Cash Flow Statement to analyse if you are spending more than you are earning or drawing out too much cash from the business

TIP


21


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chapter 1 01-21 Eng.indd 21chapter 1 01-21 Eng.indd 21 8/27/11 11:15:40 AM8/27/11 11:15:40 AM

22


Chapter 2Assessing the Financial Health

of Your Business

Chapter 2-5 p22-65 Eng.indd 22Chapter 2-5 p22-65 Eng.indd 22 8/15/11 5:01:50 PM8/15/11 5:01:50 PM

23


Financial ratio analysis will provide the important

warning signs that could allow you to

solve your business

problems before they destroy

your business

A helpful tool that can be used to predict the success, potential failure and progress of your business is fi nancial ratio analysis. By spending time doing fi nancial ratio analysis, you will be able to spot trends in your business and compare the fi nancial performance and condition with the average performance of similar businesses in the same industry.

Although there are many fi nancial ratios that you can use to assess the health of your business, in this chapter we will focus on the main ones that can be easily used. The ratios are grouped together under the key areas that you should focus on.

These ratios will assess the ability of your business to pay its bills in due time. They indicate the ease of turning assets into cash and include the current ratio, quick ratio, and working capital (which are discussed in detail in Chapter 5).

In general, it is better to have higher ratios in this category, that is, more current assets than current liabilities as an indication of sound business activities and an ability to withstand tight cash fl ow periods.

Liquidity Ratios

Current ratio = Total current assets Total current liabilities

Use these ratios toassess if yourbusiness has

adequate cash to pay debts in due time

One of the most common measures of fi nancial strength, this ratio measures whether the business has enough current assets to meet its debt obligations with a margin of safety. A generally acceptable current ratio is 2 to 1; however, this will depend on the nature of the industry and the form of its current assets and liabilities. For example, the business may have current assets made up predominantly of cash and would therefore survive with a relatively lower ratio.

HINT

Assessing the Financial Health of Your Business


24


Quick ratio = Current assets – inventory Current liabilities – overdraft

Sometimes called the “acid test ratio”, this is one of the best measures of liquidity. By excluding inventories which could take some time to turn into cash unless the price is ”knocked down,” it concentrates on real, liquid assets. It helps to answer the question: If the business does not receive income for a period, can it meet its current obligations with the readily convertible ”quick” funds on hand?

The quick ratio will give you a good indication of the“readily” available cash to meet current debt obligations

TIP


25


These ratios indicate the extent to which the business is able to meet all its debt obligations from sources other than cash fl ow. In essence, it answers the question: If the business suffers from reduced cash fl ow, will it be able to continue to meet the debt and interest expense obligations from other sources? Commonly used solvency ratios are:

Leverage ratio = Total liabilities Equity

Debt to assets = Total liabilities Total assets

These ratios indicate the extent to which the business is able to meet the debt obligations from all sources, other

than just cash fl ow, as in the case with liquidity ratios

The leverage (or gearing) ratio indicates the extent to which the business is dependent on debt fi nancing versus equity to fund the assets of the business. Generally speaking, the higher the ratio, the more diffi cult it will be to obtain future borrowings.

This measures the percentage of assets being fi nanced by liabilities. Generally speaking, this ratio should be less than 1, indicating adequacy of total assets to fi nance all debt.

TIP

Solvency Ratios

HINTThese ratios measureif your business has

adequate long-term cashresources to cover all

debt obligations


26


Gross margin ratio = Gross profi t Revenue

Net margin ratio = Net profi t Revenue

This measures the percentage of sales proceeds remaining (after obtaining or manufacturing the goods sold) to pay the overhead expenses of the business.

This measures the percentage of sales proceeds left after all expenses (including inventories), except income taxes. It provides a good opportunity to compare the return on income of the business with the performance of similar businesses.

Comparing your net and gross margin calculations to businesses within the same industry will provide you with comparative

information and may highlight possible scope for improvement in your margins

TIP

Profi tability Ratios

These ratios will measure your business performance and ultimately indicate the level of success of your operations. More discussion on these measures is included in Chapter 4.

HINTUse gross and netmargin calculations

to measure andmonitor the

profi tability of yourbusiness operations


27


Management Ratios

Management ratios monitor how effectively you are managing your working capital, that is, how quickly you are replacing your inventories, how often you are collecting debts outstanding from customers and how often you are paying your suppliers. These calculations provide an average that can be used to improve business performance and measure your business against the industry average (refer to Chapter 5 for more details).

Days inventory = Inventory x 365 Cost of goods sold

Days debtors = Accounts receivable x 365 Net income

Days creditors = Accounts payable x 365 Cost of goods sold

This ratio reveals how well your inventory is being managed. It is important because it will indicate how fast inventory is being replaced. Usually, the higher number of times the inventory can be turned in a given operating cycle, the greater the profi t.

This ratio indicates how well the cash from customers is being collected - referred to as accounts receivable. If accounts receivable are excessively slow in being converted to cash, the liquidity of your business will be severely affected (accounts receivable is the total outstanding amount owed to you by your customers).

This ratio indicates how well accounts payable are being managed. If payables are being paid on average before agreed payment terms or before debts are being collected, cash fl ow will be affected. If payments to suppliers are excessively slow, there is a possibility that relationship with the supplier will be damaged.

Comparing your management ratio calculations to businesses within the same industry will provide you with comparative information that may

highlight possible scope for improvement in your trading activities

TIP

HINTUse the number ofdays for inventory,

debtors and creditorsto calculate the cashconversion rate for

your tradingactivities


28


Return on assets = Net profi t before tax x 100 Total assets

Balance Sheet RatiosThese ratios indicate how effi ciently your business is using assets and equity to make a profi t.

Return on Investment = Net profi t before tax x 100 Equity

This measures how effi ciently profi ts are being generated from the assets used in the business. The ratio will only have meaning when compared with the ratio of others in similar industry. A low ratio in comparison with the industry average indicates an ineffi cient use of business assets.

The return on investments (ROI) is perhaps the most important ratio of all as it tells you whether or not all the efforts put into the business is yielding an appropriate return on the equity generated, in addition to achieving the strategic objective.

These ratios will provide an indication of how effective is your investment in the business

TIP

Use the return onassets and

investment ratios toassess the effi ciency

in the use of yourbusiness resources

HINT


29



30


Chapter 3Budgeting


31


Budgeting is the tool that develops the strategic plans of the business into a fi nancial statement by setting out forecasted income, expenses and investments for a given period. The budget will enable you to evaluate and monitor the effectiveness of the strategic plans as they are implemented and to adjust the plan wherever necessary.

Most SMEs operate without large cash reserves to draw on; therefore, budgeting will provide the financial information required to assess if the strategic plans will support the ongoing operations. In short, budgeting is the process of planning your fi nances over a period. Budgeting can also provide an opportunity to plan for several years ahead in an effort to identify changing conditions that may affect the business operations and lead to fi nancial diffi culties.

In short, budgets are one of the most important fi nancial statements, as they provide information on the future fi nancial performance of the business. If the budgets are planned and managed well, they will be the central fi nancial statement that allows you to monitor the fi nancial outcome of the implementation of your strategic plans.

Preparation of strategic goals;• Budgeted timeline that is aligned to the preparation of fi nancial statements;• Regular comparison of budgets against actual fi nancial results as disclosed • in the fi nancial statements; andScope for amending activities and targets.•

Budgeting

A budget is the future fi nancial plan of the business. It is where the strategic plans are translated into fi nancial numbers

to ensure that these plans are fi nancially

viable

Good practice budgeting requires the following:


32


Preparing Profi t and Loss Budget

The key to successful preparation of a profi t and loss budget is to undertake the process in an orderly manner, involving all key staff and ensuring that the goals of the business are clearly understood prior to the preparation. There are two methods of preparing a profi t and loss budget:

Incremental• – where the activities carried out in the previous year are used as the basis for budget preparation.

Zero-based• – where the budget is prepared without consideration of past activities.

A profi t and loss budget is an important tool for all businesses because where activities can generate profi t, your business will be less dependent on external funding. The budget is a summary of expected income and expenses set against the strategic plans for the budget period. This is usually one year, although, in some cases, the period can be shorter or longer, depending on the purpose of the budget.

Although your accountant can be of assistance in thepreparation of this budget, it is important that you understand how it has been developed and know how to monitor the outcomes against the prepared budget to ensure that your business will achieve the required fi nancial outcomes.

Profi t and Loss Budget

By preparing a profi t and loss

budget annually, you will be in a

position to determine if your future business

plans will support the

ongoing activities of your business

Hint

For annual budgeting, the preferred method would be incremental, as zero-based budgeting would require an enormous amount of dedicated resources and time. In the case of project-based or activity-based budgets, zero-based may be more suitable, particularly for new projects where there is no previous fi nancial data.


33


Assumptions

An annual budget preparation policy should be documented and followed, and could include some or all of the following steps:

Review the approved strategic plan and record all required activities for the 1. budget period.Separate activities into existing and new for the new budget period.2. Identify and document all assumptions that have been made for the budget 3. period.Review the income statement in the previous year by regular period (monthly, 4. quarterly etc.).Prepare the profi t and loss budget for the selected period using all the steps 5. listed above.

An independent profi t and loss budget can be developed forseparate projects to assess the fi nancial viability of each project

TIP

All assumptionsmade during theplanning process

of preparingbudgets should be

realistic anddocumented

HINTTo ensure that your budget will be a useful tool, you need to spend some time planning on what you think is going to happen in your business in the future. As you are preparing your estimates on income and expenditure, you will be estimating how your business will operate in the future and these are referred to as assumptions. When determining your assumptions, it would be best to use realistic targets that you believe will be achievable. Using your historic fi nancial information and looking for any trends in this information is a good place to start. Also, any industry information provided by independent reputable companies will give your assumptions credibility. This is particularly useful when you are going to provide your budget to a potential or current lender or investor.

Make sure you write down all the assumptions and then establish a fi nancial number that reflects the event. Once you have completed the table of assumptions, attach them to the budget. This way, you will remember what you anticipated to happen and when reviewing your budget against the actual fi gures, this will help to determine why the actual results may not be the same as your budgeted numbers.


34


When listing your assumptions, if you believe there is some risk that the event may not occur, include this detail, together with any actions you could undertake if a particular assumption turns out to be incorrect so that you would already have an action plan in place. Let us return to Adam’s Computer Bags and see how he is going to set his budget for year two of his business.

Using his fi rst year income statement, Adam is now going to set some assumptions for the second year of his business.

Assumption Table

AssumptionSales Review

inventory holdings and operatingexpenses

Increase by 50%

Forward orders

Sales remainconstant ordecrease

Stock pricesincrease

Source newsupplier

Reduce salaryexpense

Reviewoperationalactivities toidentify possible savingsin expenditure

Cash fl owshortage

Cash fl owshortage

Current supplier contract

In line withindustrystandards

Required forsales andmarketing

Remain at 60% ofsales

Increase toRM19,500

Purchase vehicleand includerunning expenses

Cost of goods

Salaries

Vehicleexpense

Forecast Source Risk Action

Introduce marketingprogramme


35


We can see Adam is now confi dent that, in the second year, he can increase his sales by 50%. Of course, with increased sales, comes an increase in expenditure to support the sales. Therefore, he has developed a plan of what the year two income statement will look like.

Adam will need to monitor his actual results, checking them against this budget, to ensure that his plan will be achieved.

RevenueSalesTotal Sales

RM 52,000RM 52,000

RM 31,200

RM 20,800

RM 15,600

RM 5,200 RM 5,850

RM 25,350

RM 31,200

RM 46,800

RM - RM 34,320RM 3,120

RM 500 RM 1,000RM 120 RM 200RM 500 RM 550RM 13,000 RM 19,500

RM 200 RM 420 RM 250RM 800 RM 880 RM 480 RM 100

RM 3,120 RM 49,920RM 6,240

RM 78,000RM 78,000

Opening inventoryInventory purchasesLess closing inventory

Cost of Goods Sold (COGS)

Total Cost of Goods Sold

Gross Profi t

Expenses total

ExpensesAdvertising Bank service charges InsurancePayrollProfessional fees (legal,accounting) Stationery Utilities & telephone Vehicle expenses Other: computer software

Net Profi t Before Tax


When documenting your assumptions, include both the risk assessment of each assumption and the anticipated action required to match the risk. By

doing this, you will be well prepared and have an action plan already in place if the actual events do not match your assumptions

TIP

As at end of Year One As at end of Year One

RM 2,450

0

0


36


HINT

Remember, the moreregular the reports,

the fasteroperations can be

reviewed for fi nancialimpact and action

can be implementedimmediately whenever required

Monitoring and Managing Your Profi t and Loss Budget

There are a number of ways in which the profi t and loss budget can be managed. As mentioned in Chapter 1, regular preparation of fi nancial statements is important, particularly the income statements so that the actual activities can be compared against the budget. Standard practice would be to prepare monthly statements. However, for smaller businesses, quarterly preparation and comparison may be suffi cient.

Where the income statement is prepared on a monthly basis, the budget will need to be separated into months for the budget period. At the end of each month, the actual results are compared with the budgeted results to analyse any variances. Such variances should be highlighted on the reports and explanations to be provided. All variances should be categorised as either a “timing” or “permanent” variance.

A timing variance is where the estimated result did not occur but is still expected to happen at some point in the future.

A permanent variance is where the expected event is not likely to occur at all.

The power of this analysis is that each variance is documented for future reference, and whenever required, actions can be taken to counteract future variances or implement new or improved activities to ensure that the strategic goals underlying the budget can still be achieved.

Regular review of budget against actual results will provide information on whether your business is on track to achieve the

plans formulated when you fi rst prepared your budget

TIP


37


Improving business fi nances means

you need to take a practical approach to implement new

processes that allow you to monitor the

key aspects of your business profi tability

and cash fl ow

Now that you have been introduced to the basics of business fi nance, you can use these tools to improve the fi nancial management of your business. Proactive management of the fi nancial position of your business would ensure that any issues encountered will be identifi ed early so that appropriate actions to rectify the situation can be taken in a timely manner.

Through the use of the fi nancial information discussed in the fi rst section of the Guide, and by implementing the processes introduced in this section, you would be on the way to achieving good fi nancial management for your business.

Profi tability and cash fl ow are the key areas that should be monitored on an ongoing basis to help ensure that your business prospers. This section of the Guide presents a number of easy-to-understand procedures and tools that can assist you in maintaining profi tability and improving cash fl ow.

Managing the business fi nances is all about taking a practical approach to maintaining profi tability and improving cash fl ow, together with having the discipline to continuously monitor and update the financial information as circumstances change.

Section II : Improving Business Finances


38


Chapter 4Maintaining Profi tability


39


HINT

Using the profi tabilitymeasures provided will

ensure that you are aware of any reduction in profi t as it occurs and understand what level of sales is required for

the business to generate profi t

It is very easy for profi tability to be eroded if you do not measure

and monitor on a regular basis. Therefore, it is

important to understand how to use the tools

available to continuously evaluate the profi tability

of your business

One of the most important issues for any business is maintaining profi tability. A profi table business will ensure that you can manage your business in line with your overall strategic objective, whether it is to grow the business, sell at a later date, or to achieve some other objective.

In this chapter, we will be looking at three useful tools that will help you monitor the profi tability of your business. We will also discuss on how discountingcan affect your profi t, and how to manage the expenses of the business to maintain profi tability.

Once you have an income statement, you can use the tools explained below to ensure that you know:

Your profi ts are not being eroded by • increasing prices in inventories or expenses – Margin.• How to set new selling price when inventory • costs increase – Mark-up.• How much you need to sell before the • business is making a profi t – Break-even analysis.

Maintaining Profi tability

Profi tability Measures


40


Net Margin is the sales amount left after subtracting both the cost of goods sold and the overhead expenses. The net margin will tell you what is your profi t before you pay any tax. Tax is not included because tax rates and tax liabilities vary from business to business for a wide variety of reasons, which means that making comparisons after taxes may not provide useful information. The margin can be expressed either in value (net profi t) or in percentage.The percentage value is particularly useful if you are comparing your business with other businesses in your industry or with past performance of your business.

Net profi t (RM) = Net sales less gross profi t less overhead expenses

Gross margin (%) = Net sales value X 100

Net margin (%) = Net sales value X 100

Gross profi t (RM) = Net sales less cost of goods sold

Gross profi t value

Net profi t value

Margin

There are two margins that need to be considered when monitoring your profi tability: gross and net. For a service business, only net margin would be relevant, as it is unlikely that there would be a direct cost of service provided.

Gross margin is the sales proceed left after subtracting the cost of goods sold from net sales. What does it mean by “net sales”? This is all the sales amountless any discounts that have been given to customers and commissions paid to sales representatives. By knowing what your gross margin is, you can be sure that the price set for your goods will be higher than the cost incurred to buy or manufacture the goods (gross margin is not commonly used for service businesses, as they often do not have “cost of goods”) and you have enough money left to pay expenses and hopefully, make some profi t.

Gross margin can be expressed either in value (gross profi t) or in a percentage, that measures the percentage of sales proceed remaining (after obtaining or manufacturing the goods sold) to pay the overhead expenses of the company. The percentage value is particularly useful if you are comparing your business with other businesses in your industry or with past performance of your business.


41


Mark-up is the amount that you sell your goods above the cost to purchase or manufacture those goods. It is generally only a meaningful fi gure when referring to the sale of products rather than services. It can be useful to use mark-up calculation to ensure that you set the selling price at a level that covers all costs incurred with the sale.

Mark-up is calculated as follows:

The break-even calculation shows how much sales are required, in either value or units, before all the expenses are covered and actual profi t begins.

This simple calculation is used to fi nd where profi t really starts. The break-even point is calculated as follows:

If we remember Adam’s income statement for year one (in Chapter 1), we can use this to calculate the profi tability measures for his business.

Sales less cost of goods sold Cost of goods sold

[Expenses / 1 less (Cost of Goods Sold)] (Net Sales)

Break-even (%) = Expenses / (Unit selling price less Unit cost to produce)

Mark-up

Break-even Calculation

Percentage value = X 100

Break-even (RM) =


42




Summary of Adam’s Computer BagsProfi tability Measures

Sales Less cost of goods sold Gross profi t

Less operatingexpenses Net profi t RM5,200 (10)

RM15,600 (30)

RM20,800 (40)

RM31,200 (60)

RM52,000 (100)

Sales less cost of goods soldMark-up (%) = Cost of goods sold

=

= 66.67%

Net sales - cost of goods soldGross margin (%) = Net sales

=

= 40%

Net margin (%) =

=

=

ExpensesBreak-even (RM) = 1 less (Cost of goods sold) (Net sales)

RM15,600 = 1 less (RM31,200) (RM52, 000)

= RM15,600 1 less 0.6

= RM39,000 sales required before any profi ts can be made

Mark-up 66.67%Gross margin 40 %Net margin 10 %Break-even RM39,000

Compare your profi tability measures to the businesses within the same industry to ensure that you are

being competitive and achieving maximum

profi t potential

X 100

X 100

X 100

X 100

RM52,000 less RM31,200

RM52,000 less RM31,200

RM31,200

RM52,000

Net profi t (value)Net sales (value)

RM5,200

10%RM52,000

TIP

%


43


HINT

You may want to consider offering your customers add-on services as an alternative to offering

discounts

The Effect of DiscountingAnd your present Gross Margin (%) is .......

10%

100%5%

If you cut yourprices by...

6%

8%

10%

12%

15%

150%

400% 114.3%

200%

400%

66.7%

100%

150%

300% 150% 100% 75% 60%

47.1%

66.7%

92.3%

36.4%

50%

66.7%

29.6%

40%

52.2%

25%

33.3%

42.9%

50%

66.7%

33.3%

42.9%

25%

31.6%

20%

25%

16.7%

20.7%

14.3%

17.6%

15% 20% 25% 30% 35% 40%

Discounting your goods or services to entice customers to purchase may erode your profi ts. Of course, some discounting can be benefi cial; however, before you decide to offer discounts, it is important to understand the impact that discounting will have on your profi ts. Alternatives such as add-on products or services may deliver more value of gross profi t to the business and should be considered before deciding to offer discounts.

Discounting Sales

In the previous section, we discussed sales “net” of discounts. When you offer discounts you are effectively offering your goods or services at a reduced selling price. Where discounts are offered, you will need to sell more goods in order to achieve your gross margin.

Let us return to Adam’s Computer Bags. He is considering offering a 5% discount to encourage more sales. Adam needs to keep his gross margin at 40% to ensure that he reaches his profi t goal. As the table below shows, if he decides to discount his bags by 5%, he will need to increase his sales volume by 14.3%.


44


If we put some numbers to this, we can see the results in the box below:

Adam wants to discount his bags by 5%. To maintain gross margin of 40%, he will need to increase sales units by 14.3%.

Adam is currently selling 1,000 bags

Increase volume by 14.3% = 1,000 + (1,000 x 0.143) = 1,143 bags

To maintain gross margin (and achieve target profi t), Adam will need to sell

1,143 bags if he sells at 5% discount.

Adam’s Computer Bags

The same would apply to a service business; if selling price is cut by 5% and the net margin is 30%, sales will need to increase by 20% to ensure all operating costs are covered.


45


To maintain constant control on expenses, continuous review will help you to identify where costs are getting out of hand. Do not forget to use the profi tability measures, as they are the simplest way to quickly identify if your profi ts are being eroded. Some other ideas to manage expenses are to consider joining forces with other businesses to benefi t from group buying, investigate using companies that provide access to discount services for bulk orders, and to seek quotes from different services to ensure that you are paying the best possible price for your expenses. Often, if you are a member of an industry association, the association may have established relationship with service providers such as insurance companies and you may be able to access discounted services or products through your membership.

However, be careful not to focus too much on individual expenses. The value you may save from such an exercise may be outweighed by the cost of your time and the aggravation such a focus may cause your staff, suppliers or customers.

Good management of general expenses by the business will contribute to increasing profits. By monitoring business expenses, you may be able to identify where costs are increasing and take action to ensure that you maintain your net profi t margin.

When monitoring expenses, do not forget to identify the expenses that are important to your business operation (e.g. presentation of premises, marketing, staff training) and keep these at sustainable levels.

HINT

Keeping a close eye on your expenses

will ensure that you maintain the

profi tability of the business

Expense Management

TIPLook for opportunities to join with other businesses for “group” buying

that can provide discounts on your expenses


46


Chapter 5Improving Cash Flow


47


Often referred to as “the working capital cycle”, this is really about the length of time it takes from using your cash to purchase inventory (or perhaps getting it from a supplier on credit terms), and using the inventory, possibly for a manufacturing purpose (hence creating part of the cycle called “work-in-progress”), to securing the sales and receiving the cash.

Here is a diagramme of the working capital cycle:

Manufacturer or Product Provider Service Provider

CASH

CASH

SalesDebtors

Debtors PurchaseInventory

SupplierPayment

Work-in-progress

Sales

Working capital is the short-term capital that works for the business. This includes inventory,

work-in-progress,payment to suppliers

and receipt fromcustomers. By working

on your cycle more effi ciently, you would

have more readily available cash to use in

other parts of the business

One of the most important aspects of running a business is to ensure that there is adequate cash fl ow to meet all of the short-term obligations. The survival of your business will depend on this. Referred to as working capital management, this is all about setting up strategies to ensure that there is enough cash in the business to operate on a day-to-day basis without facing a cash fl ow crisis.

