financial management
Briefing investors with your management accounts
As you grow your business it’s reasonable to suggest that there will be those who are not working on or in the business day to day but who have a stake in your future success … perhaps because they’ve invested time and/or money, or perhaps because they are key clients or research colleagues.
One of the things that helps build trust and confidence with stakeholders is the ability to tell them how you are doing, especially vs. previous expectations or commitments that you’ve made. This is not to say that you should simply open your books to them in their glorious detail but instead you should be able to extract the relevant information and keep them updated.
For example if you have received investment from Finance Yorkshire one of the strings attached to the finance is a commitment to provide monthly management accounts. The expectation here is that within two weeks of the end of a month your accounts will be fully up to date for the completed month and you’ll send a copy to Finance Yorkshire.
Implications?
Well your book-keeping needs to be a regular activity and you need to be able to produce reports simply and painlessly!
Of course you shouldn’t just be doing this for their benefit, these numbers should be used internally to see how reality matches up against the forecast so that you can take action to tweak your plans in the light of better or worse sales and costs than expected.
So, what reports might you run regularly (say monthly if not definitely quarterly) and share as appropriate?
Here’s our checklist:
- Monthly Income – shows you a monthly total across the year to date
- Income by Customer – good for getting a better handle on how your income splits between major and minor clients
- Income by Sales Type – for product based folks this means you can look at key products or ranges, for service based folks you can see a split between different services and also the production expenses that you charge on to clients
- Profit and Loss – you can pick your time period here but as a starter look at the current year (financial or calendar)
- Expenditure by Type – how does your cost base split out between labour, travel, rent etc?
And if you really want to wow them why not also show them how your business stacks up vs others in your sector … the MyCake benchmarks offer you this as standard. If you’re in the top twenty five percent you should certainly be shouting about it!
Here are a couple of examples of the sorts of reports you could routinely share … pretty much at the click of a button ~ annual report and monthly income report 
annual report
monthly income report
IP: brand value what is your company really worth?
Assessing the value of intellectual property, intangible assets and goodwill is a complex affair. Kevin King’s post for ACID (Anti Copying in Design) throws light on the concepts and methods for valuing IP in your business:
Valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so called industry/sector norms in ignorance of the fundamental theoretical framework of valuation.
read the full post here
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Digital Communications Knowledge Transfer Network is hosting a FREE seiminar about unlocking the value of intellectual property and intangible assets within your business ~ through collaboration, licensing and fundraising.
Tuesday 14th September 2010, Radisson Edwardian Kenilworth Hotel, London
Full details here.
Cockpit Arts Top tips: The Pricing Decision 2: Price and the Market
Ahead of this week’s Cockpit Arts Finance workshop with MyCake on Wedensday, 11th August 2010: Financial Planning for Growth we’re have some more Top Tips by Ellen O’Hara, Head of Business Development at Cockpit Arts.
There’s no doubt that getting your pricing right is a crucial part of your marketing and business strategy as a designer-maker.
As part of the Pricing Decision series I am looking at three key areas: Cost, Market and Value, as well as how different pricing strategies fit with the overall goals, for your practice and business.
My last post looked at the relationship between price and cost with cost-plus pricing. This week I will explain how the market affects the pricing decision.
Price and The Market
Market based pricing methods depend on having an accurate picture of what’s going on in your marketplace. For example: Are you selling to craft collectors? The mainstream gift market? Or high end fashion? And what are the current trends in these market sub-sections?
In the larger, mainstream markets, prices will tend to be dervied from two key factors:
- What competitors are charging
- What customers are willing to pay
Who are your compeitiors and what are they charging?
If you don’t feel there are any direct competitors out there, try and pick out a few other makers or brands that:
- Are making similar work
- Are aiming at a similar customer base
- Who are at a similar stage in their career and have a similar profile
How do your prices compare? Are you competitive, or potentially over or under pricing yourself?
What are customers willing to pay?
- Research other companies’ prices online, in stores and in galleries. Pick a broad range of products so that you can compare the going rate for different types of products in your field. For instance as a designer-maker jeweller, you could look at a combination of mass produced high-street designer jewellery and high end fashion jewellery, as well as other makers.
- Look at the overall price range that other companies offer (minimum and maximum), how different work is priced differently, whether discounts are offered etc.
Use all of this information together to inform your own pricing decisions.
The Advantages
The advantages of following a market-based approach are that it tends to keep you price competitive in the eyes of your customers, so it’s important to consider who you’d like to be compared with and sit alongside in terms of price.
