Benefits of a Fractional CFO ALL businesses should have

Employing the right people in your team is essential for business success.  You need an expert who can make sure everything runs smoothly and that’s where a modern part-time fractional CFO comes in.  A modern fractional CFO is invaluable to all businesses regardless of their size, complexity or market for the following reasons –

Use of accurate information for data-driven decisions

The modern fractional CFO oversees data from all areas of the business ensuring this is both accurate and up to date.  This is used to provide informed advice on how to proceed with any investment, operation or other strategic initiative within the business.

Ability to adapt

Technology, regulation and laws – especially around your business operations are continually evolving or changing.  It is the role of a fractional CFO to both remain up to date in all and to ensure their compliance or application has the best possible outcome for the business. Most recent emergences have been in cloud computing, automation and AI aiding efficiencies in routine tasks and capabilities in management reporting and analysis set against the challenges of home working and cyber security. 

This said systems, controls and the level of information needs to be appropriate for the size of the company – ideally with scalability factored in.  This needs to be suitable for its intended readers – i.e.  senior leadership team, shareholders, executive committee and employees. 

There are many MDs which do not completely understand their accounts but feel (incorrectly) reassured by graphs and charts – too much information is as bad as not enough.  The best reporting in the world is worthless if its message is not understood!

Maximising Profits

An effective fractional CFO will audit current costs and identify potential areas for cost savings and efficiencies.  They also help develop plans for future budgeting and forecasting activities so the business is always aware of their financial outlook ahead of time.  A budget is used as a yardstick to compare against actual performance (good or bad),  the results of which being used for future forecasts and planning.

Improving Compliance

The modern fractional CFO ensures compliance with accountancy rules and ensures submissions to HMRC and Companies House are both accurate and timely.  They keep track of changes in legislation together with compliance with existing rules.  This reduces the risk of future fines due to non-compliance issues.

Bringing out the best in the in-house bookkeeping team

A fractional CFO will develop, motivate and provide direction to your in-house bookkeeping team.  This will be achieved through setting goals, targets and priorities so ensuring transactions are accurately processed competently performing routine tasks so ensuring reporting is timely and accurate – a true aid to decision making.

The glue to hold other areas of the business together

The fractional CFO’s ability to read business information should enable them to use this to drive informed change.  They should be ‘critical friends’ with all areas of the business challenging managers to provide ‘cost-benefit’ for any expenditure or investment purchase done without affecting the ability of the company to carry out its underlying strategy.

Having a modern finance director as part of your team can be invaluable when it comes to maximising profits, improving compliance, and making data-driven decisions within your business – no matter its size!  Not only do they provide expertise in various financial matters but they also act as a valuable resource for generating new ideas and strategies for taking your business into different areas.

A modern fractional CFO is invaluable to all businesses regardless of their size, complexity or market.  Our flexible tailored packages start from one day per month making this service truly available to all.  This is a core specialism of FD Solutions and Accounting please contact us for more information and to discuss our flexible packages.

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Does Your Accountant Really Care About Your Business’s Profit?

Having a commercial accountant is essential for your business’s financial success.  To provide relevant advice it is essential they take an active interest in your business.  As a minimum a commercial accountant should

    • Know business owners as people – what are their personal and business goals, pressures and stresses – both financial and non financial.

    • Know the business – have they visited your premises, met key employees, understand the business structure, market and your key products and services?

    • Offer pro-active advice – a commercial accountant should ask questions you have not thought of – for example.  Do they bring to your attention future risks and methods to avoid them? Do they offer practical business advice which in the past has been put into practice with positive results?  Our industry experience enables us to quickly grasp any root issues and to provide viable solutions leading to savings and efficiencies.

    • Go the extra mile when you need extra help and support?

All of which are part of the core service offered by the commercial accountants at FD Solutions and Accounting.  Using our industry experience our aim is to identify any root issues to then solve problems. We never forget that you the client come first, offering you support in the way you require it.  

