Market Development

Your finances

It is essential for any organisation to cover it's costs and ensure it's long term survival. To do this every organisation needs to have robust financial processes and systems. Without money you will not be able to operate. This will mean you will be out of a job, any staff you employed will be out of a job and your customers will have to find new services and products, which in social care can mean considerable distress and inconvenience for the individual and for their families and carers.

This section will not tell you everything you need to know about managing the finances for a business. It may provide you with a basic understanding of how business finance works but you really must consider taking professional financial advice and support when setting up your business. A good accountant or professional advisor may save you considerable cost and inconvenience.

Understanding your costs

A key part of running your business is understanding, and not just knowing, your costs as you will generally be setting a price to be able to generate enough income to cover your costs. There are generally two types of costs, fixed costs and revenue costs.

Fixed costs

Fixed costs are costs that you will have to pay whether you sell any products or provide any services or not. This includes things like:

- premises costs (rent or loans)

- utility costs that aren't linked to providing services to people (heating and lighting for offices)

- equipment costs

- insurances

- some salaries, for example management and administration

- advertising or marketing

Variable costs

These are costs that increase the more products you sell or service you provide, over and above the fixed costs you already pay. This includes things like:

- staff salaries

- staff travel costs

- sales linked costs (equipment, disposables, transport, trips)

Estimating your costs

Working out your costs may take some time but is not too difficult. If you have been trading for a number of years look back at your bank accounts and financial records to see what you have spent and where. If you are starting a new business make realistic judgements - do your research, compare and scale up from your own domestic costs, consider the level of staff salaries you will need to pay.

linksLINKS to find more information about financial statements and systems


Pricing strategy

You will need to consider your pricing strategy - what is it you are trying to achieve through setting your price? How does your price reflect the value you offer? Will your strategy focus on attracting customers, covering costs, maximising capacity or another business aim? Continually review your pricing strategy and compare your prices and pricing structures with other similar product providers in the area, but don't just check the price, compare your circumstances, for example quality of provision, facilities, marketing, with your competition as these will all impact on price.

Pricing structure

Your pricing strategy should lead you to your pricing structure, balancing the need to cover your costs whilst keeping you attractive to customers and, if possible, offering them choice and flexibility. Will you charge:

- an hourly fee - perhaps with a minimum charge or minimum period to offer flexibility to customers

- a sessional fee - through breaking the day into different chargeable sessions, for example a morning session, lunch session and then afternoon session. Your price may differ for each session.

- a block fee - getting people to pay up front for the services they may receive over the next week, month or longer period, perhaps by paying by standing order or direct debit. Consider what refund policy you will have if people don't turn up.

- A membership fee - where certain parts of your service can be used by the customer when they like. You may wish to define a 'minimum' offer, which customers can then add further sessions or service to.

You may also wish to consider discounts - a certain amount of your price if people pay up front or buy so many products. Always be sure that any discount policy still allows you to cover your costs overall.

Setting prices

You will need to decide what level of turnover (the income you receive from your sales) you need to attain. This may include considering covering your costs (see next section) and also what surplus or profit that you wish to make. You will then need to forecast or estimate how many products you will sell (consider your previous sales levels, your marketing strategy, the prices of your competitors, any changes there may be to your products environment (new legislation, change in fashion, substitutes) and then set your prices for each product accordingly so that you end up with your required level of turnover.

It is then essential that you do some 'sensitivity analysis' or 'what if analysis. This means that you calculate the effects and impact your calculated prices  will have in different scenarios (a fall in sales, and increase in costs etc) so that you can check that your prices are robust.



Cash is the lifeblood of all businesses. You need cash to pay staff, pay bills and buy equipment. You sell your services / products and receive cash which you then use to pay your staff, pay bills and buy equipment and so the cycle goes on. NOTE though that profit does not mean cash and you can make profits but have no cash and your business can still fail.

The reason for this is that if your cycle of receiving cash slows, (perhaps you have had to deliver a lot of services that you have not been paid for, have had to buy a new piece of equipment, have had a bad debt where someone doesn't pay you) then you may not have enough cash to pay your staff or pay your own bills if and when they become due. If you are unable to fid alternative sources of cash to meet your expenses then your business could fail.

What you can consider if your cash flow slows?

Increase income by increasing price - Always consider your pricing strategy and market conditions before making any changes to pricing AND always keep your current customers informed of any changes.

Increase income through greater sales - This may include pricing changes but should be done a part of a marketing strategy or campaign and following consideration of competitors and other market conditions

Reduce your expenditure - Look at your costs and see if you can make any savings - can you change suppliers or can you negotiate reductions in costs e.g. rent or discounts

Collect any outstanding money - Make sure that all your customers have paid what they owe you - although this may only provide a very short term benefit.