The Disadvantages
The disadvantages of this method are that the market price may not provide you with the profit margin that you want (and need!). You may actually have a very different business model to the people you are comparing yourself with, who may be able to produce and sell work at very different costs.
New and Unique Work
Your work may be so new and unique that there is no solid market-based price to compare with. So you have be the price setter yourself. If this is the case, it’s likely that your operating at the niche end of your market, where the percieved value of your work bears more influence on price than what others might be producing and charging. We’ll explore this in more detail next week with The Pricing Decision # 3: Price and Perceived value.
Let us know how you get on by leaving a comment on your experiences in making your own pricing decisions.
See more top-tips on finance from Ellen and other industry experts.
Or check our resources section for a worksheet on Calculating Your Costs and Budgeting.
And if your doing some financial planning this summer, come along to our workshop: Financial Planning for Growth on 11 August.
Risk and the Creative Entrepreneur ~ your thoughts please
Calling all creative entrepreneurs…
The Creative Industries are known for being very risky and yet we have little understanding of how risk affects creative entrepreneurs. Nicky Riley at Birkbeck College is conducting research and is interested in your views on risk and how risk affects you.
Please help by filling out this survey. All fully completed responses will be entered into a prize draw – 4 individual prizes of Amazon vouchers worth £25 will be made and Nicky will contact the winners by email.
Please log on here to complete the questionnaire.
All survey responses will be treated anonymously and findings only reported in the aggregate. Please feel free to contact Nicky if you have any questions and require further information. The survey will be open until Friday 20th August 2010.
We value your feedback for this research very much and thank you for your time.
Cockpit Arts Top tips: The pricing decision series
Ahead of Cockpit Arts Finance workshop with MyCake on 11th August 2010: Financial Planning for Growth we’re featuring Top Tips by Ellen O’Hara, Head of Business Development at Cockpit Arts.
The question that I’m asked more than any other in my role at Cockpit is ‘how should I price my work?!’
There’s no doubt that getting your pricing right is a crucial part of your marketing and business strategy. So what is there to consider when making the pricing decision?
In the workshop The Price is Right, which is part of our rolling programme of Making It Workshops, we look at three key areas: Cost, Market and Value, as well as how different pricing strategies fit with the overall goals for your practice and business.
Over the next few weeks, I’ll be posting a series of top tips, looking at pricing from these four different perspectives:
The Pricing Decision # 1: Price and Cost
Your first consideration when setting prices will usually involve looking at what costs are involved when producing your work. The ‘Cost-plus’ approach to pricing involves setting price by starting with the cost of creating a product, and then adding a mark-up. The mark-up provides you with your profit margin and so the cost-plus approach almost guarantees that you will not sell at a loss.
Mark-ups can be based on industry standards, individual expert opinions, or widely accepted rules of thumb. I usually advise makers to try and double their cost price to arrive at their wholesale price. In other words, add a mark up of 100% or x 2. And then add a mark up of around 2.5 on the wholesale price to arrive at the retail price. This is equal to multiplying your cost price by 5 to arrive at your retail price, or adding a mark up of 400%. This should ensure that there’s enough profit to cover some of the other costs associated with running your business.
The disadvantage of this approach is that if costs increase, the price of the product must also increase. The price of each product is therefore dependent on how many costs it creates.
The key to using this approach effectively is to be as accurate as possible about actual costs. So what should you include?
- Firstly there are the costs that directly relate to the production of the work such as materials, the cost of outworkers and packaging. These costs will tend to vary as the volume of work you produce and sell changes and can be refered to as variable direct costs.
- Then there is the cost of your time (if you produce the work yourself) which will be based on your hourly rate.
- Finally you also need to think about making a contribution to the day to day running costs of your business, or overheads (also refered to as fixed costs). This will include things like studio rent, day to day administration costs, PAYE staff costs and marketing. Some makers build this into their hourly rate.
A cost-plus figure generally provides a basis for the lowest price acceptable, but should not be the only consideration. It takes into account the cost and profit side of buying and selling, but it neglects demand for your work and what is going on in your market.
Another way of using costs to determined price is ‘target pricing’ where are a target price is made, and then costs are adjusted so that that price can be achieved. However, this is often very difficult to achieve for designer-makers who produce in small batches because costs are less flexible.
Next we’ll be looking at Price and Market in The Pricing Decision # 2.