Working capital in business is made up of these core components:

Inventory management;• Work-in-progress;• Payment to suppliers (creditor • payments); andCollection of cash from customers • (debtor collection).

Improving Cash Flow


48


Between each stage of the working capital cycle, there is a time delay. For some businesses, there could be a substantial length of time to make and sell the product. In these enterprises, a large amount of working capital will be required to survive. Others may receive their cash very quickly after paying out for inventory, perhaps even before paying their bills. Service businesses may not be required to pay out cash for inventory and therefore, will need less working capital.

The key to successful cash management is monitoring carefully all the steps in the working capital cycle. The faster the cycle turns, the faster you have converted your trading operations back into available cash, which means you would have increased the liquidity in your business and will be less dependent on cash or extended terms from external stakeholders such as banks, customers and suppliers.

There are many ways you can make the working capital cycle move faster. The following sections provide information on how you can make the cycle move more quickly and improve the cash fl ow in your business.


49


Inventory management is about having the right level of inventory to satisfy the needs of your customers and managing the inventory to identify excess or old inventory. Of course, inventory has to be purchased, either from existing cash in the business or from borrowings, so it is important that the inventory levels are managed so that they use minimum fi nancial resources as possible. This does not necessarily mean keeping low levels of inventory, but rather ensuring that inventory is held for the shortest possible time, which means that it will be converted into cash quickly (too little inventory can affect sales, so the key is to fi nd the appropriate level, which can change over time).

However, maintaining inventory comes with a cost. It is estimated that holding inventory can cost anything between 10 to 30 percent of the value of the inventory. This includes storage, insurance, keeping accurate tracking records and proper controls to avoid theft.

Effi cient inventory control involves three elements:

Inventory review;• Buying policy; and• Operational issues.•

HINTSetting up goodinventory controlprocedures will

ensure that cash is not tied up

in holdingunnecessary

inventory

Managing Inventory

The following checklist will help you to determine what measures for inventory control you may need or can use to improve your existing procedures.

Checklist for Managing Inventory1. Inventory ReviewAction

Review sales of inventory

List all inventory

DescriptionDetermine the current level, what items are held and the value of inventory on hand.

Look at the sales records to fi nd out which are the best selling items and which are slow moving. Do not forget to look at seasonal trends. A focus on the best selling items should increase cash fl ow, if you manage your debtors well. Work out which items of inventory sold make the highest gross margin. This is important, as you may then be able to increase profi t by focusing more energy on these sales.


50


Checklist for Managing Inventory

2. Buying Policy

Action

Tighten thebuying of inventory

Negotiate withsuppliers

Beware ofdiscounts offered

Understand what is “core” inventory

Description

Identify inventory that you simply must never run out of in order to maintain sales momentum and ensure that customers would not be disappointed over the basic products.

Know the volume sales per inventory item. This will help you to buy the right amount. Carrying too little inventory may discourage customers, as you may not be able to satisfy their needs immediately, and carrying too much inventory means you are tying up cash that could be put to better use.

Negotiate deals with suppliers, but avoid volume-based discounts. When money is tight, there is no point investing in next month’s inventory without good reason. Instead of volume dicounts, try to negotiate discounts for prompt settlement (unless your cash position is poor) or negotiate for smaller and more frequent deliveries from your suppliers to improve your cash fl ow.

Do not let discount prices determine your inventory-buying decisions. Buy inventory that you can sell at a profi t in a reasonable time frame.

List slow-moving,old and excessinventory

Update inventoryrecords

Make a list of slow-moving, old and excess inventory items and develop an action plan to move this inventory immediately, even if it is at lower price than the cost of the item. This will generate cash to invest in new inventory that will move more quickly and make available display space for faster moving inventory.

Update your inventory records with the current levels and then implement a policy to track all movements of inventory. This will help to ensure that inventory is re-ordered only when needed, and will highlight any theft or fraud that may occur.


51


Checklist for Managing Inventory3. Operational Issues

Action

Supplier service

Advertising andpromotion

Sales policy

Customer delivery

Description

Suppliers can assist in inventory management by providing access to inventory only when you need it (called JIT or just- in-time) and by providing good delivery service. By ordering less inventory more frequently and arranging better delivery schedules, you can reduce inventory quantities, saving valuable cash resources and improving liquidity without reducing sales.

Before launching a promotion, ensure that you have adequate inventory or can source for adequate inventory. If you have taken on larger than normal quantities, make sure you have a back-up plan if they do not sell during the promotion.

This can have a strong infl uence on inventory levels and should be managed with a view not only to maximising sales, but also to minimising investment in working capital. This can be achieved by directing policy towards a higher turnover of goods, selling goods bought at bargain prices faster, and clearing slow-moving items.

Ensuring that goods are delivered to the customer faster means the inventory is moved and the cash for the sale will come in more quickly.


52


For fast-moving inventory, negotiate with suppliers for delivery when • required (JIT or just-in-time), eliminating the need to hold a large amount of inventory to meet customer demand.

For old and excess inventory, either sell at whatever price to move• it, or use as a donation to a charity or community group. (Do not forget to advertise that you have made a donation!)

Keep accurate inventory records and match the records to a • physical count regularly – at least once a year. However, if there are large variances between the records and physical count, do the count more regularly until the issues are identifi ed and corrected.

Understand your inventory: which ones move quickly, which ones • contribute the highest gross margin, and which ones are seasonal etc. This will help you know how much of each line of inventory to keep on hand and when re-order is required.

Use your fi nancial system to track inventory items. This will help• with both:

o Automating re-order requirements o Matching different inventory items to sales and easily identifying high margin sales.

Keeping good control over your inventory holdings will ensure that • you keep old and excess inventories to a minimum and reduce the risk of theft, while still having adequate inventory levels to meet your customers’ needs.

TIPS FOR IMPROVING INVENTORY CONTROL

high margin sales.


53


Using Numbers to Manage Inventory

Days Inventory Ratio

This ratio reveals how well your inventory is being managed. It is important because it will indicate how quickly inventory is being replaced, and the more times inventory can be “turned” (replaced) in a given operating cycle, the greater the profi t.

Days inventory ratio is calculated as follows:

Inventory Turnover

This calculation shows the effectiveness of your planning of inventory holdings. A low inventory turnover rate will show that you are not moving inventory, which could lead to excess or old inventory and, of course, higher holding costs. A high in-ventory turnover rate could indicate that you run the risk of not having adequate inventory on hand to supply customers’ needs.

Inventory turnover is calculated as follows:

The days inventory and inventory turnover calculations should be compared with industry average to provide useful information. Comparing these measures regularly with previous periods in your business will also provide information on the effectiveness of inventory management within your business.

Inventory turnover = Cost of Goods Sold Inventory on hand


Days inventory = RM 3,120 x 365 = 36.5 days RM 31,200

This calculation shows that, on average, Adam holds his inventory for 36.5 days.


Inventory turnover = RM31,200 = 10 times RM 3,120

This calculation shows that, on average, Adam turns his inventory over 10 times per year.

Days inventory = x 365Inventory on handCost of Goods Sold


54


Checklist for Managing Suppliers & Payments to Suppliers1. Supplier Selection

Action

Determinepreferredsuppliers

Checkreferences

Select supplier(s)

Priorities

Description

Determine your priorities in relation to your suppliers. Is it quality, reliability, returns policy, price, terms, or a combination of some or all of these factors?

Prepare a list of preferred suppliers.

Undertake credit and trade reference checks for each supplier on the list.

Select supplier(s) based on your priorities and results from credit and trade checks.

The payments to suppliers will affect your cash fl ow. Often, start-up businesses will have to pay suppliers in cash on delivery of goods or services, because they do not have a trading history. The supplier will not be prepared to provide the goods or services on credit because they are not sure if the business will be profi table or still operating in the future. Once your business is up and running, there is likely to be some basis to negotiate with your suppliers so that you can pay on credit and have more cash fl ow.

Making full use of your payment terms with your supplier is effectively an interest free loan. Therefore, it is important to manage your suppliers and the payments to them in the same way as you manage the other key components of the working capital cycle. Effective management of suppliers and the payments to them consists of three key elements:

Supplier selection• Payment terms• Managing relationships•

HINTSetting up good

managementprocedures will

ensure that you get the most out of your

relationship withsuppliers

Managing Payments to Suppliers

The following checklist will help you review what procedures you may need to improve your existing supplier procedures:


55


Establishalternativesuppliers

Review regularly

If you have one main supplier, make sure that you have an agreement in place with an alternative suppliers to cover any risk that the chosen supplier cannot provide the agreed service at any time.

Monitor the selected supplier(s) and regularly review their performance against your priorities (priorities may change as the business grows).

Checklist for Managing Suppliers & Payments to Suppliers

2. Payment Terms

Action

Include terms on the order

Considerdiscount benefi t

Pay on terms

Have damagedgoodsprocedures

Review termsregularly

Negotiate terms

Description

Agree on the payment terms with suppliers before entering into a transaction.

Document standard payment terms on each purchase order.

Calculate the benefi t of taking a discount for early payment.

Ensure all suppliers are paid on agreed terms, not earlier and not too late (check this on a regular basis).

Have an agreed process in place for where damaged goods or unsuitable goods are supplied. Do not withhold payment without communicating to the supplier that there is an issue.

Review the terms with each supplier regularly. If you fi nd an alternative supplier that can provide better terms, fi rst discuss this with your existing supplier before changing over. They may be able to match this offer and will appreciate the loyalty you have shown.


56


3. Managing RelationshipsActionMeetregularly

Communicate

Have a non-paymentprocess

Adhere topayment terms

Be a goodcustomer

Description

Communicate with suppliers when payment needs to be delayed and, if possible, set up an agreed payment arrangement, and make sure you stick to it. Summarise this agreement in writing and ensure that the senior fi nance person (or owner etc.) receives a copy.

Ensure that there are processes in place for when suppliers are not paid on time i.e. they can contact someone to discuss on the situation.

Ensure that agreed payment terms are adhered to.

Meet regularly with your main suppliers to discuss the progress of your business (they are often able to assist with increased credit terms, new product etc.)

To maintain good relationship with key suppliers, be seen as a good, reliable customer.

Checklist for Managing Suppliers & Payments to Suppliers


57


Extend payment terms. Extending the payment period from 30 to 45 • days may help to reduce fl uctuations in cash fl ows.

Some larger companies may accept quarterly payments, which • can help in forecasting cash fl ow requirements.

Payment terms should specify that payment terms commence from• complete delivery, as opposed to part delivery. This should also include goods or services that have not been provided as agreed.

Where goods are returned, either: • o a new invoice should be produced, and this is the initiation of the payment terms; or o disputed invoices are held over until a credit note is received.

Initiate a structured payment run, usually once a month (i.e. on the• last day of the month) and stick to it.

Ensure that your systems have good controls so that suppliers are not:• o paid early. Where fi nancial systems are used, ensure payment date is automated from approved supplier details and no change to the automated date is possible without authorisation. o over paid. All received goods must be checked against the purchase orders and the totals on invoices checked. o paid twice. Pay only on statement.

Continuously review supplier contracts for opportunities such as:• o improved pricing o effective discounting o improved delivery (you will not need to order so early and hence will be able to defer payment).

TIPS FOR IMPROVING SUPPLIER PAYMENTS


58


Days Creditors Ratio

This ratio indicates how well accounts payable (payments to suppliers) is being managed. If these payments are being paid, on average, before agreed payment terms, cash fl ow may be affected. If payments to suppliers are excessively slow, there is a possibility that relationship with your suppliers will be damaged.

The days creditors ratio is calculated as follows:

Note: Accounts payable is the amount that is owed to your suppliers at the time of the calculation.

Days creditors = x 365Accounts payableCost of goods sold


Days creditors = RM 4,120 x 365 = 48.20 days RM31,200

This calculation shows that on average, Adam pays his suppliers every 48 days.

Using Numbers to Manage Payments to Suppliers

Work-in-progress is where an order has been taken from the customer and you are in the process of “working” to complete the order. Of course, in most circumstances, there will be many orders in progress, so you will need good management systems in place for effi cient execution of customer orders. Work-in-progress is often thought to be only relevant in manufacturing business; however, some retail and service businesses will also have a form of work-in-progress – the time of order from customer to delivery means that the work is in progress.Managing work-in-progress is important because the faster the job can be completed, the earlier the invoice can be issued and hence the cash received for the job. The following checklist will assist you in comparing your work-in-progress procedures and may help to identify some improvements.

HINT

The key to managing work-in-progress is to

have a good record keeping

system

Managing Work-in-progress


59


Checklist for Managing Work-in-progressAction

Track progress of outstandingorders

Invoice on delivery

Use records for cash fl owforecasting

Record all details atorder

Description

Ensure that all orders are recorded and all relevant details are noted, such as when the order is due, any payment received (e.g. deposit), any progress payments to be invoiced, how long the job takes to complete, and any additional costs incurred in completing the job.

Have procedures in place to track all outstanding orders and rank them by priority. The procedures should highlight any actual or potential delays and have steps outlined for action when delays occur.

When an order is completed, ensure that the invoice is issued and sent with the goods.

The record-keeping system should provide details of expected completion, delivery, and invoice date, and therefore provide information on cash receipt to assist in cash fl ow forecasting.

Only order inventory when you are ready to use it to effectively • reduce the number of days held (and hence paid) before production begins.Identify any bottlenecks in the production process and look for•

improvements.Look at the process, including the physical layout of goods, and•

identify possible improvements to speed up the movement through the work-in-progress stage.

Before accepting the order, make sure that you know how much • inventory you need to have on hand to complete the order. Delay in receiving goods is delay in preparing the sale.Review work-in-progress procedures annually to identify possible • procedures or technology that could improve the process.Where specifi c materials are required for the customer order (e.g. • fabric for covering a couch), include in your order agreement that the customer pays a deposit up front before the order is commenced.

TIPS FOR IMPROVING WORK-IN-PROGRESS


60


1. Set up Credit Control

Checklist for Managing Receivables

Action

Rank all customersaccording to creditrisk

Set credit limits

Record customercredit check

Description

Set appropriate credit limit for each customer. The limit should be set in accordance with the credit-risk rating as set out above.

This could be in terms of the time they have been in business, the quality of the credit check, the credit limit allowed for each customer etc.

Have a system in place that record credit check for all new customers to ensure that the process has been properly undertaken.

The following checklist can be used to compare your existing procedures for collecting outstanding amounts from your customers and help to identify possible improvements:

Sales income is a cash fl ow driver of all businesses and converting the sales into cash is one of the most important processes in any business. Where sales are offered on credit, fi nancial systems will refer to the amount outstanding as “receivables”. Managing the payments due from receivables can consume a lot of time and efforts if proper controls and procedures are not put in place at the outset. Your customers are your key to business success; however, until you receive the cash for the sale, effectively you have given a donation to your customers! So it is important to manage all outstanding payments from your customers and ensure that you have good procedures in place to encourage your customers to pay the right amount and on time.

Effi cient receivables collection procedures include the followings:

Set up credit control• Establish payment terms• Managing customer relationships•

HINTEnsure that

you have good procedures in

place to encourageprompt payment

Managing Receivables


61


Regularly reviewcredit checks

Record customers’limit usage

Put policies in place for exceededlimits

During tough times, the credit status of some customers maychange.

Make sure your system tracks the outstanding credit of customers and notifies relevant staff if the limit has been exceeded (ensure that the notifi cation happens before the next sales).

Record procedures to be undertaken when a credit limit is exceeded and ensure that all relevant staff are aware of what needs to be done.


2. Establish Payment TermsAction

Have late paymentprocedures

Communicateterms to all staff

Manage returnedgoods

Include terms oninvoice

Description

Record standard payment terms on each invoice.

Implement systems to ensure that all payment terms are met. Send out regular reminders and follow up on late payments.

Ensure that all staff (including sales representatives) are aware of the payment terms and that they follow them.

Have a policy and process in place for returned goods to ensure that payment is not delayed for any length of time.


62


3. Managing Customer Relationships

Action

Meetregularly

Communicate

Non-paymentprocess

Review paymentterms

Be a good supplier

Description

Where an order or delivery is going to be delayed, communicate with the customer and discuss alternative solutions. Only agree on a completion date with the customer if you are certain you can meet the deadline.

Ensure that there are processes in place for customers when products or services are not provided as expected (returned goods). Have a policy that covers how to correct this type of situation.

Regularly review the actual payment and agreed terms for each customer. If you fi nd a customer is continuously paying outside the agreed terms, meet and discuss on the issues.

Meet regularly with your customers, particularly key customers. Sometimes, visiting their premises will help you to understand their business requirements and fi nancial position.

Be seen as a good, dependable supplier to your customers.



63


Send out invoices as soon as work is completed, not at the end of • the week or month.

Provide incentives to pay early (e.g. a discount, but know the impact • on profi t margin).

Make it easy to pay – direct credit arrangements or credit card.•

Where commission is paid to sales staff, pay commission on • amounts collected, rather than on total sales amount ordered.

Produce regular reports to identify when payments are due.•

Identify slow paying customers and make contact early to discuss • on any issues (e.g. faulty goods, inadequate service, inability to pay).

Monitor non-paying customers and keep in regular contact.•

Make arrangements for non-paying customers (payment plan to• clear the debt).

Have a policy to stop supplying a customer until all debts are• cleared.

Send letters• of demand for long outstanding debts and if necessary, use a professional debt collector.

Remember, a good customer is only one that pays. If you are not• collecting the cash from your customer, then your organisation is funding your customer’s business as well as your own.

Consider “terminating” a customer if they are unreliable in making• payments

TIPS FOR IMPROVING RECEIVABLES COLLECTION


64


Using Numbers to Manage Payments from Receivables

Days Debtors Ratio

This ratio indicates how well the cash from receivables is being collected. Referred to as accounts receivable in accounting terms, this is the total outstanding amount owed to you by your customers. If these receivables are not collected reasonably in accordance with their terms, you should reconsider the collection policy. If receivables are excessively slow in being converted to cash, the liquidity of your business will be severely affected.

The days debtors ratio is calculated as follows:

Days debtors = x 365Accounts receivable Sales revenue


Days debtors = RM18,000 x 365 = 126 days RM52,000

This calculation shows that, on average, Adam collects from his debtors every 126 days.

HINT

Calculate the cashconversion rate and

compare this with thestandards within your

industry. Identify whichareas of the cycle are

problematic and prepare an action plan

to improve the cash conversion rate

The overall number of days to convert your trade from the cash outfl ow at the beginning of the working capital cycle to cash received at the end of the cycle can be calculated through the cash conversion rate.

Working Capital Cycle – Cash Conversion Rate

CASH

Debtors PurchaseInventory

SupplierPayment

Work-in-progress

Sales


65


Cash Conversion Rate Calculation

Adam’s Computer BagsCash Conversion Rate

This calculation shows that for Adam’sComputer Bags the working capital cycle takes 114.3 days from the start of the transaction to when the transaction is completed and converted back to cash.

Days Inventory

36.5Plus

Days Inventory Plus Days Debtors Less Days Creditors

Equals

Less Days Creditors48.2

Days Debtors126

Cash Conversion

Rate114.3

The cash conversion rate is calculated as:

TIPCalculate your cash conversion rate regularly and implement

improvement to your working capital to release idle cash that is not being used within the business. This will reduce the need to borrow additional funds to support the operations of the business, decrease

dependency on funds from fi nanciers, and reduce any interest expense incurred


66


Chapter 6Managing Cash Flow

Chapter 6 p66-78 Eng.indd 66Chapter 6 p66-78 Eng.indd 66 8/15/11 5:02:23 PM8/15/11 5:02:23 PM

67


A business can beprofi table but still have cash fl ow

issues. It is important to implement

procedures in your business that will

ensure cash fl ow is appropriately

managed

HINTCASH DOES NOT EQUAL

PROFIT!

Managing Cash FlowCash and Profi t

Now you know that profi t is made from selling your goods or services for a price higher than what it costs to make or deliver to your customers. Cash of course is generated from these transactions, as well as other activities that the business may undertake (such as selling assets). The key to a successful business is good profi tability and adequate cash fl ow.

This means that if you manage your margins properly, your trading should always be profi table and hence have positive cash fl ow, right? Wrong! A business can be profi table but still encounter cash fl ow issues. How does this happen? Well, it’s all about timing. Profi t of a transaction is calculated when the sales is made. If you are in a business that offers goods or services on credit, then the profi t is generally assessed at the time of the sales; however, you may not receive the cash until sometime later.

There are two ways in which the transaction can be recorded: either on the cash basis or accrual basis. When working out if your transaction is going to be profi table, these are probably the questions you will need to answer:

How much will it cost you to buy or make the product, or provide the service • (hours paid)?What is a realistic price that your customer will be willing to pay?• What do your competitors charge for the same or similar products or • services?

The next step is to compare the price you will receive with the cost paid, and if the price is higher than the cost, the transaction is profi table. Again, let us go back to Adam’s Computer Bags income statement, which we saw in Chapter 1.


68


Sales

Less cost of goods sold

Gross profi t

Less operating expenses

Net profi t

RM52,000

RM31,200

RM20,800

RM15,600

RM 5,200


For the year ending Year One

When we look at Adam’s income statement, we can see that he will make RM20,800 in gross profi t. This way of recording the transaction is called accrual accounting, that is, sales are recorded when made, rather than when cash is collected. This is the most effective way of matching all costs to the transaction and makes it easier to see clearly how much profi t is generated from the transaction.

Using Adam’s example, let us assume that he sells 500 bags at RM52 per bag to a computer manufacturer on thirty days’ credit, meaning that he will receive RM26,000 from this customer at the end of month one. He is also able to export 200 bags at RM52 each, which means that the payment of RM10,400 from the overseas customer is not received until the second month from delivery. The balance of his inventory will be sold later in the year. All the bags have been imported at the beginning of the year at the total cost of RM34,320, which was paid at the end of the fi rst month of trading.

When we look at the cash fl ows from Adam’s sales, it becomes clear that the cash fl ows will not equal the profi t until the total transaction is completed, that is, when all the money is received from all the sales.

TransactionCash Movement

Month 1

Sales RM52,000 RM26,000 RM10,400 RM15,600

RM15,600

RM17,680

RM10,400

RM 2,080

(RM34,320)

(RM8,320)

(RM8,320)

RM34,320 0 0

RM20,800

0

Payment for inventoryGross profi t

Cash balance

Month 2 Month 3 to 12


69


In month 1, Adam only collects RM26,000 from sales, but he has to buy all the computer bags in the same month. He only receives the cash for sales of another 200 bags in month 2 and the balance through the rest of the year. So the above table shows that at the end of month 1, he will need an extra RM8,320 to cover the purchase of the bags, and, by the end of the year, his bank balance will match his gross profit. Of course, he will also have to cover the operating expenses throughout the year, which have not been included in the above table.

HINTCash fl ow is thelifeblood of every

business. A profi table business can still

suffer from shortages in cash, so it is

important to understand what

“drives” your cash fl ow

Even when your business is profitable, managing cash fl ow can be very important. By identifying what “drives” the cash fl ow in your business, it will be easier to manage your cash fl ow. What do we mean by “drivers” of cash fl ow? They are the things in your business that affect your cash fl ow the most. For most businesses, this will be sales. However, for some businesses, it could be something else. Let us look at the most common key drivers of cash fl ow and this will help you to determine the key drivers of cash fl ow in your business.