Here are 10 warning signs to look out for –

  1. Lack of availability – if your accountant is either difficult to get hold of and/or takes a long time to respond it could be a sign you are not considered a priority. Good communication is essential.
  2. Lack of expertise – to provide specific financial advice a truly commercial accountant should have experience relevant to your industry  
  3. Little proactive advice – in addition to compliance a good commercial accountant should be looking for opportunities to provide advice to further improve your business performance.
  4. Errors in your financial statements – this could be an indication your accountant is not paying enough attention to detail. Mistakes could cost you money in the long run – its important finding an accountant which is meticulous.
  5. Ethical concerns – if you have any concerns about questionable tax strategies you should distance yourself. If HMRC decide an accountant is doing something dishonest then all their clients could potentially get drawn into the same investigation at significant cost both financially and emotionally to you.
  6. Lack of transparency – your accountant should be transparent about their fees, services and any issues that arise. If you discover any of these not be the case this could be a sign they are not acting in your best interests.
  7. Unresolved issues – if you have raised concerns and these have not been resolved to your satisfaction and/or you do not feel confident in your accountant’s ability to handle your financial needs it’s probably time to look elsewhere.
  8. Lack of innovation – your accountant should be using latest accounting tools and practices, if this is not the case possibly you will be paying for their inefficiencies. An accountant who is not consistently learning and improving their skills may not be able to provide the best service possible.
  9. Incompatibility – if your accountant’s values. work ethic or communication style does not align with yours it could prove difficult to work together effectively.
  10. Business growth – as your business grows your financial requirement will become more complex possibly requiring a higher level of service. It could be that you will need to find a more specialist commercial accountant to support you take your business to the next level.

Changing accountants may be a difficult decision but once made it is fairly quick and easy to do.  Remember your financial success depends on having the right professionals defending your corner, someone like FD Solutions and Accounting Limited. We never forget your success is our business!

Employee morale opportunities which are also tax deductible for the employer

Employee morale after a holiday season is over is usually low, when your now cash strapped employees return to work with New Year resolutions of asking for a pay rise or worse – ideas of looking for another better paid job!  This employee morale focussed tax planning blog explores ways to provide meaningful employee morale boosting rewards that do not result in extra tax liabilities and are fully tax deductible for your company.

Here are some suggestions of tax-friendly methods which equally show appreciation to your team boosting their employee morale –

Idea 1 – £50 gifts – You can give your employees gifts or vouchers up to this amount without their incurring additional tax. Vouchers are convenient and can include those accepted by major online retailers such as Amazon or for food delivery services to treat your team.  For non directors there is no annual limit to how much or how many times these are given provided the reason is not performance related, open to all and each time no more than £50.

Idea 2 – Equip their home office – This is a valuable option as you can help create a conducive work environment leading to improved performance and employee morale. Your company will own the equipment, and if they leave, you can reclaim it or sell it to them.   Flexible hybrid home working options are now becoming a major factor employees consider when accepting an employment position.

Idea 3 – Provide a mobile phone – Initially, the cost of a phone can be high. This is crucial for employees who have client interactions to separate work and personal life, or for the marketing team to capture high-quality images. Additionally, the monthly contract can be managed through the business without incurring a benefit in kind charge.  By covering the cost through the company, you can recover the full expense and VAT. If the employee is expensing the cost, they can only claim for personal use.

Idea 4 – Reimburse home office expenses – Employees can claim certain costs for working from home. If an employee requires a specific broadband service for work, your company can contribute to the business portion. The employee’s work/personal split is 50:50, allowing them to claim 50% through a monthly expense report. In certain cases, flat rate expense claims may be available at £312 per year.

Idea 5 – Branded merchandise – Select an item and add your company’s logo. As long as it’s reasonable and aligns with business needs, it’s tax deductible. T-shirts and sweatshirts are a popular choices.

Idea 6 – Did you forego an office Christmas party?  Fear not the tax and national insurance free £150 per employee can be used for any annual event whether this is a late January party, summer event or 2024’s Christmas party – something for everyone to look forward to – boosting employee morale!  One other requirement to receive this allowance is that the party must be open to all employees.  For those of you with a business operating at multiple sites, HMRC says “If your business has more than one location, an annual event that’s open to all of your staff based at one location still counts as exempt provided it is open to all employees and/or separate parties are held for other locations or departments.

The £150 rule applies to both virtual and in person events.

You may wonder, why should I do this? Well your employees will perceive it as a thoughtful gesture. The VAT is recoverable on direct business purchases and you may also potentially receive up to 25% Corporation Tax relief.   Furthermore, branded merchandise offers great exposure for your company.  So a win/win for employee morale and your business!

These tax planning strategies not only promote a positive work environment but also address tax considerations.  For personalized advice tailored to your business, contact us today and make this a rewarding experience for both your staff and your business.