For guidance on calculating your costs, try our Calculaing Your Costs and Budgeting worksheet which can be found in the Resources section of the blog. Or see the other posts on the blog that advise on finance from me and other industry experts. Let us know how you get on!
And if you’d like to attend our next Finance workshop: Financial Planning for Growth see details and book here.
Should I bet the house?
First of all let’s make a distinction between gambling the equity in your house unwittingly vs. agreeing with a bank that your house is security on a loan.
In the case of the former I’ve seen examples of entrepreneurs using either their credit cards to fund the business or telling themselves that they are making an investment in the business when they write cheques against their mortgage to cover costs of a loss making enterprise. Many do the first example and recover; the latter is more dangerous as you are increasing your debt but have a reducing capacity to pay it back.
But what about knowingly using your house? I’d like to look at how you evaluate the decision as to whether to use your house as security against a bank loan…
Under what circumstances would you be asked to use your house as security?
Well if you want a loan rather than an overdraft from a bank it is not uncommon for them to want security against the monies lent. The most common form of security is a ‘personal guarantee’ which essentially means that any assets you have could be seized by the bank to pay back the debt should you default on the loan.
If you are seeking venture capital investment then investors like to see you have some ’skin in the game’ ie investing some monies into the development of the business at the same time as they are providing the main funds (your previous investments don’t count at this stage as these are essentially sunk costs that have already been accounted for in the growth to date and the valuation of the company). However these sums are likely to be less than 5% of the total funds raised and VC’s know they are asking for a ‘gesture’ rather than a significant investment. It is much less common for VC’s to ask for a personal guarantee.
Is your business worth the risk?
Well at the end of the day we can’t answer this for you but here are a few things to consider….
- if you have a clear budget as to how much income you need to payback the loan and you’ve already accounted for the ‘what if’ scenarios of increased cost but reduced income and you can still see how it will be paid then these are indications that the business is likely to be able to pay back the loan.
- if you are in need of working capital to develop the business to a point whereby the income will start to be able to payback the loan but at the moment you can’t see what the revenue stream or scale of income would be that would have this capacity then you are considering taking on a debt without a route to payback and this is more risky.
- if you have other sources of income and or savings and investments that you could use to payback the loan if the business was not able to then whilst you are still incurring the risk of losing the monies you put into the business but you do at least have a backup plan.
You might also look at the stage of development of the company/product. One key question when considering any investment into the business is whether or not it is sufficient funds to get you to market (and thus achieve income to pay off the investment). Typically entrepreneurs invest at the very earliest stages when the ability to achieve revenues from products and services sold are at their lowest ie when the risks are greatest; furthermore it is all too easy to under-estimate the cost and time involved in getting to market so inevitably there are stressful patches when you need to progress faster than funds will allow.
It is at these points that you need to take a bit of care … as you are likely to feel that ‘if only we had x,y,z’ then everything would be ok … you risk making non-rational decisions based instead on your emotional involvement. To help avoid this scenario again the answer is a budget looking 12 to 36 months ahead where you can see where the pinch points will come and therefore can make plans ahead of time as to how to resolve this … asking for credit from suppliers or for early payments from clients are both ways to avoid seeking loans or equity investment when you are at your most vulnerable!
If you have a partner or other source of income into the household then again whilst you are risking the money you may be able to avoid not losing the roof over your head!
how do I ring fence monies for research and development?
Having decided to invest research and development to build your creative business, how to you ensure monies set aside for R&D are used correctly?
Well the main thing is that you need to make sure that you actually spend the time and money you allocate. It is all too easy to prioritise paying clients ahead of your own development. In the short term this is not too surprising but it is the long term sustainability that we’re really interested in. Here are some tricks you can employ to develop a better balance between short and long term business gain:
- Treat R&D projects as if they were client contracts ~ so set deadlines, allocate staff (good working time not evenings and weekends) and report on them in team meetings and/or to your mentor or business coach
- Ring fence the funds in a budget and report on actual spend on R&D vs the allocated budget
- Set a target for the number of new ideas you want to generate in the first round … perhaps incentivise staff, freelancers and associates to contribute to this
- Aim for not more than three ideas to develop and pick a mix of low risk, quick and cheap to develop alongside bigger vision, more costly and long term stuff
- Perhaps involve a client as a test case and therefore make yourself accountable to them for deadlines. Make promises that you have to keep
- Make a director responsible for R&D just as someone is responsible for finance or marketing or HR
- Write it into people’s job descriptions and rewards packages
- Plan to phase out some of your older products or services and set dates by which you want this to happen. This means you’ll have to replace them with new things and will speed up the process
- Make income projections that include the new products and services. At least some of this new income will go to pay staff and overheads but perhaps it will also result in a pay rise for the directors
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Extract from the fourth MyCake Benchmark Bulletin which looks in depth at research and development ~ why it’s important for creative businesses, how to fund it and how to make best use of your R&D spend.
