Business Finance
Sorting Payroll in small businesses
There are a number of reasonably priced accounting programs available for small businesses, with many of them having a “bolt on” optional payroll program, because when buying accounting software it is vital that one piece of software with compatible parts is superior to several programs that don’t really work together.
Using payroll software speeds up the overall process of calculating pay for employees and sorting payments so they can be paid on time. The company really needs to be big to be able to afford a well trained and competent person to operate payroll and follow disaster recovery plans. And even though the software will have the requirements of complex legislation programmed into its operation, it is still important to have a person that understands the process. There is also the need to have a backup person trained to cover staff illness or holiday absences. Any software needs to be accredited under the HM Revenue and Customs Payroll Standard Accreditation Scheme which covers the calculation of tax and NI contributions, sending in the returns electronically, customer service and the handling of statutory records.
Many companies choose to outsource their payroll services even if they manage their own accounting with software. This is because they can focus on employing people for their key business – because managing payroll in-house will take the time of at least two staff that need to be appropriately trained and experienced, because of the need for a backup. Companies also often outsource the Human Resources function also as a small business will rarely be able to employ a HR professional. Self Employed people or contractors often also choose to use umbrella payroll services which also sorts out their tax and PAYE issues.
Business Angels
Business Angles are either private investors or syndicated groups of investors that provide equity funding for business opportunities. Like the Dragon’s Den on television Business Angels not only provide finance by investing in the business but also usually offer skills, contact and business advice. You may pay the Business Angle in cash, or share options based on the amount of money invested.
As Business Angels are taking a risk the business itself needs to have certain characteristics. Firstly the company will need to be borrowing a relatively modest amount of capital (say, between £10,000 to £250,000) and is willing to part with company share in return. If more capital is needed then Venture Capital Companies would need to be approached. Secondly, the owners and senior managers of the business must be prepared to build up a relationship with the business angel- they will usually want some close involvement in the business without wanting a day to day management oversight. They could well offer expertise to the business say, in marketing. Crucially the business angel will want a high return for the capital – up to 20% to 30% per years which may well be realised by the gain in capital value of the company over the period. However, business angels even if they have no time-related issues for investing their money will need to know there are plans for an exit strategy. This may take the form of the sale of the business to another business, the re-purchasing of the angel’s shares by the management or by another individual.
Invoice Discounting Finance
Invoice Discounting is where finance is provided to a company backed by the security of accounts receivable. This is therefore similar to Invoice Factoring, though in the case of Invoice Discounting, the customer is not made aware of the transactions against the payments. The service is provided only where the good or services are supplied on credit terms business to business.
It is harder to obtain an invoice discounting facility than with Invoice Factoring and the provider of the Invoice Discounting Service will need to be aware of the quality of the customers and the relative spread of money owed. Usually it is considered unwise to have any one customer with over 20% of the debts. Also the supplier of the services or products will need to be able to show that there are good credit control facilities in place with debts being collected in an efficient and timely manner. In addition, the supplier should have a good system for its sales ledger.
The process works by the provider of the Invoice Discounting Service opening a trust account at a nominated bank and all monies paid to the supplier will be paid into this account. The supplier will send the service provider regular notification of invoices and credit notes together will supporting documentation specified. Then the service provider will advance to the supplier up to 85% of the invoice total with Vat included. The final payment is made when the customer settles the account.
Asset Financing and Refinancing
When a company needs to keep hold of its working capital then some companies opt to use asset finance leasing. The lease of an asset means that the company uses the asset and pays the lessor a regular payment to sue it. The lessor keeps ownership of the asset. High value capital assets are often leased in the transport, manufacturing and construction sectors. There are two kinds of Asset Finance, Direct Leasing and Sale and Leaseback. In the former case the company looks for the asset it wishes to purchase and then the Asset Finance Company will buy it for them. In the second instance the Asset owned by the company is sold to the lessor and then rented back.
Asset Finance is a service used when purchasing assets, but Asset Refinancing is not as well known to businesses. If a company has already bought high value assets such as property, machines or technology for the company it is possible to sell them back to a leasing company who will then pay you back for the current asset value. The business can then continue to use the asset in the same way but then pay the lessor regular payments for them.
Asset Refinancing involves an agreement drawn up between the business and the lessor, with agreements made to repay usually over a fixed time period at monthly or quarterly intervals usually at a fixed rate of interest.
Asset refinancing can free off capital for a business investment opportunity or weather problems caused by a bad dept. Of course, there is an interest charge attached to the agreement and the company will always pay more than the original cost of the asset though it could be a fairly low cost way to raise money for the business.
Invoice Factoring Finance
Invoice Factoring is a financial service to businesses where the company’s assets in terms of account receivable invoices are sold at a discount to a financial company. Thus the finance company takes on the financial credit risk of the debtors and gets repaid when the debtors pay their accounts. There are three parties involved in these transactions, the business wanting to raise money through its invoices, the Factor – the company providing the service and the customer who owes money to the business. The benefits to the business are that cash flow is freed up and speeds up re4cipts to the company. The resources devoted to debt collection are reduced and can sometimes offer better credit terms to large customers to increase sales.
The process helps to reduce debt and enables the company, with its increased cash flow, to make payments to its own suppliers more quickly and, if offered, take advantage of early payment reduction. It also means that as companies increase sales and grow, the more money is available to them. It also creates credit guarantees to new customers.
There are, however, some disadvantages – for example, the Factor will often want to set limits to credit terms which takes away some flexibility. It is also quite difficult to end the Factoring agreement once agreed. One major difficulty is that if a customer disputes and invoice then the money can be recalled by the factor – and this can be extremely hard to sort out in some cases. In addition, the Factor has to be doing the job properly – it is essential that debt are collected in a timely manner or the company will be in no better position than before factoring was introduced.