Research and Development in Manufacturing (food and drink sector)

Manufacturing is a highly innovative UK industry sector in the UK with numerous companies are engaged in activities which meet the criteria for research and development (R&D) tax credits.

However businesses often fail to take advantage of research and development tax relief because they assume that their work is not eligible. While certain forms of commercial product development may not qualify, the manufacturing sector is constantly involved in a wide range of activities and initiatives aimed at advancing knowledge.

Taking the food and drink production sector as an example innovation is necessary as a result of consumer demand, economic pressure (for example cost of living), supply chain or regulatory compliance.  Food and drink businesses respond by developing new products to fulfil their preserved market need for example

 

    • Improving nutritional benefits
      • Reduction in salt, sugar, additives
      • Free-from gluten or particular allergens
      • Tailored to dietary need (high in protein or fortified in vitamins)

       

        • Alcohol free alternatives

    • Extending shelf life

    • Addressing sustainability or environmental concerns –
      • For example eliminating palm oil to protect the Rain Forest

       

        • Vegan or organic ranges

    • Reducing unrecyclable or unnecessary packaging

All product development requires investment and carries a high level of risk.  The Research and Development tax credit scheme is a valuable means to help subsidise the cost of such innovation.

To quality a project needs to seek to achieve an advance in science or technology and for these activities to address scientific or technological uncertainty. 

When it comes to food and drink products, creating new recipes or formulations is highly likely to fall under Research and Development. The process of innovating and developing these products often involves scientific principles.

Formulating and combining ingredients can introduce uncertainties in their reactions. Even a small change in one ingredient can alter the properties of the mixture and their behaviour in subsequent production stages.

There are also uncertainties in the manufacturing process, such as scaling production, implementing machinery, and establishing processes to ensure a consistent end product.

While meeting consumer expectations for taste, appearance, and unique selling points is crucial, products also need to fulfil various requirements related to shelf life, transportation, compliance with regulations, and affordability.

Utilizing new materials, developing innovative solutions to safety challenges, and integrating new technology can all meet the eligibility criteria. It is crucial for manufacturing companies to monitor their projects and research and development expenses meticulously, as they are required to provide detailed records of the qualifying activities. Seeking professional guidance is essential for a successful tax credit application.

Research and Development opportunities for Restaurants and Other Hospitality Sectors

Restaurants and hospitality businesses often overlook the opportunity to claim research and development (R&D) tax credits. Despite ongoing innovation in the form of new processes, services, and recipes, many are unaware of Research and Development tax relief and the activities that could qualify them.

For establishments like restaurants, bars and hotels, investments in delivering better service and advancing methods may be eligible for such credits.  This encompasses activities such as creating gluten-free recipes and developing new technology for hotel guests.

Qualifying expenditure includes materials, ingredients, and employee wages related to Research and Development efforts, making expert advice essential in this often disregarded area.

Examples of eligible activities include

 

    • The development of vegan and gluten-free alternatives,

    • Recipe experimentation – including different cooking or food preparation methods

    • Innovative customer booking apps,

    • New eco-friendly hotel laundry techniques.

For example, a restaurant successfully improved a signature dish with reduced sugar content after the head chef spent time experimenting with alternative ingredients and preparation methods.

Transforming a finance department into a business partner at a £20m education membership organisation – case study

Virtual Finance Directors moving the Finance Department out of the back office shadows to become a true business partner

Used correctly finance business partners are an expensive but valuable resource however in reality very often end up spending much of their time in data manipulation, reconciliations and reports which are of no direct value to a business. 

Typically this is a symptom of poor systems and processes but often also due to a lack of understanding as to what activities will drive business value.

Over the last 50 years finance departments have been attempting to change their place in business from merely bean counters – paying the bills and reporting what was happened as a fait-accompli into using this information to become forward looking business decision makers and drivers of performance.  This transition continues being a challenging journey since many finance professionals are much happier just crunching numbers rather than becoming involved in commercial interpretation and performance improvement.  In recent years improvements to even the most basic of accounting software have both reduced the time finance teams need to spend in data entry whilst offering the ability to report the same information in a variety of different ways with little additional effort – that said as the quality of data improves so has the demand and expectation from other business areas.

I have been involved in rolling out varying aspects of finance department transformation in several businesses and which very often is borne out a necessity for financial information.  Typically this request originates from either a Managing Director or their Board of Directors and comes with unrealistic expectation that with additional information and their sudden new found commercial acumen, the quiet finance department will save the business!  The latter often being the biggest obstacle to overcome – whilst an effective finance business partner’s commercial acumen should be the number one competency (even above that of bean counting), none the less they are only a voice at the commercial table (albeit influential) but ultimately responsibility should rest with the commercial directors.