Sales are important for all businesses. After all, this is what ultimately generates profi ts for your business. From Adam’s example on the previous page, it can be seen that the collection of cash from sales is critical to ensuring that he has suffi cient cash in the bank. So, if sales are the key issue for you to manage cash fl ow, then you must have good procedures in place to ensure that you can convert the sale to cash as quickly as possible. The best way to do this is to manage the collection of cash from your customers using the checklist in the previous chapter.

Cash Flow Drivers in Your Business

Accounts Receivable (Debt Collection)

TIPThe timing of when cash is received is the most important issue when

managing cash fl ow


70


Where the supply of inventories or services is critical to your business, managing your supplier relationships will be important. If you have only one or two suppliers that can provide the inventories or services for your business it is critical that, you pay them on time and maintain a good relationship. If this is the case, payments of accounts can be a key driver of your cash fl ow (for tips on managing supplier payments, refer to the previous chapter).

For some businesses, the supply of goods is very important in ensuring the supply of quality inventories in time to meet customer requirements. To determine if this is a key driver, you may want to consider whether the supply of goods is critical to business operation. If it is, then maintaining the right amount of inventories will have an impact on your cash fl ow.

Where a business relies on having the most up-to-date technology to maintain market share, spending on capital expenditure can be a key driver of cash fl ow. An example may be a research and development company, where they need to keep the most up-to-date equipment to develop the latest products or services. In this case, the business will require enough cash fl ow to support the capital expenditure.

Accounts Payable (Creditor Payments)

Inventories

Capital Expenditure

TIPThe importance of knowing what are the key drivers of your cash fl ow

should not be under-estimated. In order to maintain adequate cash fl ow, these drivers should be a priority for your business and be well managed


71


HINTRemember that

cash fl ow is all abouttiming and the fl ow of cash, so when

preparing your cash fl ow forecast, make

sure you are as accurate as possible on the timing of the

cash fl ows

A cash fl ow forecast is the most important tool for business; cash flow planning is essential for business success. The forecast will predict the ability of your business to generate the cash necessary for expansion or to support the operations of the business. It will also indicate any cash fl ow gaps that the business may experience – periods when cash outflows exceed cash inflows. It uses estimated or real figures that you gather and add to a simple worksheet from the day you start the business. You can also develop a cash fl ow forecast from existing information if you are already in business. After 12 months, you’ll have a good idea as to what your cash balance will be, month by month for your next year of operation.

There are a few ways to use a cash fl ow forecast as a planning tool:

In short-term planning, to identify when more cash is needed in a month, • for example, when several large annual bills are due, and the cash in the bank is likely to be low.In long-term planning, to fi nd where cash fl ow could affect the business, • especially when you want to expand. For example, a school uniform retailer, after months of low trading volume with cash fl ow, has to buy new inventory, employ extra staff and advertise for back to school compaign. However they may also be planning to extend into the shop next door. After several lean months, the cash supply may be at its lowest, even without the added expense of the new premises, so the cash fl ow would need careful planning.

The easiest way to prepare a cash fl ow forecast is to divide the forecast into smaller areas and then bring all the information together at the end. The fi ve steps in preparing a cash fl ow forecast are:

Prepare a list of assumptions.1. Prepare the anticipated income or sales for the business (called a sales 2. forecast).Prepare details on any other estimated cash infl ows.3. Prepare details on all estimated cash outfl ows.4. Put all the gathered details together.5.

Cash Flow Forecasting


72


Step 1: Assumptions

Step 2: Sales Forecast

The assumptions used in the cash fl ow forecast are the same as those used for the income and expenditure budget process – refer to page 34.

Applying these percentages to the estimated sales for year two, Adam completes the following tables:

For any business, sales are the key to business success. Whether you are starting a new business or have an existing enterprise, estimating sales is often one of the most diffi cult process in forecasting. If you think about it, your sales will be dependent on many variables, such as the types of customers you have, the terms you offer your customers, economic events such asincrease in the interest rate or competitive infl uences. It is not possible to predict all the events that may occur and have an impact on your sales over the time frame of the forecast. This point is often the reason why many businesses do not do forecasts. However, if you accept that your forecast sales will most likely not match your actual sales, you can then focus on determining a ”realistic” fi gure for the sales of the business over the period for which the forecast will be prepared.

For existing businesses, the best starting point will be to look at last year’s sales fi gures. Do you believe that you will continue to achieve these fi gures, or have you enhanced your business operations to increase sales over the coming year? Once you have determined the likely adjustment needed to your historical sales fi gures, you can then estimate the forecast sales for the period.

After you have determined the sales for the period, the next step is to break these numbers into ”sales receipts” – the actual timing of receipt of the cash from sales. Remember that we talked about the timing of cash as the key to the cash fl ow forecasts. Again, this information will be estimated, although existing businesses will have some history to help estimate actual sales receipts.

If the business is purely a cash business (for example a fruit stall at a market), then the sales will equal the ”sales receipts” number. However, as noted earlier, where credit terms are given to customers, there will be a delay in receiving the proceeds from the sale and this is where we need to estimate the timing of receipts. Applying your accounts receivable collection pattern from the past to your sales forecast is the best way to predict your cash receipts from the collection of accounts receivable. To see how this is done, we have provided an example on how to calculate the timing of cash receipts.

After reviewing his sales collection history, Adam has determined that the following sales receipt pattern had occurred in year one.

Percentage of Cash Sales 40%

60%Percentage of Credit Sales


73


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,580

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,880

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,300

R

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,300

R

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,630

R

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,960

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,158

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,290

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,620

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,752

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,818

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,950

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,082

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74


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74

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75


To complete the cash infl ow information in the cash fl ow forecast, you will need to identify any additional cash coming into the business. Of course, the types of cash infl ows for each business will vary, but the following list may help you to recognise other cash infl ows in your business:

Additional equity contribution;• Income tax refunds;• Grants;• Loan proceeds;• Other income sources not included in sales (e.g. royalties, franchise and • license fees); andProceeds from sale of assets.•

If you are preparing a cash fl ow forecast for additional fi nancing, do not forget to include the loan funds in your infl ows.

As we have indicated earlier, one of the major inputs into the forecast is sales. Coupled with this infl ow is the cost of purchasing or manufacturing those goods to sell. Therefore, when determining your cash outfl ows, it is suggested for you to calculate the cost of goods sold in line with your sales forecast. By doing this, if you need to change your sales numbers, an automatic change to the cost of goods sold fi gure should occur. Many computer programmes will allow you to set up a link between two items, such as your sales and cost of goods sold, to make the process of forecasting easier. The calculation of cost of goods sold was discussed in Chapter 1, so you may want to refer back to the section or use the gross margin percentage discussed in Chapter 4 when estimating the cost of goods sold for your forecast.

Expenses are those cash outfl ows relating to the operations of the business and those that are not included in the cost of goods calculation. These are often referred to as ”administration” or ”operational” expenditure. Again, the items of expense will depend on the type of business you are starting or currently operating. One of the important areas to focus on when forecasting expenses is the classifi cation. Remember in Chapter 4, the difference between fi xed and variable expenses was discussed. When putting together your forecast, the variable expenses will be directly related to the forecast sales numbers. So if you adjust your sales, these expenses will need to be amended in line with the sales adjustment. Of course, the fi xed expenses will remain the same, although you may need to consider adjusting these for increases (e.g. infl ation).

Step 3: Other Cash Infl ows

Step 4: Cash Outfl ows

Expenses


76


Other Cash Outfl owsIn addition to cost of goods sold and operational expenses, you may also have other cash outfl ows during the operations of the business. Some examples of cash outfl ows include:

Purchase of assets;• One-off bank fees (i.e. establishment fees);• Principal repayments of the loan;• Payments to the shareholders (e.g. dividends); and• Investment of surplus funds.•

Now that all the relevant information has been gathered, it is time to prepare the forecast. At the beginning you would have determined the time period for the forecast. Remember, cash fl ows are all about timing and the fl ow of cash, so you will need to have an opening bank balance, then add in all the cash infl ows and deduct the cash outfl ows for each period, usually by month. The number at the end of each month is referred to as the ”closing” cash balance and this number becomes the opening cash balance for the next month.

An example of Adam’s cash fl ow forecast for year two has been provided on the following page. This cash fl ow forecast shows that his business is going to borrow RM20,000 to purchase a car to assist in his sales and marketing by visiting his potential customers. Remember that Adam included this in his assumptions (refer to page 34).

The forecast shows that the RM20,000 is borrowed in February and the car is paid for in the same month. The cash infl ows include anticipated sales receipts as shown in the table on page 74. Remember, this is cash collected from sales, not the actual sales made. In the cash outfl ows section, all the monthly expenses as they are paid have been included and also cash outfl ows from expenses incurred for the loan (establishment fee etc.).

By preparing the cash fl ow forecast, it can be easily seen that if Adam were to borrow the RM20,000 to purchase the car, he will still have not enough cash to cover all expenses for the period for which the forecast has been prepared. The main reason for this is that a percentage of sales is made on credit. This means that while sales will increase after the purchase of the car, the time lag between buying the car and increase in sales, and then the cash being collected means that his business will need an additional RM3,267 (maximum overdrawn amount as shown in month 5) to ensure that he has enough cash to cover the timingdifferences.

Step 5: Finalising the Cash Flow Forecast


77


Adam will have to consider how he is going to fund this cash shortage. Most likely, he will have to consider approaching his bank for additional funding. In addition, there are two important points to note here. Firstly, the bank is most likely to request details of the assumptions in the forecast. Secondly, if the business were to request additional funds of only the extra RM3,267, there would be no “buffer” in the event some of the anticipated cashfl ows changed (e.g. interest rates rose and the interest expense increased).

TIPOnce the forecast is completed, you can run some “what if” scenarios to

measure how reactive your business cash fl ows will be to certain changes in events, such as decrease in sales or increase in fuel costs.

This will show you how quickly you may run out of cash if any of these events occur


78

Financial Guide for SMEsFi

nanc

ial G

uide

for

SM

Es

78

page

74

Sale

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Tax

Ada

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ow F

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74


79


Just as cash fl ow and profi t are important to the business, ensuring that the business is fi nanced appropriately is essential to achieving fi nancial success.

Financing comes in many different forms and in this section, we will discuss on funding a business with debt or equity, and the different types of loan products that can be considered. In addition, we will look at the types of transactional banking available and specifi c types of fi nancing for importers and exporters.

Financing your business is an important part of

good fi nancial management practice. Not only having access

to fi nance, but also being able to choose the most appropriate method of fi nance for your business

will result in continued growth and profi tability

Section III : Financing Your Business

chapter 7-13 p79-181 Eng.indd 79chapter 7-13 p79-181 Eng.indd 79 8/15/11 5:02:53 PM8/15/11 5:02:53 PM

80


Chapter 7Debt, Equity or Internal Funds?


81


Debt, Equity or Internal Funds?

All businesses need finance to start operations and to grow. Finance can be obtained from the following sources:

•

•

•

Debt – this is fi nancing sourced externally, such as from banks.Equity – this is fi nancing sourced internally, such as from an owner or investor.Internal Funds – whereby profi ts and cash generated by the business are used to fund the ongoing operations and expansion of the business.

A key requirement to ensure that you choose

the right funding is to make certain that you fully understand the differences between

debt and equity, and to consider the

implications of each on your business

Comparing Debt Finance, Equity Investment and Internal Funds

Many SMEs are faced with the dilemma to determine which type of funding is the right option for them. The majority of SMEs look to raise debt fi nance orobtain funding support from a family member in order to expand. This is because it is often diffi cult to get an external investor interested in taking the risk of a start-up or SME business. Debt fi nance or using existing funds also enables the owner to maintain control over their business rather than having to give a percentage of ownership to an investor.

Internally generated equity is the original funding provided by the owner and may also include any profi ts from the sale of an asset owned by the business or funds generated through business trading each year that have not been drawn out (through dividends or drawings) by the owner. It could also be any additional equity funds contributed by the owner.


82


The assets of the business can also be funded from an investor who wishes to put permanent equity capital into the business. If the business is a company, then either new shares are issued by the company or the investor may purchase some of the shares from the original owner. You should seek advice from your accountant regarding the capital gains, tax and cash fl ow implications of each of these choices in relation to your specifi c circumstances.

Utilising internal funds generated from the business is, in most circumstances, one of the more favourable alternatives. Most SMEs do not adequately assess the potential ability to generate more cash fl ow through good management of working capital. Chapter 5 provides details on how this can be achieved. Where additional cash can be sourced through good management of working capital, this source of fi nancing can provide many advantages over sourcing of funding through debt or equity.

The table on the next page outlines the key areas to consider when comparing debt and equity. It shows the differences between those who have an interest in the ownership of the business (equity party), such as yourself or a shareholder, and that of a party who has a debt fi nance relationship with your business (a bank).

The comparison looks at:• Defi nitions and examples of each;• Level of risk for each fi nancier / investor;• Types of security required; • How each funding party receives income on their funds; • Repayment of debt fi nance / investment capital;• Impact of fi nancial structure on the fi nancial statements of the business; and• Advantages and disadvantages of the alternatives.

To fully understand the implications

of choosing debt, equity or internal

funds to fund your business, ask

yourself what would happen if something

goes wrong. The answer will help you

to make the right choice

HINT


83


Defi nitions and ExamplesDEBT EQUITY INTERNAL FINANCE

Debt funding can bedefi ned as:

Funds or obligations that are owed to an external party based on specifi c terms and conditions.

Examples of debt funding include:• • • • • •

•

Equity fi nance can bedefi ned as:

A form of investment in the business, from the owner, partner or other people willing to take a portion ofownership in the business.

Examples of equity funding include:• Issued shares/ share capital (company);• Trust funds;• Partnership capital (partnership);• Owner’s capital (sole proprietor);• Retained/ accumulated profi ts; and• Reserves – capital, profi t/share premium/ revaluation.(Note: The nature of the initial capital of an entity will vary depending on the structure, e.g. share capital is used if it is a company, trust funds if it is a trust, partnership capital for a partnership)

Internal fi nance can be defi ned as:

Working capital, whichis cash used during the operating cycle of the business.

Examples of workingcapital include:• Cash used to purchase inventory; • Cash required to pay suppliers; • Cash outstanding from customers.

and

Bank overdraft;Mortgage loan;Fully drawn advance;Commercial bills;Trade creditors,accounts payable;Provisions fortaxation, employeeentitlements; andShareholder/benefi ciary loans.


84


DEBT EQUITY INTERNAL FINANCE

Level of Risk

For an investor :The equity investor bears the risk of the business and its ability to achieve the required level of growth.

They also bear the risk of fi nding a willing buyer in order to exit the investment.

The risk to the business is reduced with equity funding, as it does not impose any signifi cant cash fl ow requirements on the business.

The ultimate risk for the investor is that they could lose their capital if the company does not survive. Therefore, their risk is both a capital and return-on-investment risk.

For the owner of the business, bringing in investors usuallydecreases their control of the business.

The owner of the business takes the risk that cash used from areas of working capital may affect the business operations. For example, to increase cash fl ow, the business may reduce inventory level, which could result in insuffi cient inventory available for sale.

For the owner:The lender takes the risk that the business may be :•

•

The risk for the business is generally based on:

The lender will generally require a suffi cient level of security to cover the principal. However, the costs and timing of enforcing this security poses an additional risk.

• Changes in interest rates if exposed to variable rates;

• Cash fl ow risk as high growth requires increased working capital;

• Ability to generate suffi cient funds to fund principal repayment; and

• The proportion of debts to equity, (generally the higher the proportion, the higher the risk).

For a lender :

Unable to generatesuffi cient cash fl owto service the debt; orUnable to repay theprincipal at the endof the loan period.


85


Types of Security Required


Lenders generally require some form of security against the funds that are lent to the business. In the event repayment conditions are not met, the lender can call-up the loan and realise the security.

Equity investors do n o t r e q u i r e a n y security against funds invested.

The equity investor is providing risk capital based on the potential to achieve future profi ts and increased business value.

Equity investors rank beh ind a l l o the r unsecured creditors when the business winds up. For this reason, they seek a high return on funds invested.

Internal sources of fi nance do not require any security as it is essentially using cash held by the business.

The level of fi nanceavailable is generally restricted or capped by the level and quality of security available.

Examples of commonsecurity required include:•

•

•

First or further mortgages over property (this may involve property owned by the business or personal assets of the owners or third parties);Fixed charge / debenture (covering the total assets of the business); and Specifi c assets (e.g. inventory / debtors, motor vehicle, equipment).

Some lending can be done without security, usually with a personal guarantee of the owners/directors. However, with higher interest rates refl ecting the higher risk


86



•

•

A lender achieves a return on their investedfunds through thepayment of interest.

Interest terms can vary signifi cantly, based on the terms and conditions of the fi nance. In order to compare the various debt products, you should be aware of:• The basis for calculation of the interest;• Exposure to interest rate changes;• The timing of interest payments; and• Fees and charges. Debt fi nance often has a requirement to meet bo th in te res t and principal repayments during the term of the loan.

Therefore, debt fi nance has an important cash fl ow impact on a growing business.

It can be seen from the above that the focus of the equity investor is on long-term growth of the business. As a result, equity funds do not generally place cash fl ow pressures on the business.

An equity investor receives the return on funds invested in two ways:

Profi ts from the business (and which can be left in the business to fund future growth); and Increased value of the business (as the business increases in overall value, the equity investor’s interest in the business will increase proportionately; however, this increase in value will not be realised until the business or owner’s interest is sold).

Using internal sources of fi nance will not incur any fees or interest payments.

and the lender can then call on other assets of the individual to meet business debts, subject to the terms of the guarantee.

Types of Security Required

How Each Funding Party Receives Income on Their FundsDEBT EQUITY INTERNAL FINANCE


87


Repayment of Debt Finance/ Investment CapitalDEBT EQUITY INTERNAL FINANCE

The debt fi nance agreement provides the terms of repayment of the funds borrowed.

The funds borrowed will be repaid ei ther in instalments over the loan period or at the end of the period. The business will need to generate suffi cient funds from profi ts and cash fl ow to meet these commitments.

The lender does not share the risk of the business or the benefi t of growth through increased value.

The equity investor has acquired an interest in the business. In order to obtain return on the funds invested, the investor will need to sell his/her interest in the business.

The return of the initial funds invested will depend on the change in value of the business and the ability to fi nd a willing buyer or an appropriate exit strategy. The equity investor shares both the risks of the business and the benefi ts of growth. Hence, an investor may receive either more or less than what they initially invested.

No repayment of funds is required.


88


Impact of Financial Structure on the Financial StatementsDEBT EQUITY INTERNAL FINANCE

A signifi cant reliance on debt funding provides a higher gearing structure for a business.

A higher gearing refl ects a higher risk as the business has more commitments to lenders than equity. A lower gearing refl ects less commitment to external fi nanciers as compared with equity funds.

The use of debt can also result in reduced profi ts through interest expense, although debt can be more tax effective because interest payments are deducted from assessable income.

The injection of additional equity capital can provide a more balanced debt-to-equity ratio, a common measure of risk.

With additional capital, the owners may be in a position to increase other debt finance, as the fi nancial structure of the business is much stronger.

Equity capital injection should allow the business to generate increased profi ts, as often it does not have to service funds raised (make repayments, interest payments etc).

Utilising internal fi nance can provide a more balanced debt-to-equity ratio, a common measure of risk.

Through the use of internal fi nance as an alternative source of f inanc ing , the business should be able to generate more profi ts, as it does not have to service funds raised.


89


Advantages

DEBT EQUITY INTERNAL FINANCE• Retain control over the business.

• Growth in value of the business is retained by the owner.

• Debt repayment commitment can be fi xed.

• Lower cost of capital.

• Lower cost of raising debt fi nance.

• Interest expense is tax deductible.

• Ability to raise funds in excess of security.

• No exposure to changes in interest rates.

• External resources could add strategic input; and alliances.

• Improved profi le with lenders.

• More stable fi nancial structure.

• Possible mentoring support from the investor as well as their funds.

• Better cash fl ow management with no debt / repayment commitment.

• Utilising internal fi nance as an alternative to debt fi nance will potentially increase profi tability as these funds will not carry service costs.

• No exposure to external market, such as interest rates and investor appetite.

• Retain control over the business.

• All growth in the business is retained by owners.

• No exposure to external stakeholders such as banks or investors.

• No security over assets.


90


Disadvantages


• Ability to raise funds is limited by security available.

• Business may be exposed to fi nancial risks as a result of interest rate movements.

• Reduced opportunity to establish new external alliances with potential investors.

• Liquidity exposure of a highly geared structure.

• Business opportunities can be lost through tight cash fl ow.

• Profi tability can be reduced by high debt-servicing costs.

• Loss of control and autonomy in decision-making (as other investors will want a say in the operation of the business).

• Greater pressure from other investors to achieve growth and higher returns.

• Need to identify exit strategy.

• Potential personality confl ict between owner and other investors.

• Additional costs of equity process.

• Greater management reporting required.

• Dividend payments by the business are not tax deductible.

• Length of time to raise equity can often be lengthy.

• Loss of income if dividend payments are required.

• Potential tightening of operational cash fl ow if internal fi nance is used for long-term asset purchases.

• No credit history is developed.

• Potential loss of mentoring from investor if equity fi nance was an alternative.

• No tax deductions as no servicing costs.


91


HINTIn deciding whether

or not to seek an equity party, you need to consider

both the fi nancial and non-fi nancial

outcomes

During economic uncertainties, you may wish to reduce the fi nancial risk of taking on signifi cant debt funding (it may also be diffi cult for you to raise debt fi nance). Therefore, you may need to be prepared to share the ownership of your business to increase funding.

You may also want to consider a combination of debt and equity funding to meet the business requirements. An investor may be prepared to provide both equity and debt fi nance.

Considerations in selecting equity investment as your fi nance option may include:

Deciding Between Debt and Equity

The ability to recognise an external investor’s interests in operating the business;

Your attitude to losing a 100% control position and power to make all decisions without consulting other owners;

Identifi cation of skills of potential investors that would be advantageous to the growth of the business;

The need to reduce the risk associated with the gearing level of the business through lower interest and principal repayment commitments;

Long-term plans for succession and, if it is a family business, the impact on other family members;

Willingness to identify an appropriate exit strategy and its impact on you;

The opportunities equity funding will bring that could not be achieved with existing debt available to the business;

Whether your business is attractive to an investor;

Whether you have prepared the necessary fi nancial statements and forecasts that a potential investor will want to see; and

How quickly you need the funding.

•

•

•

•

•

•

•

•

•

•


92


The choice between debt and equity is, therefore, a combination of:

• Assessing the limitations that debt fi nance may bring;

• Determining if your business has the growth potential to be attractive to an equity investor; and

•

Generally, a business would aim to maximise the use of debt fi nance to fund its operations, as long as the business can service the level of debt

and has enough security to support the funding. The business owner would retain the benefi ts of ownership in respect of growth and

profi tability of their business

TIP

TIP

Many SME owners fi nd that the retention of majority control over their business is important to them, and that their objectives are based on both lifestyle and family priorities. In these circumstances, debt will be their primary alternative for funding their business, as they are unlikely to meet an investor’s objectives.

