Insight Associates - Finance Director, monthly management accounts, payroll, VAT returns, statutory accounts & compliance and business planning.

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Jargon Buster

What is meant by integrity and control in accounting records?

As with all things in life it is often easy to do something, but often difficult to do it well. It is unbelievably easy for a business's records to become inaccurate, incomplete and lacking any credibility. Time and time again we have seen company's whose accounting records cannot be relied upon. Every key balance in the company's accounts should be checked on a regular basis and agreed to an independent source in order to prove it's accuracy. How else do you know its right?

Why is timely accurate and relevant management information so important?

Directors have a statutory obligation to understand and control their company's finances. However more importantly it is impossible to make informed and sensible management decisions about the business's future without understanding where it is has been, where it is now and the consequences of those decisions. Timely, accurate and relevant management information will give you this. If you are to manage your business properly you must first ensure you understand it - and that is not just limited to your commercial knowledge.

What is a business plan?

A business plan is a thoroughly considered statement of the intentions of a business, how they will be put into action and the financial and commercial consequences. It will therefore define what is needed to achieve the business's goals and aims, whether that be financial (new investment, increased working capital .), or physical (new plant, new premises ..) or otherwise (marketing, promotion ..). A plan commits in writing the way in which the business will develop and is therefore an essential tool in both monitoring progress towards those aims and in encouraging others to support or back them.

Why is a business plan not a financial forecast?

As explained above the financial elements of a business plan are the consequences of what is planned, not the plan itself. It is a common mistake to think of a business plan (or budget) as a financial exercise but this is not the case. It is firstly a commercial and strategic document dealing with the business's goals and targets. The financial elements follow indicating the cash and profit impacts of those plans, and often whether therefore they are possible within the financial constraints of the business.

Why should I monitor my cashflow?

In any business cash is always king! Whilst many business managers consider profits first this can often lead to disastrous results. Depending on how a business is operating it is possible to be making good profits but run out of cash. This is because it may be using its cash resources in increasing stocks, not collecting its debtors, paying back loans etc. Remember insolvency is all about cash - don't ever take your eye off that ball!

What is a non-executive director?

A non-executive director (or NED) does not have any responsibilities in the day to day running of the company in which he (or she) is a director. His role is to assist, advise and monitor the activities of the company. He is often a highly experienced businessman, or someone with specialist skills, who can bring his knowledge to the board when there is no real need for him to be there all the time. Under the Cadbury Corporate Governance Guidelines large PLC's are obliged to have NED's, but they are often just as relevant to smaller enterprises.

What is the Insolvency Act 1986, and why is it so important?

The Insolvency Act of 1986 consolidated earlier Insolvency legislation and put in place a clear framework for the regulation of the Insolvency profession and gave it many new or revised tools to assist companies in financial trouble. It also placed many new or revised obligations on the duties and responsibilities of directors including the fraudulent trading and wrongful trading provisions.

How do I know I am insolvent?

There are two main tests of insolvency outlined in the 1986 Insolvency Act. These are:

  1. The Cash Flow Test:
    The company is unable to pay its debts as and when they fall due. This means that the company's cash resources are running out. Therefore, the company is not going to be able to pay its creditors on time.
  2. The Balance Sheet Test:
    The company's assets are less than its liabilities (including contingent and prospective liabilities). It should be noted that it is possible for a company to have a strong balance sheet but be unable to fund its cash flows - meaning that it is insolvent.

Under the Insolvency Act 1986, directors can be held personally liable for the company's debts if they continue to trade when they know, or should have known, that the company was insolvent.

What is a Company Voluntary Arrangement?

A Company Voluntary Arrangement (CVA) is an arrangement (deal, or contract) between an insolvent company and its creditors, which is supervised by a licensed insolvency practitioner and is formally governed by the Insolvency Act 1986.

A properly structured and appropriate CVA will improve the returns to creditors than would otherwise be the case if the insolvent company went into liquidation or receivership. This is achieved through the positive cash flows that can be achieved through future trading.

CVA's are a very cost effective tool as the licensed insolvency practitioner's fees are significantly less than would be the case in a liquidation, increasing the returns to creditors. This is due to the nature of the arrangement which does not disenfranchise the company's existing management who are able to continue to run the business. It also does not create a forced sale of the company's assets which invariably brings low returns, as these assets continue to be used in the running of the business.

What is an Administration?

An Administrator (who must be a licensed insolvency practitioner) takes charge of a company's affairs on behalf of its creditors as a means of averting liquidation. The administrator is appointed by the court with the power to remove or appoint directors and has the authority to manage the company subject to the control of the court. He must report to the creditors within three months of his appointment with a scheme for the future of the business.

What is an Administrative Receivership?

An Administrative Receiver (who must be a licensed insolvency practitioner) is appointed by a secured creditor who has the power to appoint a receiver under the terms of his security (typically a debenture with a floating charge). He takes control of the assets which he has a charge over with the aim of realising their value to repay the creditor in full.

What is a Liquidation Buy-Out?

A Liquidation Buy-Out is a mechanism by which the original owners of a business which has gone into liquidation may purchase the assets of the business from a liquidator. This may only be achieved if the liquidator can demonstrate than he has obtained the best value for those assets and that it will maximise the interests of creditors.

Who are Private Investors, how do they invest?

Private investors (often called business angels), are private individuals with funds to invest ranging from a few thousand to hundreds of thousands of pounds. They are normally businessmen of many years experience who are looking to utilise these funds to buy an equity stake, and also have some involvement in the running of the businesses in which they invest (although not always).

What is Factoring?

Under a factoring arrangement a business sells its invoices, as they are issued to its customers, onto a factoring organisation. The factoring company's name and details appear on the invoice, and all payments are made to them by your customers. The factor makes available a proportion of the invoice value immediately (50% to 85%) and the balance when the invoice is paid. The factor collects the amount due on the invoice, and operates the sales ledger. This form of funding has many advantages over loans and overdrafts since it grows as the company's turnover and working capital requirement grows.

What is Confidential Invoice Discounting?

With an invoice discounting arrangement a business exchanges its invoices for cash much the same as in factoring, but still operates the other aspects of the accounting functions. The business sends out its own invoices and is responsible for its own sales ledger, and credit control operations. Payments collected are paid into the invoice discounting company's bank account, to offset the advance already made. These facilities are normally confidential and therefore your customers need not know about the arrangement.

If you would like to learn more please complete our enquiry form.

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Compliance Check List

The need to ensure absolute compliance with the various requirements of the Government Crown Agencies is ever present ....but in times of distress this becomes even more important. We are increasingly finding that HM Revenue and Customs is unlikely to support a rescue for a company with a poor compliance record. Use our quick check list to help you ensure you are up to date!

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News Insight - What's happening here?

Insight Team Changes

24 September 2014

Have you called or visited our office lately? If you have then you've probably already noticed a few new friendly faces around the place.

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