Several years ago I worked with a Kent based college group which had acute financial difficulties attributed to poor cost understanding and a lack of individual course profitability analysis based on actual figures.  A top level annual budget was being prepared and the finance team were posting invoices to cost centres but further analysis was limited. 

Working with each cost centre manager the budget was recalculated by each cost type and significant supplier then into which month the charge would occur.  A similar process was introduced for commercial income so turning the budget process onto its head.  Monthly meetings to discuss variances and changes to future months were introduced between budget holders and members of the finance team.

Course income was generally funded through central government grants with the amount based on varying student or course criteria.  A process for calculating the correct income allocation per course was introduced as an intense annual task.  When applied to the costs analysis above provided performance by cost centre and course.  In normal circumstances this should have provided the foundation for the finance department to become involved in discussions about curriculum development especially in respect of required course attendance numbers and trends.

Unfortunately in this situation such analysis was left too late.  The results just gave meaning to the bank balance that due to insufficient student numbers, courses themselves were either loss making or that this became the case after central management cost had been applied. 

Had the finance team become business partners sooner it might have been possible to save this organisation. However this serves to strengthen the potential valuable role finance business partnering can have to a business.

As a summary the key priorities finance heads require to develop a business partnering function are –

 

    • Strong and accurate data (which is input in a way that no further reconciliation or sub analysis is required before it can be used for performance reporting)

    • Finance employees require up skilling in negotiation and influence to underpin their likely analytic ability.

    • An understanding of Board priority as to where and what suitable analysis and general business support will add value – volume of financial reports is not a guarantee of accepted value.

How to Increase Profits by 5%?

Profit margin can be increased by at least 5% with the assistance of a Virtual CFO – here is an example of how we’ve helped a past client, not solely consultancy but hands on delivery.

Case Study

At £5 per £100 5% does not sound much however a £3 million saving per £60 million of sales and this starts looking worthwhile!  Even better, whilst some of the improvements listed below helped me achieve this increase, in businesses where these have been completely overlooked the savings could be much more significant!

Gross profit margin is the profit percentage of sales less direct costs of manufacture, for example materials and the wages of the production team.  Some organisations, where it can be attributed directly to production or distribution also include the manufacturing element of utilities and motor vehicle costs.

I achieved this success whilst working as an international virtual CFO for fine food distributor Classic Fine Foods then trading in a dozen Asian countries.  The Group sales at the time was £60m and my annual savings amounted to £3m.

As a distributor to a crowded market often with exclusive selling agreements for many of the products there was little manoeuvrability on sales price so any improvements had to be achieved from cost, process efficiency or sales volume.      

Savings achieved  

  • Using a report written from the accounting system – profitability analysis of every transaction by both product and customer was produced. This identified poorly performing products and customer buying patterns plus over reliance to either.  Products not achieving a desired gross profit margin and not deemed to be loss leaders were discontinued.    From a monthly customer buying analysis it was possible to pick up patterns and trends. The variations were passed to the sales team to discuss with the customer resulting in both additional sales and warnings of potential quality issues.
  • Inventory management – through the introduction of real time stock reports it was possible to both identify slow moving product lines and to track product expiry dates (critical for perishable items). Both of these were previously being managed through manual processes.  The result was a reduced amount of product requiring promotional discount pricing as a result of short storage life and the phasing out of slow moving product lines – so freeing both working capital and storage space for faster stock turnover item lines.
  • Stock write offs were analysed and product quality issues established either generally or customer specific, through addressing the root issue these were significantly reduced.
  • Prior to real-time automated stock reporting some information was being prepared manually, duplicating data entry. This employee time saving was estimated to be approximately two days a week per business location.

 Other factors which will affect a sales gross margin to be aware of, but not applicable to my case study above are –

  • Product theft – beware of excessive product write off or stock count differences between physical and computer system amounts.
  • Excessive product wastage in a production process – this could indicate poor product quantity, inefficient production process or worst case inaccurate product costing..
  • Are price changes for materials or substitutions being regularly updated in costings schedules then reflected in the customer selling price lists.
  • Minimum sales order value – regardless of its value its highly likely the cost of order processing and delivery (if a van drop-off service is provided) will cost the same amount.
  • Excessive customer discounting. Businesses offer sales discounts in the hope their customers will buy more – so boosting the part of the gross profit margin foregone.  Often this does not happen. This is best explained with an example – If a product costs £70 and the selling price is £100 the gross profit will be £30 (or 30%).  If the selling price is reduced by 10% to £90 the gross profit reduces to £20 (or 22%) so the business now has to sell 50% more to achieve the same profit margin position. 