You may fi nd that your ability to raise debt improves with equity investment

Evaluating your willingness or preparedness for the changes equity investment will require.


93


In matching a debt product and selecting the appropriate features to suit your business requirements, you need to determine the following about your business:

• Types and purpose of the loan / funds and how long you would require them;

• Whether they are for short-term funding of working capital or long-term funding, to fund a building extension or export market entry costs;

• How much finance you need (be realistic about the amount of funds you require – do not underestimate).

HINTIt is important to

review alternative fi nance products

from different lenders and ensure that

you are comparing apples with apples

If you select debt as a fi nancing option, you have to consider which debt product (as there are many) will meet the needs of your business.

In making this assessment, you will need to:

• Understand the nature of alternative debt products in the market to make an informed decision;

• Identify the alternative features available for each product;

• Have a common basis for comparing debt products;

• Match the right debt product / features with your business circumstances and requirements; and

• Understand the tax implications of alternative products.

Understanding the Debt Financing Options : Long-term versus Short-term

Evaluating Your Own Circumstances

To cater for your business needs, fi nancial institutions offer a wide range of fi nancing products for SMEs under both conventional and Islamic banking. You can choose from a wide variety of products offered in the market, depending on your fi nancing needs and the suitability of such fi nancing to your business. A list of different types of products available, its usage, features and benefi ts for SMEs is provided on page 95.


94


• What level of security you can offer and how the lender will view the value of the security (real property security, compared with business assets, is likely to result in a lower interest rate margin being charged); and

• How the lender will assess ”risk” for your business. This evaluation will help you better match your requirements and limitations to the specifi c “guidelines” for particular alternative debt funding.

When choosing the appropriate fi nancial product for your business, it is important to consider the impact of the features as well as the nature of the products. In some circumstances, borrowers can structure their loan with a mix of fi xed/variable/capped and other variations of interest charges. If specifi c features are important to you based on your circumstances, you may need to look at alternative debt providers until you fi nd the right fi nance for you. You may fi nd, however, that your circumstances may limit the debt products available for your business.

It can often be diffi cult for SME owners to evaluate debt product options. Lenders can have different names for similar products, and structure the terms, conditions and fees differently.

Ensure that the type of fi nancing undertaken matches the reason for seeking fi nance. A general rule of thumb is to match the term of the loan

with the length of the life of the asset you are funding

TIP


95


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pur

chas

e A

loan

gra

nted

for a

pr

edet

erm

ined

leng

th

of ti

me

(tenu

re),

with

repa

ymen

ts b

y in

stal

men

ts.

• Fa

cilita

te

man

agem

ent o

f

fund

s, a

s le

asin

g

inst

alm

ents

am

ount

is p

rede

term

ined

:•

For a

n op

erat

ing

le

ase,

mai

nten

ance

co

st is

bor

ne b

y th

e

less

or (f

inan

cial

inst

itutio

n).

• In

stal

men

ts p

aid

for

le

asin

g ar

e el

igib

le

fo

r ful

l tax

relie

f.

Facil

itate

man

agem

ent

of fu

nds,

as

repa

ymen

t am

ount

is

pred

eter

min

ed.

To a

cqui

re c

apita

las

sets

suc

h as

equi

pmen

tan

d m

achi

nerie

s.

To a

quire

fixe

d as

sets

(im

mov

able

pro

perti

es

i.e. l

and

and

build

ings

, as

wel

l as

com

mer

cial

vehi

cles

).


96


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

96

Indu

stria

lH

ire -

Purc

hase

To a

cqui

re c

apita

las

sets

suc

h as

equi

pmen

t and

mac

hine

ries.

• A

form

of f

inan

cing

w

here

by th

e as

set i

s

purc

hase

d by

the

fin

anci

al in

stitu

tion

and

hire

d to

SM

Es,

w

ith th

e ow

ners

hip

bein

g re

tain

ed b

y

th

e fin

anci

al

inst

itutio

n un

til th

e

lo

an is

repa

id.

• SM

Es m

ake

perio

dic

repa

ymen

ts to

the

finan

cial

inst

itutio

n.

• Al

low

SM

Es to

ow

n

equi

pmen

t and

m

achi

nerie

s w

ithou

t

havi

ng to

pay

the

fu

ll am

ount

upf

ront

.•

Faci

litate

m

anag

emen

t of

fu

nds,

as

repa

ymen

t

amou

nt is

pred

eter

min

ed.

• Fr

ee u

p av

aila

ble

fund

s fo

r oth

er

pu

rpos

es.

Wor

king

Cap

ital

You

r bus

ines

s ne

eds

wor

king

cap

ital f

or th

e da

y-to

-day

runn

ing

of

the

busi

ness

. Gen

eral

ly,

the

mos

t con

veni

ent

form

of f

inan

cing

wou

ld

be a

n ov

erdr

aft f

acili

ty

from

com

mer

cial

ban

ks.

Alth

ough

flex

ible

, ov

erdr

aft c

an b

e qu

ite

cost

ly. Y

ou m

ay b

e ch

arge

d co

mm

itmen

t

Ove

rdra

ft(O

D)

To m

eet w

orki

ngca

pita

l nee

ds i.

e.pa

ymen

t of s

alar

ies,

purc

hase

s, u

tilitie

s et

c.

Flex

ibilit

y in

fund

sm

anag

emen

t in

view

that

the

OD

isco

ntin

uous

ly a

vaila

ble,

prov

ided

the

faci

lities

ar

e pr

oper

ly co

nduc

ted

and

the

busi

ness

co

ntin

ues

to o

pera

tesa

tisfa

ctor

ily.

• A

revo

lvin

g lo

an

m

ade

avai

labl

e to

a

bu

sine

ss c

usto

mer

via

a cu

rrent

ac

coun

t, w

here

by

th

e bo

rrow

er m

ay

w

ithdr

aw th

e

requ

ired

amou

nt

ea

ch ti

me

by is

suin

g

ch

eque

s, a

s lo

ng a

s

th

e O

D lim

it is

not

exce

eded

. •

A co

mm

itmen

t fee

of

1%

is c

harg

ed o

n th

e

th

e as

set a

t the

e

nd o

f the

tenu

re.


97


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

97

Sim

ilar t

o O

D, i

t is

shor

t-ter

m in

nat

ure

and

is u

sed

to m

eet

shor

t-ter

m w

orki

ngca

pita

l req

uire

men

ts.

• A

form

of l

oan

gran

ted

for a

fixe

d

pe

riod

whi

ch c

an b

e

ro

lled

over

upo

n

ex

piry

.•

A co

nven

ient

form

of

sh

ort t

erm

fina

ncin

g

for c

ompa

nies

with

good

fina

ncia

l

stan

ding

. •

Dra

wdo

wns

by

mea

ns o

f a le

tter

fro

m th

e SM

E to

the

finan

cial

inst

itutio

n

st

atin

g th

e pe

riod

of

th

e lo

an re

quire

d.

• C

ash

adva

nces

are

ea

sily

and

qui

ckly

ob

tain

able

•

No

colla

tera

l

re

quire

d.

A m

etho

d of

fina

ncin

g,w

here

the

finan

cial

inst

itutio

n pu

rcha

ses

the

clie

nt’s

trad

e in

voic

es a

t a d

isco

unt

• Lo

wer

fina

ncin

g

co

sts

com

pare

d to

co

nven

tiona

l

finan

cing

in

stru

men

ts.

•

Con

tinuo

us

avai

labi

lity

of fu

nds,

as fa

cilit

y ca

n be

rolle

d ov

er.

To o

btai

n sh

ort t

erm

finan

cing

of t

rade

debt

s (s

ale

of g

oods

to c

usto

mer

s on

cred

it te

rms)

.

Rev

olvi

ngC

redi

t

Fact

orin

g

fees

for t

he u

nutil

ised

po

rtion

of t

he o

verd

raft

or re

volv

ing

cred

it.

• In

tere

st is

cal

cula

ted

on a

dai

ly b

asis

base

d on

the

outs

tand

ing

bala

nce

at th

e en

d of

eac

h

busi

ness

day

.

u

nutili

sed

porti

on

of

the

faci

lity.


98


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

98

from

the

face

val

ue o

f th

e in

voic

es, a

ndpr

ovid

e ca

sh

adva

nces

for b

usin

ess

purp

oses

.

Trad

e Se

rvic

es

To a

ssis

t cus

tom

ers

in

trade

tran

sact

ions

, fin

anci

al in

stitu

tions

al

so p

rovi

de p

aym

ent

serv

ices

.

Out

war

d /

Inw

ard

Bill

s fo

r C

olle

ctio

n(O

BC

/IBC

)

Assi

st c

usto

mer

inm

akin

g pa

ymen

tsfo

r tra

de tr

ansa

ctio

ns.

• D

ocum

ents

are

ch

anne

led

thro

ugh

the

finan

cial

in

stitu

tion

with

spec

ific in

stru

ctio

ns.

• Fi

nanc

ial in

stitu

tions

ha

ndle

doc

umen

ts

on

inst

ruct

ions

rece

ived

(fro

m

cu

stom

er o

r ano

ther

bran

ch o

r fin

anci

al

in

stitu

tion)

to:

i.

obt

ain

acce

ptan

ce

a

nd/o

r pay

men

t;

ii. d

elive

r com

mer

cial

doc

umen

ts

aga

inst

a

ccep

tanc

e

and

/or a

gain

st

pay

men

t; an

d

iii. d

elive

r doc

umen

ts

on

othe

r ter

ms

a

nd c

ondi

tions

.

i.i. ii.

A sa

fe m

etho

d of

paym

ent a

s th

epa

ymen

t can

be

defe

rred

by th

e

buye

r unt

il the

go

ods

arriv

e or

ev

en la

ter i

f de

laye

d pa

ymen

tar

rang

emen

ts

are

agre

ed to

Cus

tom

ers

will

ha

ve ti

me

to

insp

ect t

he

docu

men

ts b

efor

epa

ying

/acc

eptin

g

Doc

umen

ts o

f va

lue,

i.e.

title

s

docu

men

ts, a

reno

t rel

ease

d to

th

e bu

yer (

draw

ee)

• Bu

yer:

• Se

ller:

• Ab

le to

sel

l on

mor

e

co

mpe

titiv

e te

rms

to

cred

it cu

stom

ers.


99


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

99

Gua

rant

ees

A g

uara

ntee

is b

asic

ally

a

lega

l und

erta

king

by

a fin

anci

al in

stitu

tion

on

your

beh

alf (

the

third

pa

rty),

whe

re it

gu

aran

tees

the

paym

ent o

f a c

erta

in

sum

of m

oney

up

to a

ce

rtain

lim

it to

a

bene

ficia

ry, i

n th

e ev

ent

that

you

r bus

ines

s fa

ils

to s

ettle

a d

ebt o

r pe

rform

a le

gal

oblig

atio

n. T

his

is

how

ever

sub

ject

to fu

ll

Ban

kG

uara

ntee

(BG

)

• Pr

ovid

es g

uara

ntee

favo

urin

g a

third

party

for

perfo

rman

ce,

paym

ent e

tc.

• G

ener

ally

,

bu

sine

sses

that

have

a p

artic

ular

need

for B

Gs

are

cont

ract

ors,

suc

h as

build

ing

and

supp

lier

co

ntra

ctor

s. O

n th

e

co

rpor

ate

side

, BG

s

co

uld

also

be

give

n

fo

r the

issu

ance

of

pr

ivat

e de

bt

secu

ritie

s.

• Ty

pes

of

guar

ante

es:

i.

Ten

der G

uara

ntee

o

r Bid

Bon

d;

ii. P

erfo

rman

ce

G

uara

ntee

;

iii. A

dvan

ce

P

aym

ent

G

uara

ntee

;

iv. W

arra

nty

of

M

aint

enan

ce

Gua

rant

ee;

v.

Ret

entio

n

G

uara

ntee

; and

vi.

Sec

urity

Gua

rant

ee.

• C

omm

issio

n is

• Sh

ows

the

cu

stom

er’s

/

ap

plic

ant’s

cap

abilit

y

to

per

form

wor

k as

spec

ified

in th

e

co

ntra

ct.

• Ab

le to

obt

ain

mor

e

fa

vour

able

trad

e

te

rms

from

the

bene

ficia

ry if

a B

G is

prod

uced

. •

Ther

e is

no

ne

cces

sity

to ra

ise

cash

to m

eet t

he

de

posi

t req

uire

men

ts

an

d fu

nds

coul

d be

used

to s

uppo

rt

unt

il pay

men

t or

acc

epta

nce

has

bee

n af

fect

ed; a

nd

ii. O

nce

the

bill i

s

a

ccep

ted

by th

e

buy

er (d

raw

ee),

the

sel

ler (

draw

er)

can

see

k le

gal

rem

edy

in c

ase

of

n

on-p

aym

ent o

n

m

atur

ity d

ate.


100


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

100

Ship

ping

G

uara

ntee

(S

G)

To e

xped

ite th

e re

leas

e of

goo

ds

whi

ch h

ave

arriv

ed

befo

re th

e or

igin

al

trans

port

docu

men

ts.

• G

uara

ntee

or

unde

rtaki

ng b

y th

e

is

suin

g fin

anci

al

in

stitu

tion

to th

e

sh

ippi

ng a

gent

to

re

leas

e th

e go

ods

with

out p

rodu

ctio

n of

Faci

litate

mee

ting

of

prod

uctio

n or

con

tract

de

adlin

es.

ch

ange

d ba

sed

on th

e am

ount

and

perio

d of

the

gu

aran

tee.

• M

axim

um p

erio

d of

guar

ante

e is

gu

ided

by

the

rule

s

of

the

Asso

ciatio

n

of

Ban

ks in

M

alay

sia i.

e.

guar

ante

e sh

ould

not b

e iss

ued

for

m

ore

than

1 y

ear

ex

cept

for

Gov

ernm

ent

cont

ract

s. T

he

ex

piry

of t

he

guar

ante

e m

ust n

ot

be

mor

e th

an 1

2

m

onth

s af

ter t

he

ex

piry

of t

he

orig

inal

con

tract

.

w

orki

ng c

apita

l

requ

irem

ents

. •

Allo

w c

usto

mer

s to

have

acc

ess

to fu

nds

espe

cial

ly w

here

BG

is is

sued

for a

dvan

ce

pa

ymen

t or r

elea

se

of

rete

ntio

n fu

nds

unde

r con

tract

s.

com

plia

nce

of a

ll te

rms

spec

ified

in th

e re

leva

nt

guar

ante

e. T

here

are

se

vera

l typ

es o

f gu

aran

tees

whi

ch c

an

be a

rran

ged

by th

e fin

anci

al in

stitu

tion

depe

ndin

g on

the

spec

ific

requ

irem

ents

of

the

borr

ower

.

A fi

nanc

ial i

nstit

utio

n m

ay ta

ke in

to a

ccou

nt a

nu

mbe

r of f

acto

rs

befo

re is

suin

g a

guar

ante

e, s

uch

as, t

he

exte

nt o

f lia

bilit

y, p

erio

d an

d ex

piry

, and

cre

dit

stan

ding

of t

he

cust

omer

.


101


Purp

ose

Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

101

or

igin

al tr

ansp

ort

do

cum

ents

. •

Usu

ally

issu

ed

w

here

the

good

s

ar

e in

itial

ly

impo

rted

unde

r

Lette

r of C

redi

t (LC

)

and

is to

be

ea

rmar

ked

agai

nst

Tr

ust R

ecei

pts

(TR

) /

B

anke

r’s

Acc

epta

nce

(BA

)

faci

litie

s.


102


Chapter 8Transactional Banking to Suit

Business Needs


103


Transactional banking forms part of the overall fi nancing

of your business. The everyday banking

requirements should be considered

carefully to ensure that the payments

in your business are effi cient and effective

HINTChoosing the most

appropriate transactional banking products will assist in managing cash fl ow and

improving profi tability

Transactional Banking to Suit Business Needs

Transactional Banking Products

Transactional banking is the everyday banking requirements that your business needs to operate effectively. Primarily, this will include both deposit accounts and payment of services provided by your bank or other financial institutions (e.g. credit union, building society).

All businesses need to have some transactional banking services. There are essentially two types of transaction banking groups:

• Transaction Banking• Merchant Facilities

When deciding what type of transaction banking products your business will need, it is important to look at the type of business you are offering to your customers, the requirements from your suppliers and how you want to manage your cash flow. Although many businesses believe that paying by cheque offers a few extra days before the funds are withdrawn from the bank account, in reality, paying by cheque provides a level of uncertainty because you cannot be sure when the cheque will be presented.

With many options available to business today, it is wise to ask your bank account manager to assist in choosing the right products that will help manage cash fl ow and reduce the need for time spent in managing all your banking requirements.

• Electronic Desktop / Internet Banking;

• Credits to accounts – electronically, manually or by direct credit;

The list below provides the most common transaction banking products currently available:


104


• Debits to accounts – electronically, by manual cheque, Electronic Funds

• Overdraft and other limit facilities;

• Cheque production or cashing facilities; and

• Payroll processing arrangements.

HINTMerchant facilities

provide a real benefi t to your business cashfl ow: your customers do not necessarily

need to have cash in the bank to pay for

your goods or services

Merchant Facilities

TIPYour banker can assist you in choosing the most appropriate transactional banking products for your

business

Merchant facilities provide your customers with various options to pay by either a credit or debit card. These facilities enable you to process payments made on these cards either manually or electronically.

Some of the benefits of having merchant facilities include:

• guaranteed payment within 48 hours of the purchase made;

• improved cash fl ow and thus business performance;

• reduced exposure to keeping cash on your premises;

• reduced administration costs (you no longer have to wait for a purchase order, issue paper invoices or chase payment);

• no need for establishing accounts for one-off or infrequent transactions; and

• environmental protection (by reducing the use of paper).

When considering merchant facilities, it is best to speak to your bank account manager to discuss the best facilities for your business. Some of the questions to consider before meeting with your bank are:

Transfer (EFT) or overseas transactions;


105


By introducing merchant facilities, your business would be able to benefi t from faster payment, signifi cant reduction in invoice queries and credit

control calls and improved cash fl ow

Do you have a retail store where your customers walk in and pay for the goods with their card? You may need an Electronic Funds Transfer at Point of Sale (EFTPOS) terminal to swipe their cards.

Do you take the majority of your orders over the mail/phone/fax/internet? Do you need an EFTPOS terminal or is there an alternative method of processing?

Do you need a combination of the two options above? Can you have an EFTPOS terminal to swipe the cards of walk-in clients but key-in the details of “remote” orders?

Would a mobile EFTPOS/ credit card machine assist with faster payments?

What volume of credit card, cash, or other payment methods are you expecting?

•

•

•

•

•

TIP


106


Transactional FeesHINT

Regular review of your transactional banking

services will guarantee that you know how much you are paying for these services, and ensure that you are using transactional services that best suit your

business

TIPBy allocating all bank fees in a separate account, you would be able to clearly

identify any increases in fees that could be affecting your profi tability

Most fi nancial institutions do not provide transactional services for free. In some instances (particularly where your margins are very small), the fees related to these services can substantially impact on the profi tability of your business. With so many fi nancial institutions providing these services, it would be wise for you to consider the fee structure from a number of providers before deciding on the best provider (see the section on how to switch banks).

It is common knowledge that most SMEs do not know how much they are paying in bank fees. This can be attributed to the fact that they do not spend time reviewing the transactional banking arrangements and some banks may not make it easy to clearly establish the total amount of fees being charged.


107



108


Chapter 9Trade Financing


109


International trade fi nance products are specifi cally designed to assist importers and exporters in

managing risk and improving cash fl ow

for their business

HINTBy hedging your

international currency payments, you would

reduce the risk of negative impact on profi tability

Trade FinancingSMEs that import or export goods or services are often faced with additional challenges that come from dealing with international transactions. There are two important areas that you should consider to help you manage the risk and improve cash fl ow when undertaking international trade:

• Foreign Currency Payments; and

• International Trade Finance.

Foreign Currency Payments

When importing or exporting goods or services, you may need to pay or receive payment in a foreign currency. Your bank can help you to arrange payment in foreign currency or convert foreign currency payments into Malaysian Ringgit.

One of the main issues where the business is dealing in foreign currency payments is that currencies fluctuate on a daily basis and business can be subject to a fall in revenue (where foreign currency payments are being received) or increased costs (where foreign currency payments are made) and have little control over this issue.

However, there are various methods that can be used to assist business to minimise this impact. Essentially, the importer or exporter sets off the foreign currency risk by using one or more bank products – this is referred to as foreign currency hedging. Let us have a look at these various products and how each one can be used.


110


TIPOften using a combination of hedging products would provide the best protection over fl uctuations in foreign

currency

Forward Foreign Currency Agreement

To minimise the impact on your profi t from foreign currency fl uctuations, it may be possible to enter into a forward rate agreement with your bank. First, you need to discuss with your bank to see if your business “qualifi es” for the bank to offer this product.

How does this product work? The agreement between you and your bank allows you to lock in a pre-agreed exchange rate for a set date in the future. The agreed future exchange rate will be based on the current exchange rate and the fi nancial market’s view on where the exchange rate will be at the time you settle the transaction. The benefi t is that you then know exactly the amount you will be either paying or receiving.

It is important to note that once this transaction has been agreed with your bank, you will be required to “settle” the business transaction on the agreed date. This means you will need to ensure that you either have the foreign currency to buy the Malaysian Ringgit (importer) or have received the foreign currency to sell for Malaysian Ringgit (exporter) on the settlement date of the transaction. Therefore, before entering into this type of transaction with the bank, you should make sure your international trade transaction is confi rmed and payment date is accurate.

Foreign Currency Option

For some business, locking in the foreign currency exposure may limit their ability to provide a competitive edge. How is this so? If, for example, an importer is importing goods denominated in US dollar for delivery in three months and enters into an agreement with their bank for a forward foreign currency agreement, the importer is contractually bound to accept the US dollar he/she has purchased at the agreed rate (for Malaysian Ringgit) on the agreed date. If the Malaysian Ringgit strengthens, the importer must still honour the contract even if it is less favourable than the current exchange rate.

The importer can solve this problem by purchasing a currency option, which is similar to insurance. As with insurance, an option requires payment of a premium, which can be relatively expensive.


111


The option will protect the importer from downward movements in the value of the Malaysian Ringgit, but allow the importer to benefit from favourable fluctuations in the Malaysian Ringgit.

So if the Malaysian Ringgit increases in value, the importer can abandon the option. If the Malaysian Ringgit diminishes in value, the importer can rely on the rate in the option. The maximum cost to the importer is the premium. It is advisable to seek advice from your banker on which method of hedging that will best suit your business needs.

HINTForeign currency

payments can also be managed by

implementing alternative payment methods

If your business has both cash inflows and outflows, you can match these currency exposures. The cash fl ows do not need to match precisely in terms of timing. The perfect hedge is where infl ows are received at the same time as outfl ows are expected. However, this is rarely the case. Where the timing of the infl ows and outfl ows does not match, then timing issue can be managed by depositing surplus foreign currency in a foreign currency bank account for later use, or by borrowing now to pay for foreign currency purchases, and then using the foreign currency receipts to repay the loan.