Download the full report here.
Financial support for your business
Naturally, most people are interested in any financial support for their business.
As a creative business adviser, I have helped hundreds of creative entrepreneurs over the years. Often, their enterprises are receiving financial support – from themselves !
This is because they are not taking into account the cost of things like use of a family computer, personal mobile phone, a back-bedroom office, or car. By ignoring the cost of these essential resources, they become ‘hidden subsidies’ to the business.
Ironically, as a result, these businesses lose money.
One effect is that they pay more tax because they seem to be making more money than they really are as a consequence of not including all their business costs.
More seriously, they often lose money because they charge customers too little. By ignoring these hidden costs, they kid themselves that the price they charge customers creates a profit. But when I help them to calculate and understand the full costs of their business, we often find that the price charged is too low to cover all the true costs of the enterprise.
This problem comes to a head when they need to buy new equipment and there isn’t enough money in the bank account – because they haven’t put money aside to acknowledge the depreciation of computers, cameras or other equipment.
As the business grows, its unprofitability becomes clearer. The true costs come out of the woodwork as the creative entrepreneur has to write cheques for office space, software, transport etc – things that were previously provided free by family, friends or themselves.
So the main reason I urge people to calculate all these hidden costs is so that they fully understand the economics of their business.
I find that those creative entrepreneurs who do this are the ones that charge their customers the right prices/fees – and consequently generate enough income to make their creative enterprise profitable and sustainable.
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There’s more about making your creative enterprise even more successful in my book ‘T-Shirts and Suits: A Guide to the Business of Creativity’ (also available as a free eBook) and further ideas and information on the T-Shirts and Suits blog.
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Copyright © David Parrish 2010.
www.davidparrish.com
Investment Matters – Creative Industries meets Investment Finance
This summary video gives an overview of the challenges of connecting Creative Industries to Investment structures that were covered at Investment Matters in 2008. The message of the need for a bridge or a translation between the values of the creatives and the values of the investor clearly came across fairly strongly the question is what will people do differently as a result … watch to find out.
Investment Matters, British Embassy, Brussels, 2008 – courtesy of CIDA and the ECCE programme
Are your figures under-dressed?
High fashion businesses are often a money pit in the early years. Those first few seasons might only result in £3-5,000 of orders per season and yet the cost of sampling and PR let alone catwalk shows and salons will certainly exceed this income.
So how does anyone get going? There are several answers to this depending on which bit of the fashion sector you are in. If you are aiming to be the next Alexander McQueen then many would say that you need passion, commitment and to get noticed. Many would infer from this that your finance skills are less important. Indeed if you find a financial backer who will cushion you from the ups and downs in seasonal cashflow then indeed this can be the true. Camilla Staerke is one example of a name backed by an investor.
If however you want to build your own label independently or indeed if you want to maintain easy communications with your investors it pays to understand your numbers. There are a couple of key angles to this. You need to understand garment costing so that you know precisely what the unit cost is of each design you create. We rate F2IT as the best solution for independent labels … just looking at their customer list shows you that the likes of Christopher Kane, Eley Kishimoto and Erdem agree.
But production costing is not enough. You need to be able to make forecasts as to where your sales will come from next season and target the retailers who you feel would be a good fit for your brand. You probably need to hang out in some of those retail spaces to to get a real idea of how sales happen and why.
You also need to get a handle on the mix between online and offline sales. With such a huge growth in online fashion retailing you need to work out pretty early on whether you’re going to run your own store or whether you’re aiming to get stocked by one of the existing online retailers.
Sounds like a lot to handle, well yeah, kinda but honestly … you gotta be business savvy as well as creatively brilliant. Don’t just take our word for that, here’s Wendy Malem of the Centre for Fashion Enterprise explaining why business development matters as much as creative development … in particular check out her views on the finance needs of companies growing from creatively applauded but financially fragile to more robust global brands.
Wendy Malem speaking at Investment Matters in 2008 courtesy of CIDA and the ECCE project
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Look out for our fashion related giveaway later today…
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