          In reality sales discounts are most likely to be 20-25% – i.e. goods almost sold at cost!

          However work this in reverse in conjunction with a marketing campaign about product quality and sales prices could be              increased by 10% to  £110 so producing a 33% increase in gross profit margin for just a 10% increase in selling price!

  • Warranty claims – either the labour cost of a repair or a product replacement will be a cost without any additional income – unless there are guarantees which can be recharged to the source supplier.

In conclusion the factors which have a direct effect to an expected gross profit margin are –

  • Misunderstood product pricing or the production costs to manufacture
  • Customer discounting
  • Supplier price increases
  • Warranties and returns
  • Wastage (or scrap)
  • Excessive stock

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How do you maximise the value of your business? 8 suggestions

Well lets re-phase this – what are the key factors potential buyers will be looking at when acquiring your business – each of which adding a premium to the asking price.   Achieving these is no overnight fix and only come from focus and planning, however will offer your business resilience ready for whenever you plan to sell it.

Value Driver 1 – A Predictable and Consistent Cash Flow

Sales turnover and a positive cash flow will be one of the first business areas a buyer looks at.  Established growth patterns carry a premium which will be higher depending on the level of recurring sales.  This demonstrates a level of stability and a lower risk of being lost with a transfer of ownership.  Examples of recurring sales are maintenance contracts, subscriptions or service agreements/warranties.  Buyers are willing to pay the highest amount when they feel a positive cash flow is predictable and repeatable.

Value Driver 2 – Broadness of the Customer and Product sales base

Aim at ensuring no single customer or product makes up more than 10% of total sales.  This helps to protect the business from a loss of a significant customer or product and the cash impact this will cause.  Ideally products should be sold to multiple market sectors too.

Value Driver 3 – Reliable Financial Information

Goes without saying reliable financial records are critical for ongoing business management which in the company sale process can be used by the buyer to carry out due diligence to have proof of the figures.  Any level of doubt will have a negative impact to the purchase price.

Value Driver 4 – Quality of the Employees

Employees should be a business’ greatest asset.  Developing a low employee turnover ensures experience and depth of knowledge together with less time spent with recruitment (and its associated costs) and newbee training.  An in-place team will provide continuity and assist with business growth under any new ownership and as such are a desirable asset.

Value Driver 5 – Potential future Growth

At least annually a business should prepare a sales forecast and business plan for the coming year on which actual performance should be assessed.   The sales forecast should be derived from a growth plan which identifies realistic opportunities and profit.  Such a plan will be of significant value to a buyer which might identify areas they had not considered.  Areas to consider in a growth plan

  • If the business in a growth industry are there additional markets to pursue
  • What existing products could be sold to existing customers
  • Which products make the best profit margins – how can their sales be increased or margins replicated in other product lines?
  • Are there technology licencing or product franchising opportunities  

Value Driver 6 – Operating Systems and Procedures

Documented standard business procedures and systems help ensure product quality and aid employee learning in how the product is delivered.  This enables continuity under any new ownership.  The following are examples of business systems which enhance value –

  • Employee recruitment, training and retention
  • Product development and improvement
  • Product quality control
  • Business or product certification (for example ISO 9001/14001 or 18001)
  • Employee manual
  • Customer, supplier and employee communication

Value Driver 7 – Facility and Equipment Condition

Well maintained, tidy and modern facilities & equipment are not only likely provide the lower overhead running costs but also to realise a higher business sale value.  Potential buyers will be put off by poorly maintained equipment and facilities perceiving other aspects of the business may be similarly disorganised.  Buyers will also be looking for a modest amount of space capacity to accommodate some sales growth. 

Value Driver 8 – Barriers to Entry

Businesses should look at how they can protect themselves from competitors to strengthen its strategic position – their effectiveness of this adds a premium to a business sales price such as –

  • Aside trademarks, patients or hard to get licences
  • Trade secrets
  • Developed processes and propriety know-how
  • Hard to get contracts (for example government)
  • Goodwill – brand name, customer awareness or a good reputation.