Alternative Methods to Manage Foreign Currency Payments

This means that the supplier or customer manages the foreign exchange risk. Be careful in this situation, as the supplier may increase the cost to cover the possibility that the currency may move against them, or the customer may expect a reduced selling price to cover their risk.

Negotiating to Pay or Receive in Malaysian Ringgit

This means that the goods will be paid for at the foreign currency rate at the time of order; however, this also means that you will have to fund the goods for a longer period of time whilst waiting for the goods to arrive, and the exchange rate may be more favourable to you at a later date.

Goods Paid For at the Time the Agreement is Made

It is advisable to speak to your banker to determine the best alternative to manage your international trade payments

TIP


112


International Trade Finance

HINTTrading internationally can

be a real strain on cash fl ow. If you can negotiate

with your supplier or customer to use trade

fi nance products, you can release your cash fl ow for other parts of the business

In addition to foreign currency payments, banks also provide fi nancing for SMEs that are involved in domestic and international trade. Some of the common trade fi nancing facilities provided are listed on page 113.


113


Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

113

Lette

r of

Cre

dit (

LC) o

r D

ocum

enta

ry C

redi

t (D

C)

For i

mpo

rt or

loca

l pu

rcha

ses

of g

oods

, m

ater

ials

or e

quip

men

t.

A w

ritte

n un

derta

king

by

a fi

nanc

ial

inst

itutio

n to

pay

a

selle

r a g

iven

am

ount

of

mon

ey s

ubje

ct to

th

e fo

llow

ing

cond

itions

:•

On

pres

enta

tion

of

sp

ecifie

d;

docu

men

ts a

s se

t

out i

n th

e te

rms

and

cond

itions

of

th

e LC

; and

•

With

in a

spe

cifie

d

tim

e lim

it •

At a

spe

cifie

d pl

ace.

• C

an a

ssur

e

paym

ent i

s m

ade

to

the

bene

ficia

ry.

• Ab

le to

obt

ain

a

lo

wer

pur

chas

e

pr

ice

of th

e go

ods

and

long

er

paym

ent t

erm

s, a

s

th

e LC

pro

vide

s an

indi

catio

n of

pa

ymen

t

as

sura

nce,

from

the

selle

rs’ p

ersp

ectiv

e.

• D

ocum

ents

pr

esen

ted

will

be

ex

amin

ed b

y tra

de

fin

anci

ng s

peci

alis

ts.

• D

o no

t hav

e to

com

mun

icat

e w

ith

th

e fo

reig

n se

ller s

o

of

ten

sinc

e th

e

w

hole

tran

sact

ion

will

be ro

uted

th

roug

h an

d

hand

led

by th

e

fin

anci

al in

stitu

tion.

Inte

rnat

iona

l Tra

de F

inan

cing

Fac

ilitie

s


114


Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

114

Ban

ker’s

A

ccep

tanc

e (B

A)

Fina

ncin

g of

a b

ona

fide

trade

i.e.

exp

ort.

impo

rt or

dom

estic

trad

e tra

nsac

tion.

• A

draf

t (Bi

ll of

Exch

ange

) dra

wn

by c

usto

mer

s to

thei

r ord

er, p

ayab

le

on

a s

peci

fic fu

tura

date

and

acc

epte

d

by

the

finan

cial

inst

itutio

n fo

r the

purp

ose

of

finan

cing

a b

ona

fide

trade

. •

The

min

imum

amou

nt o

f fin

anci

ng

is

RM

50,0

00 a

nd

in

mul

tiple

s of

RM

1,00

0 (b

unch

ing

is al

low

ed).

• Pr

ovid

es c

ash

flow

befo

re p

roce

eds

for

sa

le o

f goo

ds o

n

cr

edit

can

be

colle

cted

, or t

o

fin

ance

pur

chas

es

of

raw

mat

eria

ls fo

r

prod

uctio

n.

• C

an a

lway

s be

sol

d

at

the

prev

ailin

g

m

arke

t rat

e sh

ould

the

cust

omer

nee

d

im

med

iate

fund

s.

• Pr

ovid

es tw

o-w

ay

fin

anci

ng a

s BA

finan

cing

is

appl

icab

le fo

r sal

es

an

d pu

rcha

ses.

• En

able

s th

e

cust

omer

to ta

ke

deliv

ery

of th

e

go

ods

with

out

payi

ng fo

r it

imm

edia

tely

. •

Able

to e

ase

ca

shflo

w.

Trus

t Rec

eipt

s (T

R)

Exte

nds

cred

it fa

cility

on

bills

dra

wn

unde

r the

fin

anci

al. i

nstit

utio

n’s

own

LC. A

s su

ch, c

usto

mer

sdo

not

hav

e to

mak

e im

med

iate

pay

men

tson

the

LCs.

A fin

anci

ng fa

cility

th

at e

nabl

es a

cu

stom

er to

acc

ept

deliv

ery

of th

eir

loca

l/for

eign

pu

rcha

ses

prio

r to

paym

ent o

f the

sig

ht

bills

bei

ng m

ade

by

them

.

• En

able

s th

e

cust

omer

to p

ay th

e

se

ller p

rom

ptly


115


Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

115

Fore

ign

Exch

ange

C

ontra

cts

(FEC

)Th

e bu

ying

and

se

lling

of fo

reig

n ex

chan

ge o

n a

spot

or

forw

ard

basi

s, in

re

spec

t of f

orei

gn

proc

eeds

or

paym

ents

to b

e m

ade

at s

ight

or a

t a fu

ture

de

term

inab

le d

ate.

Gen

eral

ly fo

r bu

sine

sses

, with

the

follo

win

g fe

atur

es:

• R

egul

arly

impo

rting

or e

xpor

ting

in

fo

reig

n cu

rrenc

ies

of a

siz

eabl

e le

vel.

• W

ith c

redi

t sta

ndin

g

th

at is

acc

epta

ble

to

the

finan

cial

inst

itutio

n.

• C

usto

mer

s ar

e

ab

le to

fit t

heir

exch

ange

rate

s fo

r

purp

ose

of

cost

ing/

hedg

ing.

•

No

furth

er

expo

sure

to

exch

ange

risk

fluct

uatio

ns

espe

cial

ly in

vol

atile

mar

kets

or

cond

itions

.

Bill

s of

Exc

hang

e Pu

rcha

sed

(BEP

)As

a m

eans

of w

orki

ng

capi

tal f

inan

cing

for

expo

rters

.

A fa

cility

pro

vide

d by

th

e fin

anci

al

inst

itutio

n fo

r ex

porte

rs, w

here

by

the

finan

cial

in

stitu

tion

may

pu

rcha

se c

usto

mer

s’ou

twar

d bi

lls fo

r co

llect

ion

and

the

cust

omer

s’ a

ccou

nt is

cr

edite

d im

med

iate

ly

with

the

proc

eeds

.

• Ab

le to

obt

ain

imm

edia

te fu

nds

upon

pre

sent

atio

n

of

nec

essa

ry

docu

men

ts.

• Ab

le to

impr

ove

cash

flow

of t

he

bu

sine

ss s

ince

SM

Es c

an o

btai

n

im

med

iate

fund

s

fro

m th

e fin

anci

al

in

stitu

tion.


116


Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

116

Expo

rt Cr

edit

Fina

ncin

g (E

CR

)Ch

eap

sour

ce o

f fin

ancin

g ex

ports

.•

Adm

inis

tere

d by

the

EXIM

Ban

k.•

2 ty

pes

of fa

ciliti

es

av

aila

ble:

i.

Pre

-shi

pmen

t

A

mou

nt o

f

fin

anci

ng c

an b

e

cal

cula

ted

usin

g

2

met

hods

:

O

rder

Bas

e

8

0% o

f val

ue o

f

exp

ort o

rder

or

sal

es c

ontra

ct

rou

nded

to th

e

nea

rest

tho

usan

d.

C

ertif

icat

e of

P

erfo

rman

ce

(C

P)

Elig

ible

am

ount

s

peci

fied

in th

e

CP.

ii.

Pos

t-shi

pmen

t

A

mou

nt o

f

fin

anci

ng c

an b

e

up

to 1

00%

of

the

exp

ort b

ill,

rou

nded

to th

e

nea

rest

• C

omm

only

use

d by

expo

rters

with

the

follo

win

g cr

iteria

:

i. E

xpor

ting

pro

duct

s w

ith a

v

alue

add

ed o

f

a

t lea

st 2

0%

and

use

s a

m

inim

um o

f 30%

d

omes

tic ra

w

mat

eria

ls/in

put

con

tent

(a

t

oler

ance

allo

wan

ce o

f 2%

i

s pe

rmitt

ed) a

nd

not

in th

e

n

egat

ive

list a

s

pro

vide

d by

B

ank

Neg

ara

M

alay

sia.

ii.

Dire

ct e

xpor

ter

mus

t hav

e

e

xpor

ted

at le

ast

RM

3 m

illion

of

elig

ible

goo

ds

per

ann

um in

the

l

ast f

inan

cial

y

ear a

nd R

M3

m

illion

in th

e


117


Prod

uct

Usa

geFe

atur

esB

enef

its

Fina

ncia

l Gui

de fo

r S

ME

s

117

tho

usan

d.

pre

cedi

ng 1

2

mon

ths.

•

For a

gric

ultu

ral

pr

oduc

ts, t

he

amou

nt is

a

min

imum

of R

M1

milli

on in

the

last

finan

cial

yea

r and

prec

edin

g 12

m

onth

s.


118



119


Many people in business over estimate how much a banker knows about

their business or industry, and due to past actions

by some banks, they also can feel somewhat

intimidated. However, if you take the time to

educate your banker, they can be an asset to your

business

Section IV : Managing LendersBankers and other lenders are generally very good at providing assistance when you are looking for fi nance. However, you should remember that many have not run, or been involved in a business. While they may have some industry knowledge, they are notbusiness owners. So if you are seeking debt fi nance for your business, you need to educate a potential lender about your business and the industry you are in (in order to help them make a decision on whether to lend to you and to help you decide whether you want to borrow from them).

If you take the time to discuss the key drivers of your business - how sales are generated and how you manage your business on a day-to-day basis - your banker or alternative lender will be in a better position to meet your needs and to act as an advocate on your behalf when you are applying for loans and other services offered.

Do shop around. You are also trying to fi nd a lender that can fulfi ll your needs. By developing a solid relationship with your lender, you will benefi t from the support that they will provide to your business. Lenders and bankers can be great sounding boards for new business ideas, and provide insight into what is happening in your industry, as they will most likely have other customers that are servicing your industry, region etc.


120


Chapter 10Applying For a Loan


121


The key to a successful loan application lies in the provision of all the required information. By providing the relevant information in your application, you can ensure that the lender will have something tangible to review and pass on to the credit manager and other key decision makers. In most cases, the loan offi cer processes the application and makes recommendations to the credit manager or loan committee.

The most important thing that you have to consider when preparing for a loan application is the requirements of the lender. Some lenders would require that you submit your loan application by completing a loan application form together with the supporting documents, while some may require that you prepare a detailed proposal to demonstrate your thoughts and ideas in writing and later support them with the necessary fi nancial information. This Chapter will discuss in detail the two loan application methods, followed by some tips on presentation of the loan application.

The PARTNER initiative is implemented in phases. Phase 1 of PARTNER focuses on streamlining and simplifying processes and procedures of applications for an SME loan. For this purpose, PARTNER has designed a simple loan application form that can be used in the event the bank that you wish to approach does not have its own. The form is designed to enable the bank to get to know you and is divided into seven main sections as follows:

Preparing for a Loan Application

Most of the commercial banks already have their own application form which can be obtained from their branches or downloaded from their web-sites. In an effort to enhance banking effi ciency and customer services for SMEs, the Association of Banks in Malaysia (ABM) in collaboration with its members, launched the PARTNER initiative in November 2010.

Loan Application Form

Applying For a Loan


122


•

•

•

•

•

•

•

Background Information – basic information about your business or you

Additional Information – contact information of your business or you

Facilities Required – type of facility or facilities you wish to apply for

Credit Facilities with other fi nancial institutions – information of existing credit facility or facilities which your business or you may have with other fi nancial institutions

Supporting Documents – checklist of documents and/or information to be submitted with the loan application

Start-Up – in the event your business has yet to commence or has commenced for less than 12 months, please indicate the documents and/or information that cannot be provided in the application by crossing them out from the checklist

Declaration – sign and confi rm that all information provided is true, correct and complete

Phase 2 of PARTNER will further refi ne or pursue other areas of improvement to the SME loan application process.


123


(please use the Bank's own application form if there is one)

Date :

APPLICATION FORM

SME FINANCING

BACKGROUND INFORMATION

Name and Address of * Sole Proprietorship / Individual / Partnership / Corporation (or attach business card)

* Please circle whichever is applicable

Size of Business (tick where applicable)muideMllamS orciM

For Primary Agriculture and Services Sector (including ICT)(Less than 5 employees or annual sales (Between 5 & 19 employees or annual sales turnover of less than RM200,000) turnover of between RM200,000 & less than RM1million)

For Manufacturing (including Agro-Based) and Manufacturing Related Services (MRS)(Less than 5 employees or annual sales (Between 5 & 50 employees or annual sales turnover of less than RM250,000) turnover of between RM250,000 & less than RM10million)

esimerP ssenisuBssenisuB fo erutaN (tick where applicable)Rented Owned

Year of Commencement of Business Number of Employees

ADDITIONAL INFORMATION

Contact Person : Name and Designation Telephone No / Fax No

liam-EoN enohpdnaH

FACILITIES REQUIRED

OverdraftTerm Loan (e.g. to finance purchase of factory, shoplots, etc)Trade Finance (please give details, e.g. Letter of Credit, Bills Negotiation, Trust Receipt, etc)Export Credit Insurance Trade FacilitiesForeign Exchange (Spot and Forward Contracts)Others (please specify)

Please state the purpose of applying for the loan

CREDIT FACILITIES WITH OTHER FINANCIAL INSTITUTION(S) (please use a continuation sheet if necessary)

DECLARATION

Business Registration No / Certificate of Incorporation No

Amount (RM) Collateral to Offer (if any)

Name of Financial Institution(s)

START-UP

Type of Facility(ies) Loan Amount (RM)

SUPPORTING DOCUMENTS

Type

I / We hereby confirm that all information and supporting documents provided herein are true, correct and complete.I / We hereby give you my / our expressed consent to conduct any checking on my / our credit standing / financial status with any person /institutions/agencies that you may deem necessary including CCRIS, CTOS, SME/Central Credit Bureau. I / We hereby agree the information relating to the facility may be forwarded by you to Central Credit Bureau and / or any other agencies / third party who may be entering into respective transactions with me / us.

Authorised Signatory (Name & Position)NRIC No / Company Chop

In the event of a start-up (where the business has yet to commence or business has commenced for less than 12 months),please indicate which standard documents cannot be submitted by crossing them out from the checklist itself.

For us to better consider your application, please provide the relevant documents.

a)b)

c)

(Between 20 & 50 employees or annual salesturnover of between RM1 million & RM5 million)

(Between 51 & 150 employees or annual salesturnover of between RM10 million & RM25 million)


124


There are two sets of checklist under PARTNER. The fi rst details the general types of documents or information required to be submitted with the application and the second sets out the more specifi c documents or information required for various kinds of facilities. The checklist is further detailed to cater for different forms of business establishments which include Sole Proprietorship or Partnership or Individual and Private Limited Company or Sdn Bhd. In this way, you can better anticipate supporting documents or information to be furnished for the purpose of a loan application and re-use the same if necessary. However, the checklists are not exhaustive as certain banks may have reasons to ask for more or other documents or information.

Certifi ed true copy of the business registration (Form A - sole proprietorship or Form B - partnership) and business license (Form D)

Copy of partnership deed (where available)

Photocopy of NRIC of proprietors (passport if foreigners)

Photocopy of NRIC of partners (passport if foreigners)

Photocopy of NRIC of the guarantors (third party), where applicable

Personal information of relevant persons* in the business or otherwise (i.e. information relating to net worth and fi nancial exposure) and evidence of income e.g. Form J / Form EA for the past 2 years

Profi le of company and key management

Information on other businesses (if any)

1.

2.

3.

4.

5.

1.

6.

7.

Section 1

Section 2

Company and Related Persons’ Background Information

Financial and Credit Information

Type of Documents

Sole Proprietorship / Partnership / Individual

(i) Standard / Common Documents - generally required by the banks to be submitted in a SME loan applicationThe list is not exhaustive. Banks may require applicants to submit additional documents on a case-to-case basis.


125


Audited accounts for the last 3 years (last audited period should not be more than 18 months from application date), where applicable

2.

Type of Documents

Management accounts for the last 3 years

Current debtors and creditors aging report (including information relating to credit limit and terms)

List of top 10 suppliers / purchasers

List of major competitors (where applicable)

Bank statements for the last 6 months (or more than 6 months at the discretion of the bank)

A list of facilities and securities arrangement from other fi nancial institutions

3.

1.

2.

3.

4.

5.

Section 3 Supplier / Competitor / Customer Information

* Refers to Sole Proprietor / Partners / Guarantors (whichever shall be applicable)


126


Relevant permits / licenses

Projected cash fl ow for the next 3 years (where applicable)

Product brochures (where required)

1.

2.

3.

4.

1.

2.

3.

2.

1.

Section 1 Additional Business and Financial Information

Section 2 Supporting Information for Guarantees

Section 3 Supporting Information for Property Financing

Type of Documents

(ii) Additional documents that may be required by banks to support the application The list is not exhaustive. Banks may require applicants to submit additional documents on a case-to-case basis.

For loans from the Credit Guarantee Corporation (CGC) - copy of CGC application form

If guaranteed by individual guarantors - supporting documents of the individual guarantor such as photocopy of guarantor’s NRIC, photocopy of guarantor’s evidence of income (Form J ) for last 2 years, photocopy of the monthly salary slips for last 3 months and statement of accounts with other fi nancial institutions for past 6 months

If guaranteed by corporate guarantors - supporting documents of the corporate guarantor such as profi le of company, profi le of directors, key management personnel and all other relevant persons*, business registration, Form 24 (Return on Allotment of Shares) and Form 49 (Return of Particulars of Directors), audited and / or management accounts for the last 2 years

Relevant tax returns and tax receipts of proprietors, partners and guarantors etc.

Copy of insurance policy (where required)

Copy of Sale and Purchase Agreement (SPA) or copy of booking receipt (if SPA is not available), copy of valuation report, copy of title deed and Power of Attorney (where applicable). A copy of location map and photos of the property may be required (for cases pending formal valuation report)


127


Copy of latest quit rent and assessment (where required)3.

Tenancy Agreements (where applicable) 4.

Type of Documents

Section 4 Supporting Information for Equipment / Machinery Financing

Section 5 Supporting Information for Refi nancing / Redemption

Section 6 Supporting Information for Project / Construction / Bridging Financing

List and description of fi xed assets and details on the equipment / machinery to be fi nanced

1.

To furnish copy of Letter Offer from existing Banker refl ecting details such as loan type / amount / securities / pricing / terms and conditions etc) and loan statements (if TL) and account statements (if OD)

Copy of letter of awards / contract / dealership agreements / invoices / purchase orders

Copy of Project Paper, Joint Venture Agreement, Technical Assistance Agreement or Management Agreement (where applicable)

Documentary Evidence / Confi rmation on Settlement of Debt (for applicants with adverse CCRIS, CTOS & DCHEQ record)

For applications from developer or contractor - list of completed, on-going projects and projects tendered

Relevant accreditations or certifi cations e.g CIDB, PKK, ISO etc (where applicable)

Copy of construction costs / quotations from 2 contractors for comparison

For construction / bridging loans - copy of approvals from relevant authorities on building / layout plan, licences etc (where available)

For Bridging Loan - Feasibility Report (where applicable), project costing and location map. To provide projected cashfl ow for duration of the project/contract

1.

1.

2.

3.

4.

5.

6.

7.

8.


128


A list of on-going projects with details like contract value, percentage of completion, remaining of work to be done (contract sum) etc. To provide projected cash fl ow for duration of the project/contract

1.

Type of Documents

Section 7 Supporting Information for Contract Financing

* Refers to Directors / Shareholders (whichever shall be applicable)

Private Limited Company or Sdn Bhd

Certifi ed true copy of the Certifi cate of Incorporation

Certifi ed true copy of Memorandum and Article of Association

Photocopy of NRIC of directors (passport if foreigners)

Copy of Form 24 (Return on Allotment of Shares) and Form 49 (Return of Particulars of Directors)

Profi le of company and key management and company organization chart (where required)

Information on subsidiary / parent company(ies) (where applicable)

Personal information of relevant persons* in the company (i.e. information relating to net worth and fi nancial exposure) and evidence of income e.g. Form J / Form EA for the past 2 years

Audited accounts for the last 3 years (last audited period should not be more than 18 months from application date)

Photocopy of NRIC of the guarantors (third party), where applicable

1.

2.

4.

3.

6.

7.

1.

2.

5.

Section 1 Company and Related Persons’ Background Information

Section 2 Financial and Credit Information

Type of Documents

(i) Standard / Common Documents - generally required by the banks to be submitted in a SME loan applicationThe list is not exhaustive. Banks may require applicants to submit additional documents on a case-to-case basis.

Management accounts (for period between last audited period up to current)

3.


129


List of major competitors (where applicable)3.

Section 3 Supplier / Competitor / Customer Information

Type of Documents

Bank Statements for the last 6 months (or more than 6 months at the discretion of the bank)

A list of facilities and securities arrangement from other fi nancial institutions

4.

5.

Current Debtors and Creditors Aging Report (including information relating to credit limit and terms)

List of top 10 suppliers / purchasers

1.

2.

Projected cash fl ow for the next 3 years

Relevant tax returns and tax receipts of directors, guarantors etc.

Product brochures (where required)

For loans from the Credit Guarantee Corporation (CGC) - copy of CGC application form

Market / industry profi le (where required)

If guaranteed by individual guarantors - supporting documents of the individual guarantor such as photocopy of guarantor’s NRIC , photocopy of guarantor’s evidence of income (Form J ) for last 2 years, photocopy of the monthly salary slips for last 3 months and statement of accounts with other fi nancial institutions for past 6 months

1.

2.

3.

4.

5.

1.

Section 1 Additional Business and Financial Information

Section 2 Supporting Information for Guarantees

Type of Documents

(ii) Additional documents that may be required by banks to support the application The list is not exhaustive. Banks may require applicants to submit additional documents on a case-to-case basis.

* Refers to Directors / Shareholders / Guarantors (whichever shall be applicable)


130


If guaranteed by corporate guarantors - supporting documents of the corporate guarantor such as profi le of company, profi le of directors, key management personnel and all other relevant persons*, business registration, Form 24 (Return on Allotment of Shares) and Form 49 (Return of Particulars of Directors), audited and / or management accounts for the last 3 years

Directors’ Resolution for proposed facility or where applicable, Shareholders’ Resolution for third party corporate guarantors / third party chargors (may be required only upon loan approval for more complex cases)

Copy of Sale and Purchase Agreement (SPA) or Copy of Booking Receipt (if SPA is not available), copy of valuation report, copy of title deed and Power of Attorney (where applicable). A copy of location map and photos of the property may be required (for cases pending formal valuation report)

Copy of insurance policy (where required)

Copy of latest quit rent and assessment (where required)

Tenancy Agreements (where applicable)

List and description of fi xed assets and details on the equipment / machinery to be fi nanced

Copy of letter of awards / contract / dealership agreements / invoices / purchase orders

Copy of Project Paper, Joint Venture Agreement, Technical Assistance Agreement or Management Agreement (where applicable)

To furnish copy of Letter Offer from existing Banker refl ecting details such as loan type / amount / securities / pricing / terms and conditions etc) and loan statements (if TL) and account statements (if OD)

2.

3.

1.

2.

3.

4.

1.

1.

2.

1.

Section 3 Supporting Information for Property Financing

Section 4 Supporting Information for Equipment / Machinery Financing

Section 5 Supporting Information for Refi nancing / Redemption

Section 6 Supporting Information for Project / Construction / Bridging Financing

Type of Documents


131


As part of the initiative, ABM and its members have also prepared a timeline which shows you the stages involved in the processing of a straight forward loan application by a bank and the time to be expected. A straight forward loan application refers to one which is for a clean or unsecured loan, not subject to consent from authorities, any third party or any other particular conditions precedent, for which specifi c approval requiring time has to be obtained. Last but not least, PARTNER has also included a comprehensive list of SME contact points of the banks for ease of reference. For more details, please refer to www.abm.org.my or their toll-free hotline ABMConnect at 1-300-88-9980 from 9:00 am to 5:30 pm, Mondays to Fridays.

Documentary Evidence / Confi rmation on Settlement of Debt (for applicants with adverse CCRIS, CTOS & DCHEQ record)

For applications from developer or contractor - list of completed, on-going projects and projects tendered

Relevant accreditations or certifi cations eg CIDB,PKK,ISO etc (where applicable)

Copy of construction costs/quotations from 2 contractors for comparison

For construction/bridging loans- copy of approvals from relevant authorities on building/layout plan, licences etc (where available)

For Bridging Loan - Feasibility Report (where applicable), project costing and location map. To provide projected cashfl ow for duration of the project/contract

A list of on-going projects with details like contract value, percentage of completion, remaining of work to be done (contract sum) etc. To provide projected cashfl ow for duration of the project/contract

3.

4.

5.

6.

7.

8.

1.

Section 7 Supporting Information for Contract Financing

Type of Documents

* Refers to Directors / Shareholders (whichever shall be applicable)


132


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133


The objective of preparing a loan application proposal is to show the lender that providing you with a business loan is a worthwhile proposition. To increase your chances of success, the loan application package should be comprehensive and easy to review. A template for loan application proposal is as shown below:

Loan Application Proposal

Template for Loan Application Proposal

1. Summary of application information (often called an Executive Summary)

2. Short written information on: a. Company History; b. Industry information; dan c. Ownership details / Management Team / Experience

3. Details of the loan required

4. Forecast fi nancial information

5. Forecast assumptions including any independent information to support assumptions and any alternative plans that can be implemented if events do not go according to plan (Refer to Chapter 3)

6. Details of any sensitivity outcomes and/or comments on fi nancial ratio analysis of forecasts and budgets (Refer to Chapter 2)

7. Personal information

8. Historical fi nancial information

9. Financiers loan application forms

10. Other information required in the fi nancial checklist


134


Details of the Loan Required

The potential lender will need to review why you are applying for a loan. You would have identified the amount of the loan when preparing your cash flow forecasts and now you need to provide a detailed description of the loan required. The application should contain all the information on the funding required and should include the following:

• Purpose of the loan;

• Amount of the loan required;

• Duration of the loan;

• The method that the loan will be serviced; and

• The security that is available to support the loan.

Each of these points will be discussed in detail in below.

A detailed description of why the loan is required should be included in the application as it is very important to a potential lender. Most lenders will not be willing to provide a loan to assist in funding operating losses or for purchase of luxury assets for the business owner. The purpose should be set out simply and clearly. This may include:

•

•

•

•

•

•

•

Funding capital expenditure such as plant, equipment, vehicles, property and renovations;

Increased working capital resulting from growth or to support increased inventory holding;

Replacement of existing equity with debt;

Succession planning to provide an exit strategy for family members;

Acquisition of another business or part of business;

Research and development or commercialisation stage; and

Expanding distribution or developing new markets.

The Purpose of the Loan


135


Example of Statement of PurposeAs a result of a new sales agreement with XYZ, our business will require an increase in stock purchases to fulfi l the contract requirements. The funding will support this business growth through the purchase of additional stock. This contract will increase annual revenue by a minimum of 20%.

If the loan is to be used to purchase an asset (i.e. equipment or property), or for a contracted service, then provide the lender with all the important documentation that you have gathered relating to the purchase. The important documents should include any agreement or contract to be signed, quotations for the asset or service, any specifi c requirements for the installation of the asset or provision of the service etc.

It is imperative to link the purpose of the loan to the overall business benefi ts that will be achieved as a result of the additional funding. It is also important at this point to state when the funds will be required. We often underestimate how long it will take the bank or lender to process the loan application and this can have an adverse effect on the business if the funds are not available when required. Make sure you submit your application with plenty of time for the assessment to take place.

The amount of funds required will be determined from your planning. Whether you are starting up a business, or funding an existing business, the planning stage will be the same. In a start-up scenario, the planning will be undertaken as part of the initial business planning process. For an existing business, a new business plan should also be prepared. It is good fi nancial practice to revisit your business plan when key elements of your business change.

In order to determine the total amount of funds required, you will need to prepare a cash fl ow forecast. This forecast must be prepared as if the loan has been successful and should cover the expected duration of the loan. All of these details are covered in Chapter 6.

The Amount of the Loan


136


It is important to remember that there will be a number of costs that you will have to pay when the lender provides the loan. Some of these costs will have to be paid at the time the loan is made available; other costs will be incurred over the loan period. Make sure these costs are included in your cashfl ow forecast to ensure that you would have adequate funds to cover all costs. Upfront costs may include establishment fee, guarantee fee, legal fee or valuation fee while ongoing fee may include half-yearly loan charges, interest, transaction fee or default fee.

When determining the amount of funds you would like to apply for, you should also consider including a ”buffer” amount, in addition to the costs associated with the loan funds. This is an amount above what your plan shows as the minimum amount required to fi nance your activities. Generally speaking, it is not possible to forecast all events. A buffer will allow for any unexpected expenses or lower than expected income that is earned over the period of the loan. You will need to make an assessment of an adequate ‘buffer’ amount. Discuss this with the lender, as they may be able to assist in determining the level of contingency required.

Term of the LoanThrough your planning, it will become obvious how long you will need the funds. A cash fl ow forecast shows the movement of cash in and out of the business, and indicates when the business will be in a position to repay the funds. Another important factor in determining the term of the loan is the type of loan that you may be seeking. Some types of debt fi nance have a maximum term available. For example, where funds are required to purchase an asset, a lease may be the most appropriate debt product and the lease company may only provide lease funds over a maximum of fi ve years. So again, the cashfl ow forecast will assist in determining what types of fi nance products you can consider.

Servicing the LoanThe most important element of the loan application is to show the lender that the business has suffi cient cash fl ow to make the regular loan repayment, including all the associated costs of the loan, over the loan period, and ultimately repay theloan. This will entail having a good understanding of your fi nancial statements, most importantly the cash fl ow forecast. You must be in a position to make a strong justifi cation to the lender on how the forecast cash fl ow will adequately support the repayment obligations of the loan within the allocated time frame. Reviewing the fi nancial ratios on your forecasted profi t and loss and balance


137


Forecast Financial InformationA lender will pay particular attention to the budget and forecasts, as these will show how your business will operate during the period of the loan. It is therefore important to know how to prepare these forecasts in line with your lender’s expectations. By preparing both a cash fl ow forecast and profi t and loss budget, you will have suffi cient information to prepare a balance sheet budget. Remember, a balance sheet is fi nancial information ”at a point in time”; therefore, it has less importance to a potential lender when they are reviewing forecasts. This is because they are using the forecast information as a guide to “the continuing” operations of the business, rather than ”at a point in time.”

Security for the LoanFor most types of loans, lenders will require security (also known as “collateral”) over the loan. As part of your preparation, make sure you identify what security you are prepared to offer a lender. Appropriate security provides the lender with some comfort that in the event the business is not able to repay the loan funds borrowed, they can liquidate the security items to repay the outstanding funds.

For a successful loan application, it is important that the security offered matches both the type of loan being made and the lender’s perception of the risk associated with the loan application. For example, where the loan is for a medium term of three years, inventory or customer receivables will not be acceptable as they are short-term assets. The lender will be looking for security that has value that exceeds the duration of the loan. Therefore, more appropriate security would be equipment or property that has a valuation in excess of the loan over a lifespan of more than three years.

It is recommended that you identify and provide details to the lender of the security available, as part of your loan application. This way, you will be able to present your preferred security prior to the lender nominating his or her preferred security.

sheet will also provide information on the expected profi tability and fi nancial health of your future business operations.


138


Cash Flow ForecastA cash fl ow forecast is probably the most important information for the lender. It will provide the necessary detail to a potential fi nancier on the cash available to pay back the loan (refer to Chapter 6 for information on how to prepare a cash fl ow forecast).

Profi t and Loss BudgetA profi t and loss budget will indicate to the potential lender whether the new business plan is profi table (refer to Chapter 3 on how to prepare a profi t and loss budget).

Personal InformationAlthough lenders are in the business of lending funds to businesses, they like to make sure that the funds will be repaid. One of the most important indicators for them will be your own personal spending habit, which will show them how you manage your own fi nances, and will be particularly important when the business loan application is for a business start-up, where history of the business pattern has not yet been established.

When you are applying for a loan, it is most likely the lender will undertake a personal credit check and the authorisation to do so is usually included in your application form. A clear report would indicate that you have not, in the past, defaulted on any payment obligations and this will impact positively on your business application. Therefore, maintaining a sound personal credit record or rating is very important. Paying your credit cards and personal loans on time will be considered favourably by a lender, as it helps to prove that you are able to meet your future debt obligations on time.

The types of personal information the lender will be looking for can include:

•

•

Personal assets - purchase price and date, independent valuation if available, ownership documents (i.e. mortgage or leasing agreements) and, for any policies, the most recent policy statements;

Tax returns - you may be required to supply supporting documentation to the tax schedules such as proof of income from investments etc; and

• Personal bank details - all statements issued from the bank or fi nancial institution. For bank loans, include the original loan agreement as well as the statements.


139


To gain an understanding of your personal position, the lender will usually require the key fi nancial information for the past three years. This is to ensure any unusual circumstances are ”averaged” over the period.

The most important asset of a business are the experience of the owners, the potential value of prospective customers and other non-fi nancial items. It is for this reason that some banks may require that you make a presentation to the loan approval committee. The committee will be looking at your confi dence, management style and capacity to understand fi nancial and other risks associated with your business. In doing so, you will be able to present yourself, your business and your fi nancial needs in a manner that will convey a message of confi dence and capability to the lender. This may well be the fi rst step in developing an ongoing relationship that will foster the growth of your business in the future.

To ensure that your presentation is successful, establish the expectations of the lender before you meet with him or her. This can be done by looking at the website of the fi nancial institution or by contacting the institution and askingfor a checklist of the information that will be required. In addition to the loanapplication package, be prepared to discuss certain aspects of your business,competitors and industry. Be prepared for the lender to look at relevant fi nancial

HINT

Make sure you understand all the fi nancial information

that has been prepared and is being presented

Historical Business Information

Presentation of the Loan Application

For existing businesses, the lender would want to review historical fi nancial information. Typically, they would want at least three years’ business records to give an indication of the business operations. The fi nancial information they require will be the statements outlined in Chapter 1- balance sheet, income statement and cash fl ow statements. Ideally, this information should be either prepared and or reviewed by an accountant. This will give comfort to the lender that all the information contained in the statements is accurate, complete and correct. In addition to the fi nancial statements, the lender would also most likely want to check the historical operating data of the business. This will provide an overview of the way the business is managed and some insight into the character of the owner. Such information may include annual tax returns, current accounts receivable and payable schedules (debtors and creditors lists), bank statements for all bank accounts and loans for the past three years or details of any other type of fi nancing such as leasing or hire purchase.


140


ratios. Make sure these ratios on your forecasts are within the acceptable levels and that you understand what the ratios mean. Furthermore, a good presentation will include discussion on the sensitivity of the ability to repay the loan. This means you know where the risks in the forecast may be, and have thought about potential fallback plans in the event the activities do not go according to the plan.

Be confi dent when you present your loan application. Dress for success. If you have forgotten something, don’t get fl ustered. Explain to the lender that you have forgotten the item and that you will deliver it later that day or the following day. The same goes for any additional information that the lender may request that you have not included in your application.

TIPWhen applying for a loan, always meet your banker in person to discuss

the application

Accountants and business advisers can assist in preparing a loan application. They are well versed in translating your future ideas into fi nancial forecasts and to emphasise the potential areas the lender will focus on. You may even want to practise your presentation with them. However, it is important to remember that the fi nancier will be looking at your ability to manage the future growth of your business, so you must ensure that you fully understand the information you present.

If your loan application is denied, fi nd out as much as you can about why it was not successful. This will assist you in any future loan applications that you may consider. Above all, remember that the lender is in the business of providing loans, and therefore will be looking for future business. Often loan applications fail not because the business is too high a risk, but more likely because the loan application was poorly prepared, indicating a lack of understanding, which sends immediate warning signals to the lender.

For more information on applying for a loan for your business, you can refer to the respective web sites of potential lenders or www.bankinginfo.com.

Conclusion

The Role of Advisers


141



142


Chapter 11Refi nancing Your Debt


143


Often SMEs have the same banking

facilities years after they have

started. A review of existing facilities may

highlight that the current facilities

and structure need to be changed to

meet the change in business operations

HINTRefi nancing can involve a number of alternatives. To achieve the best outcome, ensure that you understand all the alternatives before

committing to a new lender

Refi nancing Your Debt For many SMEs, the initial financing arrangements put in place at start-up still remain in place for many years later. For example, a business starts off with a simple overdraft facility and just arranges for several modest increases in the facility without considering the cost–benefi t of the fac i l i ty or the su i tab i l i ty o f the debt arrangements to its needs.

SME owners are encouraged to review existing debt fi nance arrangements on a regular basis to ensure that the fi nance facility and structure fi t the current needs of the business. You may fi nd that there is a strong case for refi nancing the business. This process should not be undertaken lightly, as there are many pitfalls in changing lenders, all of which should be considered as part of your review.

Refi nancing your debt fi nance may involve:

• Changing lending institutions (but retaining the same debt products);

• Funding the business from different debt products (with the same or a different lender);

• Combining debt into a single facility or product;

• Increasing or decreasing the total amount of the borrowing as part of the refi nancing;

• Changing the repayment amount or timing; and

• Increasing or decreasing the security offered to the lender.


144


Refi nancing involves taking a new debt facility where the new funds are used to pay out your old debt facility. This is all done by the new lender. If the refi nancing involves an increase in debt, then additional funds would be available to draw on.

The key reasons why you choose to refi nance may include:

• Gaining a better interest rate from a different lender or from a different mix of debt products;

• Switching to fi xed rates or back to variable rates;

• Gaining more fl exible features in a facility to meet your business needs;

• Increasing your overall borrowing with a new debt facility;

• Changing the fi nancial cash fl ow commitment required to fund debt (e.g. fully drawn advance to an overdraft);

• Consolidating debts to minimise and simplify repayments; and

• Releasing security over personal / specifi c assets as the business reaches a level of continued profi tability.

How Refi nancing Works?

TIPMake a list of the reasons why you might consider refi nancing your loan to

compare against the loan offer you receive


145


HINT

After carefully undertaking a cost–benefi t evaluation of refi nancing, you may fi nd it brings a range of

new opportunities to your business

Benefi ts of Refi nancing

Many benefi ts may be gained from refi nancing. Some of these are outlined below.

A new perspective based on your current position and not the past

You may fi nd that a ”fresh start” with a new lender may not carry any of the long-term pre-conceptions which your previous lender may be infl uenced by. These may have included a poor trading period in earlier years or a particular experience they have had with another customer in your industry, which has infl uenced their lending decision-making against your interests.

Refi nancing may also result in increasing the funds available for business growth. You should ensure that, in taking on additional debt, you can still service the higher debt commitment and that these funds are utilised to achieve a higher return for the business.

There is often an opportunity to combine a number of ad-hoc debt fi nance arrangements into a single product to simplify repayments and to potentially reduce your monthly cash fl ow repayment.

Refi nancing may also provide the opportunity for a change in the security being offered to the new lender. You may fi nd that, over time, the value of security offered to the existing lender has increased at a far greater rate than the level of borrowing. When you negotiate your refi nancing, review what is a reasonable offer of security assets.

Access to increase in debt fi nance

Consolidation of debt funding – cash fl ow savings

Restructuring security offering

Refi nancing a strong healthy business may also indicate that there is an opportunity to separate your personal assets from security offered if the value of the business assets (i.e. commercial land and building, debtors,

fi xed assets etc.) is suffi cient to cover the borrowing

TIP


146


Common Dangers in Refi nancingHINT

Ensure that you have undertaken suffi cient review of your circumstances prior to making any commitments for refi nancing, as there are

many pitfalls that may impact any perceived

benefi t

When considering refi nancing, make sure you understand all the implications before changing your facilities.

Your existing facility may have an “early repayment penalty” clause, which could outweigh any future interest savings.

What is the cost of paying out your existing debt facility?

Changing to a new lender (as opposed to a new product with the same lender) will require additional costs such as application, documentation, valuation (to value your security assets), mortgage fees, stamp duty on a new mortgage and settlement fees. If your new lender is keen to get your business, you may be able to negotiate a waiver of some of the bank’s internal costs as part of the package.

When you are refi nancing, you need to be aware of how your existing fi nancing is linked to your security assets. For example, your existing bank may provide an overdraft facility, using security over your residential property, as well as an EFTPOS or credit card facility and access to an automated payroll system to transfer funds into employee bank accounts. If you change your debt facilities to a lender that does not have retail facilities such as EFTPOS and credit card processing, you may fi nd that you need additional security to guarantee these facilities.

What will be the ingoing costs of the new fi nance facility?

Impact of security assets used to support multiple borrowings

interest savings. Other exit fees may include discharge of mortgage costs if property is involved as security. Deferred establishment fees may apply.


147


Before you commit to a change of lender or product, you need to ensure that you have a fi rm letter of offer in place and not one that is subject to satisfactory valuation or a third-party validation (such as a mortgage insurer) on the security required. Different lenders can come back with lower or higher valuations of your property, depending on the value used or the current market conditions.

You need to assess the strength of your long-term relationship with your current lender. Are there some intangible benefi ts that you have now, because the current lender knows your banking and business history, which you may not get in a new relationship?

Change in valuation of your security

Impact of leaving a long-term banking relationship


148


TIPMake a list of all the points and note the pros and cons

for each point to help assess whether to refi nance

Switching BanksA good banking relationship is crucial to your business operation and, in many cases, the fi nancial survival of your business. Banks are vital to the fi nancing of your business operation and a good relationship with your bank can help you negotiate better terms for your banking needs. Even if you are satisfi ed with the service quality of your bank, you should still meet with your bank at least once a year to discuss your banking requirements and areas of improvements in products and services that your business could use.

If you are not happy with the service of your bank, you should review your bank accounts and facilities. You should not move to another bank without comparing the services provided by your current bank with that of the new provider.

Many businesses split their banking between two or more fi nancial institutions to have more control over their fi nancial arrangements. These businesses usually have one main bank provider who does most of their banking transactions. If you are dissatisfi ed with the pricing or service levels of your main provider, you should compare its offer with those of other banks.


149


Banking Review

You can use the following checklist to help you review your bank accounts andfacilities:

1. Create a list of all bank accounts in your company

You should include what the account is used for; bank account details such as branch, account number, account name; and any special arrangements with each account such as set-off arrangements. All social accounts, old companies, branch accounts, petty cash accounts and special-purpose accounts should be included. This information can be obtained from your bank statements or by asking your bank. You may be surprised at the number of accounts you have.

3. Select your top three preferred banks

How you select your top three preferred banks can be based on any criteria, such as the bank you have the most transactions with, the quality of their service, friendly staff, convenience, or pricing sensitivity. Knowing the existing or likely account manager (and having a favourable impression) is often a good reason to include a bank in your list.

2. Obtain a letter of facilities

Request a letter of facilities from all the banks you deal with. The aim is to build a complete picture of all your banking arrangements with your fi nancial institutions. In your letter, you should ask your banks to ensure all facilities are covered, including:

• Credit or purchasing cards;• Merchant facilities;• Trade facilities;• Lease facilities;• Any information on loans that the bank provides;• Letter of credit; • Internet banking; and• Cheque cashing.

Item Descriptions


150


4. Meet with your current bank

6. Meet with alternative banks on your list

5. Review your current bank’s offer

Once you have gathered the required information, you are ready to meet your bank. The aim here is to give your existing bank fi rst chance of improving the price or service or any other criteria you have noted in step 2.

When the bank has all your information, ask your banker what will be the best package and fees available for you. Usually, a bank will give you its best rates when you agree to do all transactional banking arrangements through them.

If you are not happy with your current bank’s offer, make an appointment with the next bank on your preferred bank list. If you disclose your current pricing, the second bank may only offer you a deal that is slightly better than that of your current bank. Due to the cost and resources required to move to a new bank, it is generally not advisable to move banks unless the new bank offers substantially better pricing, product or service.

The areas you should be reviewing are loan fees, interest margins, merchant facilities, and cash handling, if you are in a retail business or organisation. However, this will vary according to your business.

If your current bank offers you improved pricing and service levels, you may wish to stay with your current bank and stop the review process. We recommend that you ask your bank to detail a letter of agreement including the renegotiated fees, charges and service levels offered. If possible, negotiate for these revised terms to apply for one to three years. If your bank does not offer a better deal in pricing, you should fi nd out why and what is missing from the picture.

Item Descriptions


151


• Is the new bank’s service level good? You may be able to fi nd out by talking to some of their customers. You may have customers or suppliers who have an account with the new bank.

•

You should consider the following factors before you change banks:

• Will your business incur additional costs as a result of switching banks? (for example, costs in notifying customers and suppliers, changing deposit and chequebooks).

Give preference to the bank that allows you to meet with bank staff other than your account manager. This should include the bank manager and perhapseven the regional manager. Often, staff change on a regular basis withinbanks, so it is preferable that more than one staff member of the chosen bank has an understanding of your business and the banking relationship.

TIPComparative information on bank fi nance is available on the

SME Info Portal at www.smeinfo.com.my or Banking Info at www.bankinginfo.com.my


152


Chapter 12Managing Your Banking

Relationships


153


TIPDuring the annual review, the bank is likely to require up-to-date fi nancial data and all other relevant information that summarises

your business operations for the last 12 months

Annual Review

Good relationships with your bankers

will ensure that they understand your

business and are in the best possible

position to provide advice and support

when needed

HINTBeing well prepared for the annual review will show the bank that

you understand their requirements and indicate

good management practices

Managing Your Banking Relationships

When you arrange for a business loan or other fi nancing through a bank for the fi rst time, you may think that the process of providing information and being interviewed by the bank is over. This is not always the case. When they have provided fi nance, banks may also carry out annual review. This usually happens either when your annual accounts are available or on the anniversary of the borrowing.

Annual reviews should be taken seriously because banks always have far-reaching power to cancel a loan that they have granted. The review results in a submission to the bank’s administration, with the manager recommending continuance or withdrawal of the loan. Although a review of this kind may appear traumatic, there is nothing to worry about if your business is performing well, and it may result in an offer of additional fi nancing. If the business has been successful, the bank may also be willing to reduce its costs, but most likely only if you ask. If your business has not been performing well, and you have not previously advised the bank, you should be open about the situation.


154


HINT

Keeping your bank well informed of your business activities and performance will ensure that they are ready to respond to any

additional request

Continuing Relationships

Banking is essentially a hands-on type of activity. A good bank manager keeps a watchful eye over the businesses under his or her control, both evaluating the risks involved and looking for new business opportunities. There are advantages in this for a business that is well run. Besides maintaining an overview that is designed to protect the bank, the bank manager is also a salesman with sales targets. A business that is clearly performing well can therefore expect to be able to obtain increased bank assistance to match any growth in requirements.

For the relationship with the bank to develop well, there is one requirement that must be observed: there must be an open approach that involves keeping the bank properly informed. Any tendency to inform the good side and leave the bad side unmentioned should be avoided. Any downward turn in events should be discussed with the bank manager as soon as it is known, not when the overdraft limit is exceeded or loan repayments are late. Remember, while the bank is providing facilities, they are effectively in partnership with your business.

One of the advantages of a well-developed banking relationship is that the experienced bank manager can assume some of the role of an unpaid fi nancial adviser. Bank managers have experience with many types of businesses and can give fair advice, since they are not closely involved in the business.

Bank managers are often working with other businesses in similar industries and can be a useful source of information for your business

TIP


155


Bank loans usually have conditions of default, with the bank being able to demand payment if one or more conditions are breached. Also, overdrafts are at call, with the bank being able to ask for repayment on demand.

Before a bank decides to call in a loan, there would normally have been discussion or a letter expressing its concerns. If the bank decides not to allow continuous default or escalation in borrowings, it must provide written advice that banking facilities have been withdrawn, in which case it will ask that all monies be repaid immediately.

It is in your best interest to contact the bank immediately if your business is facing diffi culties, as there may be several ways that the bank can help you. They may:

• Agree to change your borrowing arrangements to facilitate repayment;

• Discuss with you, and if you wish, your accountant or advisers, the plans for improving cash fl ow and profi ts; or

•

HINT

If your business is having problems such as diffi culty

in keeping up with repayments, discuss them

with the bank immediately so that they can work with you to fi nd

a solution

Managing Diffi culties

Recommend that you discuss the problem with your accountant or get in touch with independent advisers, who can help you and possibly assist with your business problems. If there is no mutual agreement, then refer to BNMLINK (Bank Negara Malaysia Laman Informasi Nasihat dan Khidmat) at www.bnm.gov.my/bnmlink.

Bank managers are more ready to provide any assistance required, such as a negotiation of repayments, if they are told about a deteriorating

position rather than having to fi nd out about it themselves

TIP


156



157


Financial management is not only about understanding the fi nancial information in your business and using this information to improve your business operations. It is also to ensure that you have the right policies and procedures in place to make sure that the fi nancial information you are using is accurate and that you can protect your investment in the business. For complete fi nancial management of your business, you need to consider implementing good fi nancial controls.

Section V : Better Business Financial Management

When you are using fi nancial information to make decisions, it is important that

policies and procedures are in place to ensure

that the information is complete and accurate and will lead to correct

decisions


158


Chapter 13Financial Controls


159


Financial controls are policies and procedures used

in your business to protect your assets and to support good fi nancial reporting

Financial ControlsFinancial control is a procedure implemented to detect or prevent errors, theft or fraud, or policy non-compliance in a fi nancial transaction process.

Financial control procedures can be implemented by either an individual or as part of an automated process within a fi nancial system.

Each fi nancial control procedure is designed to fulfi l at least one of the following eight criteria:

Completeness

Accuracy

All records and transactions are included in the reports of the business.

The right amounts are recorded in the correct accounts.

Authorisation

Validity

Existence

Handling errors

Segregation ofduties

Presentation and disclosure

Approved authorisation levels are in place to cover such things as approval, payments, data entry and computer access.

The invoice is for work performed or products received and the business has incurred the liability properly.

All assets and liabilities recorded in the books actually exist. Has a purchase been recorded for goods or services that have not yet been received? Is there correct documentation to support the item?

Procedures ensure that errors in the system have been identifi ed and corrected.

Certain functions are separated. For example, the person taking cash receipts does not also do the banking.

There is timely preparation of reports for compliance or review.

Criteria Descriptions


160


Procedure Descriptions

Align objectives of the business

Safeguard assets

Prevent and detect fraud and error

Encourage good management

Ensure that reporting procedures and the activities carried out by the business are in line with the objectives of the business.

Ensure that the physical and monetary assets of the business are protected from fraud, theft and errors.

Ensure that the systems can quickly identify errors and fraud as and when they occur.

Allow the manager to receive timely and relevant information on performance against targets, as well as key fi gures that can indicate variances from target.

HINT

If you are using inaccurate fi nancial information for

decision-making, you could be making the wrong

decisions

Benefi ts of Financial Controls

Financial control procedures ensure that all f inancial information is recorded and accurate.

Some of the benefi ts of implementing fi nancial controls are:

• Regular reporting will provide accurate fi nancial information that can be used by those responsible for the operations of the business (for example, sales numbers can be provided to sales representatives to monitor targets and budgets);

• Business can make informed decisions on budgets and spending;

• Controls provide documentary proof for compliance requirements; and

• Business standards are set and every person within the business is informed of these standards through reporting.

Good fi nancial control procedures will:


161


Procedure Descriptions

Act against undesirable performance

Reduce exposure to risks

Ensure proper fi nancial reporting

Authorise a formal method of dealing with fraud, dishonesty or incompetence when detected.

Minimise the chance of unexpected events.

Maintain accurate and complete reports, and minimise time lost correcting errors and ensuring resources are correctly and effi ciently allocated.

Good fi nancial controls will protect your investment in the business and ensure that the business runs more effi ciently, resources are not lost and

there are fewer unpleasant surprises

TIP

HINT

Using the checklists will help you to determine

which fi nancial controls are relevant for your business,

and highlight the areas where you can improve your fi nancial controls

Financial Controls Checklist

To manage the risk of a fi nancial transaction processing failure, manual or automated control procedures should be implemented at key stages of the process.

Some of the questions that can be asked are:

• How well are the fi nancial aspects of the business managed?

• Are the business operations protecting the organisation against disasters, internal theft and unfavourable external audits?

• How comprehensive are the management practices?

• Are the fi nancial records truly accurate?


162


This checklist will help you to review your business’s fi nancial controls. A business with good fi nancial management practices would answer "yes" to most of the following questions:

Is a chart of accounts used?

Is it detailed enough to give adequate management information?

Is a double-entry bookkeeping system used?

Are journal entries used?

Are journal entries approved?

Do you use budgets and cash projections which are: • compared to actual results?• investigated if there are major discrepancies?

Do you understand the form and contents of the fi nancial statements?

Are comparative financial statements produced and reviewed?

Are the books and records kept up to date and balanced?

Is fi nancial information produced regularly?

Are reasonable due dates imposed for preparation of fi nancial information?

Are storage facilities safe from fi re etc.?

Is insurance coverage regularly reviewed?

Is there a records-retention schedule used?

General YES/NO


163


Is there a policy for credit approval for customers?

Are credit fi les kept current?

Are credit checks on customers done regularly?

Are sales orders approved for price, terms, credit and account balance?

Are all sales orders recorded on pre-numbered forms and are all numbers accounted for?

Do you review the monthly debtors’ statements for outstanding balances?

Is accounts receivable subsidiary ledger balanced monthly to control account?

Is an aging schedule of customers’ accounts prepared monthly?

Are write-offs and other adjustments to customer accounts approved?

Do you, or a responsible employee other than the bookkeeper or person who maintains accounts receivable: • Open the mail and pre-list all cash receipts before turning them over to the bookkeeper? • Stamp all cheques with restrictive endorsement “for deposit only” before turning them over to the bookkeeper? • Compare daily pre-listing of cash receipts with the cash receipts journal and the duplicate deposit slip?

Are cash receipts deposited intact on a daily basis?

Are cash receipts posted promptly to appropriate journals?

Are cash sales controlled by cash registers or pre-numbered cash receipts forms?

Sales

Cash Receipts

YES/NO

YES/NO


164


Are all disbursements, except for petty cash, made by cheque or Internet payments?

Are cheques pre-numbered and all numbers accounted for?

Are all cheques recorded when issued?

Are all unused cheques safeguarded, with access limited?

Is a mechanical cheque protector used to inscribe amounts as a precaution against alteration?

Are voided cheques retained and destroyed?

Do you sign or view all cheques and Internet payments?

If a signature plate is used, do you have sole control?

Are supporting documents, processed invoices, receiving reports and purchase orders presented with the cheques and reviewed by you before you sign the cheques?

Are supporting documents for payments properly cancelled to avoid duplicate payment?

Are cheques payable to cash prohibited?

Are signed cheques mailed by someone other than the person who writes the cheques?

Are bank statements and cancelled cheques: • Received directly by you? • Reviewed by you before they are given to the bookkeeper?

Cash Used (disbursements) YES/NO


165


Are bank reconciliations prepared: • At least monthly for all accounts? • By someone other than the person authorised to sign cheques or use a signature plate?

Are bank reconciliations reviewed and adjustments of the cash accounts approved by a responsible person other than the bookkeeper?

Are all disbursements from petty cash funds supported by approved vouchers?

Is there a pre-determined maximum dollar limit on the amounts of individual petty cash disbursements?

Are petty cash funds set on an imprest basis (i.e. if the total amount is RM100, you can only spend what you have and it is only replenished by the amount spent)?

Are petty cash funds:• Kept in a safe place?• Reasonable in amount so that the fund ordinarily requires reimbursement at least monthly?• Controlled by one person? • Periodically counted by someone other than the custodian?

Are supplier invoices matched with applicable purchase orders and receiving reports?

Are all available discounts taken?

Is there written evidence that invoices have been properly processed before payment, e.g. stamped?

Bank Reconciliation Statements

Petty Cash

Accounts Payable

YES/NO

YES/NO

YES/NO


166


Are there procedures that ensure any direct shipments to customers are properly billed to them?

Do you verify that the trial balance of accounts payable matches with the general ledger control account?

Are expense reimbursement requests submitted properly and approved before payment?

Are all materials inspected for condition and independently counted, measured, or weighed when received?

Are receiving reports used and prepared promptly?

Are receiving reports subjected to the following: • Pre-numbering and accounting for the sequence of all numbers? • Copies promptly provided to those who perform the purchasing and accounts payable function? • Controlled so that liability may be determined for materials received but not yet invoiced?

Are all employees’ job references checked?

Are individual personnel fi les maintained?

Is access to personnel files limited to a person who is independent of the payroll or cash functions?

Are wages, salaries, commission and piece rates approved?

Is proper authorisation obtained for payroll deductions?

Accounts Payable

Goods Received

Employees

YES/NO

YES/NO

YES/NO


167


Are there adequate time records for employees paid by the hour?

Does the sales people’s commission records reconcile with sales records?

If employees punch time clocks, are the clocks located so that they may be watched by someone in authority?

Are time records for hourly employees approved by a supervisor?

Are there appropriate controls in place to ensure that the absence of any employee is noted?

Is the clerical accuracy of the payroll checked?

Are payroll registers reviewed by a responsible person?

If employees are paid in cash, is the cash requisition compared to the net payroll?

Is there control over unclaimed payroll cheques?

Do you cross-train staff in accounting functions?

Employees YES/NO

Reviewing this checklist and taking appropriate action will ensure that you have good fi nancial controls in place for your business.

For all those questions in the checklist that have not been answered with “yes”, review which ones are applicable to your company. Then make an action plan that includes who will be responsible for implementing each

policy and procedure and give a due date for completion

TIP


168


155

Sec

tion

I : B

usin

ess

Fina

nce

Bas

ics

Sum

mar

y of

Tip

s an

d H

ints

Cha

pter

One

- U

nder

stan

ding

Fin

anci

al

S

tate

men

ts

Impl

emen

ting

good

fina

ncia

l pra

ctic

es in

you

r bus

ines

s w

ill p

rovi

de s

ound

fin

anci

al in

form

atio

n th

at c

an id

entif

y cu

rren

t iss

ues

and

be u

sed

to p

lan

for t

he s

ucce

ssfu

l fin

anci

al fu

ture

of y

our b

usin

ess

Topi

cH

int

Tip

Inco

me

S

tate

men

t

Sta

tem

ent o

f C

ash

Flow

s

Onl

y th

ose

busin

esse

s th

at h

ave

good

s (pr

oduc

ts)

to s

ell w

ill u

se th

e ca

lcul

atio

n of

cos

t of g

oods

so

ld

Stat

emen

t of c

ash

flow

s on

ly s

how

s th

e hi

stor

ical

da

ta a

nd d

iffer

s fro

m a

cas

h flo

w fo

reca

st

A pr

ospe

rous

bus

ines

s w

ill ha

ve a

sset

s of

the

busi

ness

fun

ded

by p

rofit

s ra

ther

tha

n be

ing

heav

ily d

epen

dent

of f

undi

ng fr

om e

ither

ext

erna

l pa

rties

(lia

biliti

es) o

r con

tinuo

us c

ash

inje

ctio

ns

from

the

owne

r (eq

uity

)

App

endi

x

168

Fina

ncia

l Gui

de fo

r S

ME

s

Fina

ncia

l sta

tem

ents

pro

vide

info

rmat

ion

on h

ow th

e bu

sine

ss is

ope

ratin

gfin

anci

ally

and

why

. Ens

urin

g if

thes

e st

atem

ents

are

pro

duce

d re

gula

rly

will

prov

ide

finan

cial

info

rmat

ion

for

cont

inuo

s im

prov

emen

t of

bus

ines

s op

erat

ions

Reg

ular

ly (m

onth

ly) p

rodu

ce p

rofit

and

loss

info

rmat

ion

and

com

pare

aga

inst

act

iviti

es in

th

e pr

evio

us m

onth

s to

ens

ure

that

you

r pr

ofit

expe

ctat

ions

are

bei

ng m

et

Bal

ance

She

etTh

e di

agra

mm

e sh

ows

how

the

bala

nce

shee

t w

orks

. The

bus

ines

s re

quire

s as

sets

to o

pera

te

and

thes

e as

sets

will

be

fund

ed fr

om th

e eq

uity

in

the

busi

ness

, the

pro

fit fr

om th

e op

erat

ions

of

the

busi

ness

or

by

bo

rrow

ing

mon

ey

from

ex

tern

al p

artie

s

Use

the

Cas

h Fl

ow S

tate

men

t to

anal

yse

if yo

uar

e sp

endi

ng m

ore

than

you

are

ear

ning

or

draw

ing

out t

oo m

uch

cash

from

the

busi

ness


169


156

Topi

cH

int

Tip

Cha

pter

Tw

o -

Ass

essi

ng th

e Fi

nanc

ial

H

ealth

of Y

our B

usin

ess

Fina

ncia

l rat

io a

naly

sis

will

pro

vide

the

impo

rtant

war

ning

sig

ns th

at

coul

d al

low

you

to s

olve

you

r bus

ines

s pr

oble

ms

befo

re th

ey d

estro

y yo

ur

Liqu

idity

Rat

ios

Sol

venc

y R

atio

s

Pro

fitab

ility

Rat

ios

Man

agem

ent R

atio

s

Bal

ance

She

et R

atio

s

Use

the

se r

atio

s to

ass

ess

if yo

urbu

sine

ss h

as a

dequ

ate

cash

to

pay

Thes

e ra

tios

mea

sure

if y

our b

usin

ess

has

adeq

uate

long

-term

cas

h re

sour

ces

to c

over

all d

ebt o

blig

atio

ns

Use

gro

ss a

nd n

et m

argi

n ca

lcul

atio

ns

to m

easu

re a

n m

onito

r the

pro

fitab

ility

Use

the

retu

rn o

n as

sets

and

inve

stm

ent

ratio

s to

ass

ess

the

effic

ienc

y of

the

The

quic

k ra

tio w

ill g

ive

you

a go

od i

ndic

atio

n of

the

“rea

dily

” av

aila

ble

cash

to

mee

t cu

rren

t

Com

parin

g yo

ur n

et a

nd g

ross

mar

gin

calc

ulat

ions

to

bu

sine

sses

w

ithin

th

e sa

me

indu

stry

w

ill

prov

ide

you

with

com

para

tive

info

rmat

ion

and

may

hig

hlig

ht p

ossi

ble

scop

e fo

r im

prov

emen

t in 16

9

Fina

ncia

l Gui

de fo

r S

ME

s

busi

ness

debt

s in

due

tim

e

of y

our b

usin

ess

oper

atio

ns

use

of y

our b

usin

ess

reso

urce

s

debt

obl

igat

ions

your

mar

gins

Use

the

num

ber o

f day

s fo

r inv

ento

ry,

debt

ors

and

cred

itors

to

calc

ulat

e th

eca

sh c

onve

rsio

n ra

te f

or y

our

tradi

ngac

tiviti

es

Thes

e ra

tios

indi

cate

the

ext

ent

to w

hich

the

busi

ness

is a

ble

to m

eet t

he d

ebt o

blig

atio

ns fr

om

all s

ourc

es,

othe

r th

an ju

st c

ash

flow

, as

in th

e ca

se w

ith li

quid

ity ra

tios

Com

parin

g yo

ur m

anag

emen

t rat

io c

alcu

latio

nsto

bu

sine

sses

w

ithin

th

e sa

me

indu

stry

w

ill

prov

ide

you

with

com

para

tive

info

rmat

ion

that

m

ay h

ighl

ight

pos

sibl

e sc

ope

for i

mpr

ovem

ent i

n yo

ur tr

adin

g ac

tiviti

es

Thes

e ra

tios

will

pro

vide

an

indi

catio

n of

how

effe

ctiv

e is

you

r in

vest

men

t in

the

busi

ness


170


157

Cha

pter

Thr

ee -

Bud

getin

g

Topi

cH

int

Tip

Pro

fit a

nd L

oss

Bud

get

An

inde

pend

ent

profi

t an

d lo

ss b

udge

t ca

n be

de

velo

ped

for

sepa

rate

pro

ject

s to

ass

ess

the

All

assu

mpt

ions

m

ade

durin

g th

e pl

anni

ng

proc

ess

of

prep

arin

g bu

dget

s sh

ould

be

re

alis

tic

and

Ass

umpt

ions

Reg

ular

rev

iew

of

budg

et a

gain

st a

ctua

l re

sults

w

ill p

rovi

de in

form

atio

n on

whe

ther

you

r bus

ines

s is

on

track

to a

chie

ve th

e pl

ans

form

ulat

ed w

hen

170

Fina

ncia

l Gui

de fo

r S

ME

s

docu

men

ted

finan

cial

via

bilit

y of

eac

h pr

ojec

t

you

first

pre

pare

d yo

ur b

udge

t

A bu

dget

is th

e fu

ture

fina

ncia

l pla

n of

the

busi

ness

. It i

s w

here

the

stra

tegi

cpl

ans

are

trans

late

d in

to fi

nanc

ial n

umbe

rs to

ens

ure

that

thes

e pl

ans

are

finan

cial

ly v

iabl

e

Whe

n do

cum

entin

g yo

ur

assu

mpt

ions

, in

clud

ebo

th th

e ris

k as

sess

men

t of e

ach

assu

mpt

ion

and

the

antic

ipat

ed a

ctio

n re

quire

d to

mat

ch t

he r

isk.

By d

oing

this

, you

will

be w

ell p

repa

red

and

have

an a

ctio

n pl

an a

lread

y in

pla

ce if

the

actu

al e

vent

s do

not

mat

ch y

our a

ssum

ptio

ns

Mon

itorin

g an

dM

anag

ing

Your

Pro

fitan

d Lo

ss B

udge

t

Rem

embe

r, th

e m

ore

regu

lar

the

repo

rts,

the

fast

er o

pera

tions

can

be

re

view

ed

for

finan

cial

im

pact

an

d ac

tion

can

be

impl

emen

ted

imm

edia

tely

whe

neve

r req

uire

d

By

prep

arin

g a

prof

it an

d lo

ssbu

dget

ann

ually

, yo

u w

ill b

e in

apo

sitio

n to

det

erm

ine

if yo

ur f

utur

ebu

sine

ss p

lans

will

sup

port

the

ongo

ing

activ

ities

of y

our b

usin

ess


171


C

hapt

er F

our –

Mai

ntai

ning

Pro

fitab

ility

Pro

fitab

ility

Mea

sure

s

Dis

coun

ting

Sal

es

Exp

ense

Man

agem

ent

Com

pare

yo

ur

prof

itabi

lity

mea

sure

s to

th

e bu

sine

sses

with

in t

he s

ame

indu

stry

to

ensu

re

that

you

are

bei

ng c

ompe

titiv

e an

d ac

hiev

ing

max

imum

pro

fit p

oten

tial

Keep

ing

a cl

ose

eye

on y

our e

xpen

ses

will

en

sure

th

at

you

mai

ntai

n th

e Lo

ok fo

r opp

ortu

nitie

s to

join

with

oth

er b

usin

esse

s fo

r “g

roup

” bu

ying

tha

t ca

n pr

ovid

e di

scou

nts

on

Topi

cH

int

Tip

171

Fina

ncia

l Gui

de fo

r S

ME

s

profi

tabi

lity

of th

e bu

sine

ssyo

ur e

xpen

ses

It is

ver

y ea

sy fo

r pro

fitab

ility

to b

e er

oded

if y

ou d

o no

t mea

sure

and

mon

itor o

n a

regu

lar b

asis

. Th

eref

ore,

it is

impo

rtant

to u

nder

stan

dho

w to

use

the

tool

s av

aila

ble

to c

ontin

uosl

y ev

alua

te th

e pr

ofita

bilit

y of

your

bus

ines

s

Usin

g th

e pr

ofita

bilit

y m

easu

res p

rovid

edw

ill e

nsur

e th

at y

ou a

re a

war

e of

any

redu

ctio

n in

pro

fit a

s it

occu

rs a

ndun

ders

tand

w

hat

leve

l of

sa

les

isre

quire

d fo

r the

bus

ines

s to

gen

erat

epr

ofit

You

may

wan

t to

con

side

r of

ferin

gyo

ur c

usto

mer

s ad

d-on

ser

vice

s as

an

alte

rnat

ive

to o

fferin

g di

scou

nts

Im

prov

ing

busi

ness

fina

nces

mea

ns y

ou n

eed

to t

ake

a pr

actic

alap

proa

ch to

impl

emen

t new

pro

cess

es th

at a

llow

you

to m

onito

r th

eke

y as

pect

s of

you

r bus

ines

s pr

ofita

bilit

y an

d ca

sh fl

ow

Sec

tion

II : I

mpr

ovin

g B

usin

ess

Fina

nces


172


159

Topi

c

C

hapt

er F

ive

– Im

prov

ing

Cas

h Fl

ow

Man

agin

g In

vent

ory

Man

agin

g P

aym

ents

to

Sup

plie

rs

Man

agin

g W

ork-

in -

prog

ress

Man

agin

g R

ecei

vabl

es

Wor

king

Cap

ital

Cyc

le –

Cas

h C

onve

rsio

n R

ate

Ens

ure

that

you

hav

e go

od p

roce

dure

s in

See

pag

e 52

for c

ompl

ete

list

See

pag

e 57

for c

ompl

ete

list

See

pag

e 59

for c

ompl

ete

list

See

pag

e 63

for c

ompl

ete

list

Hin

tTi

p

172

Fina

ncia

l Gui

de fo

r S

ME

s

plac

e to

enc

oura

ge p

rom

pt p

aym

ent

of ti

ps

of ti

ps

of ti

ps

of ti

ps

Wor

king

cap

ital i

s th

e sh

ort-t

erm

cap

ital t

hat w

orks

for t

he b

usin

ess.

Thi

sin

clud

es in

vent

ory,

wor

k-in

-pro

gres

s, p

aym

ents

to s

uppl

iers

and

rece

ipts

from

cus

tom

ers.

By

wor

king

on

your

cyc

le m

ore

effic

ient

ly, y

ou w

ould

ha

ve m

ore

read

ily a

vaila

ble

cash

to u

se in

oth

er p

arts

of t

he b

usin

ess

Set

ting

up g

ood

man

agem

ent p

roce

dure

sw

ill e

nsur

e th

at y

ou g

et t

he m

ost

out

ofyo

ur re

latio

nshi

p w

ith s

uppl

iers

Setti

ng

up

good

in

vent

ory

cont

rol

proc

edur

es w

ill en

sure

that

cas

h is

not

tied

up

in h

oldi

ng u

nnec

essa

ry in

vent

ory

The

key

to m

anag

ing

wor

k-in

-pro

gres

s is

to h

ave

a go

od re

cord

kee

ping

sys

tem

Cal

cula

te th

e ca

sh c

onve

rsio

n ra

te a

ndco

mpa

re th

is to

the

stan

dard

s w

ithin

you

r in

dust

ry. I

dent

ify w

hich

are

as o

f the

cyc

le

are

prob

lem

atic

and

pre

pare

an

actio

n pl

an to

impr

ove

the

cash

con

vers

ion

rate

Cal

cula

te y

our

cash

con

vers

ion

rate

reg

ular

lyan

d im

plem

ent

impr

ovem

ent

to y

our

wor

king

capi

tal t

o re

leas

e id

le c

ash

that

is n

ot b

eing

used

with

in t

he b

usin

ess.

Thi

s w

ill r

educ

eth

e ne

ed t

o bo

rrow

add

ition

al f

unds

to

supp

ort

the

oper

atio

ns o

f th

e bu

sine

ss,

decr

ease

dep

ende

ncy o

n fu

nds f

rom

fina

ncie

rs,

and

redu

ce a

ny in

tere

st e

xpen

se in

curr

ed


173


160

wolF hsaC gni gana

M – xiS r et pah

C

t fiorP dna hsa

C

ni sr evi rD

wol F hsaC

sseni suB r uoY

gnit sacer oF wol F hsa

C

yr eve f o dool befil eht si wolf hsa

C llit s nac sseni sub el bat fior p A . sseni sub si ti os , hsac ni segatr ohs

morf r eff us ” sevi r d“ t ah

w d nat sr ednu ot t natr opmi

r

t uoba ll a si wofl hsac t aht r eb

meme

R neh

w os , hsac f o wofl eht dna gni

mit ,t sac er of

wofl

hsac r uoy

gni r aper p sa et ar ucca sa er a uoy er us eka

m hsac eht f o gni

mit eht no el bi ssop

ci poTt ni

Hpi T

173

Fina

ncia

l Gui

de fo

r S

ME

s

hsac uoy

wofl

swoflCA

SH

DO

ES

NO

T E

QU

AL

PR

OFI

T!Th

e tim

ing

of w

hen

cash

is r

ecei

ved

is th

e m

ost

impo

rtant

issu

e w

hen

man

agin

g ca

sh fl

ow

The

impo

rtanc

e of

kno

win

g w

hat

are

the

key

driv

ers

of

your

ca

sh

flow

sh

ould

no

t be

un

der-

estim

ated

. In

ord

er t

o m

aint

ain

adeq

uate

ca

sh f

low

, th

ese

driv

ers

shou

ld b

e a

prio

rity

for

your

bus

ines

s an

d be

wel

l man

aged

Onc

e th

e fo

reca

st is

com

plet

ed, y

ou c

an ru

n so

me

“wha

t if”

scen

ario

s to

mea

sure

how

rea

ctiv

e yo

ur

busi

ness

cas

h flo

ws

will

be

to c

erta

in c

hang

es in

ev

ents

, suc

h as

dec

reas

e in

sal

es o

r in

crea

se in

fu

el c

osts

. Thi

s w

ill s

how

you

how

qui

ckly

you

may

ru

n ou

t of c

ash

if an

y of

thes

e ev

ents

occ

ur

A b

usin

ess

can

be p

rofit

able

but

stil

l ha

ve c

ash

flow

iss

ues.

It

is

impo

rtant

to im

plem

ent p

roce

dure

s in

you

r bus

ines

s th

at w

ill e

nsur

eth

at c

ash

flow

is a

ppro

pria

tely

man

aged


174


In

dec

idin

g w

heth

er o

r no

t to

see

k an

equ

ity p

arty

, you

nee

d to

con

side

r bo

th t

he fi

nanc

ial

and

non-

finan

cial

It is

im

porta

nt t

o re

view

alte

rnat

ive

finan

ce

prod

ucts

fr

om

diffe

rent

le

nder

s an

d en

sure

th

at

you

are

Ens

ure

that

th

e ty

pe

of

finan

cing

un

derta

ken

mat

ches

the

reas

on fo

r see

king

fina

nce.

A g

ener

al

rule

of t

hum

b is

to m

atch

the

term

of t

he lo

an w

ith

Cha

pter

Sev

en –

Deb

t, E

quity

or

Inte

rnal

Fun

ds?

Topi

cH

int

Tip

174

Fina

ncia

l Gui

de fo

r S

ME

s

outc

omes

com

parin

g ap

ples

with

app

les

the

leng

th o

f the

life

of t

he a

sset

you

are

fund

ing

A ke

y re

quire

men

t to

ens

ure

that

you

cho

ose

the

right

fun

ding

is t

o m

ake

certa

in t

hat

you

fully

und

erst

and

the

diffe

renc

es b

etw

een

debt

an

d eq

uity

, and

to c

onsi

der t

he im

plic

atio

ns o

f eac

h on

you

r bus

ines

s

Com

parin

g D

ebt

Fina

nce,

Equ

ityIn

vest

men

t and

In

tern

al F

unds

Dec

idin

g B

etw

een

Deb

t and

Equ

ity

To fu

lly u

nder

stan

d th

e im

plic

atio

ns o

fch

oosi

ng d

ebt,

equi

ty o

r int

erna

l fun

dsto

fun

d yo

ur b

usin

ess,

ask

you

rsel

fw

hat w

ould

hap

pen

if so

met

hing

goe

sw

rong

. Th

e an

swer

will

hel

p yo

u to

m

ake

the

right

cho

ice

Gen

eral

ly, a

bus

ines

s w

ould

aim

to m

axim

ise

the

use

of d

ebt fi

nanc

e to

fund

its

oper

atio

ns, a

s lo

ng

as th

e bu

sine

ss c

an s

ervi

ce th

e le

vel o

f deb

t and

ha

s en

ough

sec

urity

to

supp

ort

the

fund

ing.

The

bu

sine

ss

owne

r w

ould

re

tain

th

e be

nefit

s of

ow

ners

hip

in re

spec

t of g

row

th a

nd p

rofit

abili

ty o

f th

eir b

usin

ess

You

may

find

that

you

r abi

lity

to ra

ise

debt

impr

oves

w

ith e

quity

inve

stm

ent

Fina

ncin

g yo

ur b

usin

ess

is a

n im

porta

nt p

art

of g

ood

finan

cial

m

anag

emen

t pr

actic

e. N

ot o

nly

havi

ng a

cces

s to

fin

ance

, bu

t al

so

bein

g ab

le to

cho

ose

the

mos

t app

ropr

iate

met

hod

of fi

nanc

e fo

r you

r bu

sine

ss w

ill re

sult

in c

ontin

ued

grow

th a

nd p

rofit

abili

ty

Sec

tion

III :

Fina

ncin

g Y

our B

usin

ess

Und

erst

andi

ng th

eD

ebt F

inan

cing

Opt

ions

Lo

ng-te

rm v

ersu

s S

hort-

term


175


162

Topi

cH

int

Tip

Tr

ansa

ctio

nal

bank

ing

form

s pa

rt of

the

ove

rall

finan

cing

of

your

bu

sine

ss.

The

eve

ryda

y ba

nkin

g re

quir

emen

ts s

houl

d be

co

nsid

ered

car

eful

ly to

ens

ure

that

the

paym

ents

in y

our b

usin

ess

Tran

sact

iona

l Ban

king

P

rodu

cts

Cho

osin

g th

e m

ost

appr

opri

ate

trans

actio

nal

bank

ing

prod

ucts

w

ill

assi

st i

n m

anag

ing

cash

flo

w a

nd

Your

ban

ker c

an a

ssis

t you

in c

hoos

ing

the

mos

t ap

prop

riate

tra

nsac

tiona

l ba

nkin

g pr

oduc

ts f

or

Mer

chan

t Fac

ilitie

s

Tran

sact

iona

l Fee

s

By

intro

duci

ng m

erch

ant f

acili

ties,

you

r bus

ines

s w

ould

be

able

to

bene

fit f

rom

fas

ter

paym

ent,

sign

ifica

nt re

duct

ion

in in

voic

e qu

erie

s an

d cr

edit

cont

rol c

alls

and

impr

oved

cas

h flo

w

By

allo

catin

g al

l ban

k fe

es in

a s

epar

ate

acco

unt,

you

will

be

able

to c

lear

ly id

entif

y an

y in

crea

ses

Fina

ncia

l Gui

de fo

r S

ME

s

impr

ovin

g pr

ofita

bilit

yare

effic

ient

and

effe

ctiv

e

your

bus

ines

s

in fe

es th

at c

ould

be

impa

ctin

g yo

ur p

rofit

abili

ty 17

5

Cha

pter

Eig

ht –

Tra

nsac

tiona

l Ban

king

to

S

uit B

usin

ess

Nee

ds

Mer

chan

t fa

cilit

ies

prov

ide

a re

albe

nefit

to y

our b

usin

ess

cash

flow

: you

rcu

stom

ers

do n

ot n

eces

saril

y ne

ed to

have

cas

h in

the

bank

to p

ay fo

r yo

urgo

ods

or s

ervi

ces

Reg

ular

rev

iew

of

your

tra

nsac

tiona

lba

nkin

g se

rvic

es w

ill g

uara

ntee

tha

tyo

u kn

ow h

ow m

uch

you

are

payi

ng fo

rth

ese

serv

ices

, and

ens

ure

that

you

are

usin

g tra

nsac

tiona

l ser

vice

s th

at b

est

suit

your

bus

ines

s


176


Alte

rnat

ive

Met

hods

to

M

anag

e Fo

reig

n C

urre

ncy

Pay

men

ts

Inte

rnat

iona

l Tr

ade

Fina

nce

Fore

ign

curr

ency

pay

men

ts c

an a

lso

be m

anag

ed b

y im

plem

entin

g al

tern

ativ

e It

is a

dvis

able

to s

peak

to y

our b

anke

r to

dete

rmin

e th

e be

st a

ltern

ativ

e to

man

age

your

inte

rnat

iona

l tra

de p

aym

ents

Trad

ing

inte

rnat

iona

lly c

an b

e a

real

st

rain

on

cash

flow

. If

you

can

nego

tiate

w

ith y

our

supp

lier

or c

usto

mer

to

use

trade

fina

nce

prod

ucts

, you

can

rele

ase

your

cas

h flo

w f

or o

ther

par

ts o

f th

e bu

sine

ss

C

hapt

er N

ine

– T

rade

Fin

anci

ng

Inte

rnat

iona

l tra

de fi

nanc

e pr

oduc

ts a

re s

peci

fical

ly d

esig

ned

to

assi

st i

mpo

rters

and

exp

orte

rs i

n m

anag

ing

risk

and

impr

ovin

g

Fore

ign

Cur

renc

y P

aym

entsTo

pic

Hin

tTi

p

176

Fina

ncia

l Gui

de fo

r S

ME

s

paym

ent m

etho

ds

cash

flow

for t

heir

busi

ness

By

hedg

ing

your

inte

rnat

iona

l cur

renc

ypa

ymen

ts,

you

wou

ld r

educ

e th

e ris

k of

neg

ativ

e im

pact

on

profi

tabi

lity

Ofte

n us

ing

a co

mbi

natio

n of

hed

ging

pro

duct

sw

orld

pro

vide

the

best

pro

tect

ion

over

fluc

tuat

ions

in fo

reig

n cu

rren

cy


177


164

177

Cha

pter

Ten

– A

pply

ing

For a

Loa

n

Pre

sent

atio

n of

the

Loan

App

licat

ion

Topi

cH

int

Tip

Fina

ncia

l Gui

de fo

r S

ME

s

Mak

e su

re

you

unde

rsta

nd

all

the

finan

cial

inf

orm

atio

n th

at h

as b

een

prep

ared

and

is b

eing

pre

sent

ed

Whe

n ap

plyi

ng

for

a lo

an,

alw

ays

mee

t yo

ur

bank

er in

per

son

to d

iscu

ss th

e ap

plic

atio

n

Sec

tion

IV :

Man

agin

g Le

nder

sM

any

peop

le in

bus

ines

s ov

er e

stim

ate

how

muc

h a

bank

er k

now

s ab

out

thei

r bus

ines

s or

indu

stry

, and

due

to p

ast a

ctio

ns b

y so

me

bank

s, th

ey

also

can

fee

l som

ewha

t in

timid

ated

. H

owev

er,

if yo

u ta

ke t

he t

ime

to

educ

ate

your

ban

ker,

they

can

be

an a

sset

to y

our b

usin

ess


178


165

Topi

cH

int

Tip

Com

mon

Dan

gers

in R

efina

ncin

gE

nsur

e yo

u ha

ve

unde

rtake

n su

ffici

ent

revi

ew o

f you

r circ

umst

ance

s pr

ior t

o m

akin

g an

y co

mm

itmen

ts fo

r refi

nanc

ing,

as

ther

e ar

e m

any

pitfa

lls th

at m

ay im

pact

any

per

ceiv

ed

bene

fit

Cha

pter

Ele

ven

– R

efina

ncin

g

Y

our D

ebt

Bene

fits

of

Refi

nanc

ing

Afte

r ca

refu

lly u

nder

taki

ng a

cos

t–be

nefit

ev

alua

tion

of r

efina

ncin

g, y

ou m

ay fi

nd i

t br

ings

a ra

nge

of n

ew o

ppor

tuni

ties

to y

our

busi

ness

Mak

e a

list o

f the

reas

ons

why

you

mig

ht c

onsi

der

refin

anci

ng y

our l

oan

to c

ompa

re a

gain

st th

e lo

an

Refi

nanc

ing

a st

rong

hea

lthy

busi

ness

may

als

o in

dica

te th

at th

ere

is a

n op

portu

nity

to s

epar

ate

your

pe

rson

al a

sset

s fro

m s

ecur

ity o

ffere

d if

the

valu

e of

the

bus

ines

s as

sets

(i.e

. com

mer

cial

land

and

bu

ildin

g, d

ebto

rs,

fixed

ass

ets

etc)

is

suffi

cien

t to

co

ver t

he b

orro

win

g

178

Fina

ncia

l Gui

de fo

r S

ME

s

offe

r you

rece

ive

Ofte

n S

ME

s ha

ve th

e sa

me

bank

ing

faci

litie

s ye

ars

afte

r the

y ha

ve s

tarte

d.

A r

evie

w o

f exi

stin

g fa

cilit

ies

may

hig

hlig

ht th

at th

e cu

rren

t fac

ilitie

s an

d st

ruct

ure

need

to b

e ch

ange

d to

mee

t the

cha

nge

in b

usin

ess

oper

atio

ns

Ref

inan

cing

can

inv

olve

a n

umbe

r of

alte

rnat

ives

. To

achi

eve

the

best

out

com

e,en

sure

that

you

und

erst

and

all t

he a

ltern

ativ

es

befo

re c

omm

ittin

g to

a n

ew le

nder

Switc

hing

Ban

ksM

ake

a lis

t of

all

the

poin

ts a

nd n

ote

the

pros

an

d co

ns fo

r ea

ch p

oint

to h

elp

asse

ss w

heth

erto

refin

ance

Bank

ing

Rev

iew

Com

para

tive

info

rmat

ion

on

bank

fin

ance

is

av

aila

ble

on

the

SM

E

Por

tal

at

ww

w.s

mei

nfo.

com

.my

or

Ban

king

In

fo

at

ww

w.b

anki

ngin

fo.c

om.m

y

Ref

inan

cing

Y

our D

ebt


179


Topi

cH

int

Tip

Goo

d re

latio

nshi

ps w

ith y

our

bank

ers

will

ens

ure

that

the

y un

ders

tand

you

r bus

ines

s an

d ar

e in

the

best

pos

sibl

e po

sitio

n to

pr

ovid

e ad

vice

and

sup

port

whe

n ne

eded

Ann

ual R

evie

w

Con

tinui

ng

Rel

atio

nshi

ps

Man

agin

g D

iffic

ultie

s

Ban

k m

anag

ers

are

ofte

n w

orki

ng w

ith o

ther

bu

sine

sses

in

sim

ilar

indu

strie

s an

d ca

n be

a

usef

ul s

ourc

e of

info

rmat

ion

for y

our b

usin

ess

179

Fina

ncia

l Gui

de fo

r S

ME

s

Cha

pter

Tw

elve

– M

anag

ing

Your

Ban

king

Rel

atio

nshi

ps

Bei

ng w

ell p

repa

red

for

the

annu

al r

evie

w

will

sho

w th

e ba

nk th

at y

ou u

nder

stan

d th

eir

requ

irem

ents

and

indi

cate

goo

d m

anag

emen

t pr

actic

es

Dur

ing

the

annu

al r

evie

w,

the

bank

is

likel

y to

re

quire

up-

to-d

ate

finan

cial

dat

a an

d al

l ot

her

rele

vant

info

rmat

ion

that

sum

mar

ises

you

r bus

ines

s op

erat

ions

for t

he la

st 1

2 m

onth

s

Kee

ping

you

r ba

nk w

ell

info

rmed

of

your

busi

ness

act

iviti

es a

nd p

erfo

rman

ce w

illen

sure

tha

t the

y ar

e re

ady

to r

espo

nd t

o an

y ad

ditio

nal r

eque

st

If yo

ur b

usin

ess

is h

avin

g pr

oble

ms,

suc

h as

diffi

culty

in k

eepi

ng u

p w

ith re

paym

ents

, di

scus

s th

em w

ith th

e ba

nk im

med

iate

ly s

o th

at

they

ca

n w

ork

with

yo

u to

fin

d a

solu

tion

Ban

k m

anag

ers

are

mor

e re

ady

to p

rovi

de a

nyas

sist

ance

req

uire

d, s

uch

as a

neg

otia

tion

ofre

paym

ents

, if t

hey

are

told

abo

ut a

det

erio

ratin

gpo

sitio

n ra

ther

than

hav

ing

to fi

nd o

ut a

bout

itth

emse

lves


180


C

hapt

er T

hirte

en –

Fin

anci

al C

ontro

lsFi

nanc

ial

cont

rols

are

pol

icie

s an

d pr

oced

ures

use

d in

you

r bu

sine

ss t

o pr

otec

t yo

ur a

sset

s an

d to

sup

port

good

fina

ncia

l re

porti

ng

Bene

fits

of

Fina

ncia

l Con

trols

Goo

d fin

anci

al c

ontro

ls w

ill pr

otec

t you

r inv

estm

ent

in th

e bu

sine

ss a

nd e

nsur

e th

at th

e bu

sine

ss ru

ns

mor

e ef

ficie

ntly,

res

ourc

es a

re n

ot lo

st a

nd th

ere

are

few

er u

nple

asan

t sur

pris

es

Fina

ncia

l C

ontro

ls

Che

cklis

t

Usi

ng th

e ch

eckl

ists

will

hel

p yo

u de

term

ine

whi

ch fi

nanc

ial c

ontro

ls a

re re

leva

nt fo

r you

r bu

sine

ss, a

nd h

ighl

ight

the

area

s w

here

you

ca

n im

prov

e yo

ur fi

nanc

ial c

ontro

ls

If y

ou a

re u

sing

ina

ccur

ate

finan

cial

in

form

atio

n fo

r de

cisi

on-m

akin

g, y

ou c

ould

be

mak

ing

the

wro

ng d

ecis

ions

Topi

cH

int

Tip

180

Fina

ncia

l Gui

de fo

r S

ME

s

For a

ll th

ose

ques

tions

in th

e ch

eckl

ist t

hat h

ave

not b

een

answ

ered

with

“yes

”, re

view

whi

ch o

nes

are

appl

icab

le t

o yo

ur c

ompa

ny.

Then

mak

e an

ac

tion

plan

that

incl

udes

who

will

be re

spon

sibl

e fo

r im

plem

entin

g ea

ch p

olic

y an

d pr

oced

ure

and

give

a d

ue d

ate

for c

ompl

etio

n

Whe

n yo

u ar

e us

ing

finan

cial

info

rmat

ion

to m

ake

deci

sion

s, it

is im

porta

ntth

at p

olic

ies

and

proc

edur

es a

re in

pla

ce to

ens

ure

that

the

info

rmat

ion

is

com

plet

e an

d ac

cura

te a

nd w

ill le

ad to

cor

rect

dec

isio

ns

Sec

tion

V :

Bet

ter B

usin

ess

Fina

ncia

l

M

anag

emen

t


181


ACKNOWLEDGEMENT

The Financial Guide for SMEs reproduces sections of Achieving Financial Success (a publication co-owned by CPA Australia and the State of Victoria, Australia through the Department of Business and Innovation). The State of Victoria and CPA Australia have granted permission for such reproduction. SME Corporation Malaysia and CPA Australia wish to acknowledge the support the State of Victoria provided for this publication.

SME Corporation Malaysia and CPA Australia also wish to record our deepest appreciation to the following institutians who have assisted to verify the information contained in this Guide to ensure that it is relevant to the Malaysian context, and hence making the production of the Financial Guide for SMEs a reality.

1. Association of Banks in Malaysia2. Malaysia Institute of Accountants3. Bank Negara Malaysia4. EXIM Bank Berhad


chapter 7-13 p79-181 Eng.indd 79 8/15/11 5:02:53 PM