Seek additional funding sources - Increase income through an overdraft, loan or grant or by some other funding source. Always be very careful and only do this after thorough consideration and taking professional advice as you may simply be making your problems worse.

linksLINKS to find more information about financial statements and systems

linksLINKS to information about the various funding options


Financial records and statements

Financial statements are often required to ensure that you are accountable as a business as well as allowing you to review your financial performance. By law, and for you to maintain control of your cashflow, you should keep up to date and accurate records of your business income and expenditure. This means retaining a range of financial records, which may include maintaining a cash book (a record of all cash transactions), keeping all receipts for items purchased, keeping details and bills of property costs and utilities, keeping accurate employee records for wages and associated costs and maintaining an accurate invoicing system for all products and services sales.

These records will help you to complete the two primary financial statements that most businesses will need to complete.

Income and Expenditure (I&E) or Profit and Loss (P&L) Account

This statement (I&E or P&L) measures the trading performance of your business over a period of time (usually a year). It shows the difference between how much the business has earned (turnover (sales) and other income) and the costs (purchases and expenses) and shows the surplus / profit or loss over that trading period. The I&E or P&L is often required for tax purposes and may be used for assessing personal tax or business corporation tax liabilities. An I&E or P&L account is usually made up of the following (covering your I&E or P&L period):

- Sales / turnover - your total invoiced or billed trading of your products and services. Note this may be different from the cash you have actually received as some payments may not have been received by the date you do your I&E or P&L account.

Cost of sales - these are the direct costs (variable costs) relating to making or distributing your products and services.

Gross Profit - is your trading profit and equals turnover/sales less cost of sales

Overheads - these are your fixed costs, the expenses that you have had to pay whether you are selling or providing services or not

Net profit - shows how much is left when you have taken your costs away from your income. This is surplus that you may wish to invest in the business, keep to meet future costs or you may wish to withdraw it from the business.

Example Income & Expenditure and Balance Sheet Microsoft Word 58kb

Balance Sheets

A Balance Sheet is a statement of a business's financial position at a particular point (date) in time. It shows what the business owns (it's assets) and what it owes (it's liabilities) on that date. As the name suggests the total assets (fixed, current and intangible) of the business must equal it's liabilities (non current, current and capital and reserves). A Balance Sheet will usually contain:

Fixed Assets - items owned by your business which are usually going to be kept for at least a year (premises, equipment etc).

Intangible assets - are items that cannot be physically touched but are of value to your business (for example goodwill, patents, copyrights).

Current assets - are items that your business will keep for less than a year and are usually fairly easy to turn into cash (stock, smaller equipment, debtors (people who owe you money) and cash)

Current liabilities - are monies owed by your business (liabilities) that will need to be paid within the next year (creditors (people you owe money to), loans ending next year)

Net Current Assets (or liabilities) are the sum of your current assets less your current liabilities. This figure will show whether you are owed more than you owe or not.

Non-current liabilities - these are monies owed by your business that are due to be paid in more than one years time (e.g. long term loans)

Financed by - this shows how the Net Assets are funded. This includes net profits or surpluses and for limited companies will show how much share capital there is and for smaller organisations how much money the owner may have put in.

Example Income & Expenditure and Balance Sheet Microsoft Word 58kb

linksLINKS to find more information about financial statements and systems


Financial management

Bank reconciliation

Perhaps the most important set of financial records that a small business has is it's bank statements, which should show all the income you have received and expenses / costs you have paid. However they do not have considerable detail so always ensure you are maintaining robust financial records, for example a cash book (detailing all your cash transactions in or out), a sales ledger or invoices (recording all your products or services sold) and copies of bills so that you can 'reconcile' what is on your bank statement with your activity. You should reconcile your records with your bank statement at regular intervals (monthly, weekly) depending on your level of turnover (sales) and your business circumstances.

Budgets and forecasts

As situations can change very quickly in business it is essential that you keep yourself updated about how your business is performing. This will allow you to remain in control of your business and make informed business decisions when they are needed. To do this you should consider setting up financial management systems that will inform regular reviews of your financial performance. A common practice is to develop budgets or forecasts of how you think the business will perform to give you a benchmark against which you can check your actual performance and ensure your business sustainability.

When developing a budget or forecast performance you may want to think about what has happened previously and is currently happening in your business, to try to understand what has happened in the past so you can learn from it. Use the figures from your last trading period as a guide, adjusting them to take account of what you now know. For example if your sales were rising last year, do you expect them to continue to rise at the same rate or will they slow due to competition or lack of demand or any other reason. If this is your first trading period then make as accurate an estimate as you are able.

Most annual budgets are split into monthly budgets. Be careful, this does not necessarily mean simply dividing each figure by 12 - consider seasonal or other affects that may mean monthly variations (for example, your service may be needed more over certain months or over the winter you may use more electricity and gas for heating than in the summer).

You should then review where you actually are against your budget or forecast at regular periods (monthly if you have split down your annual budget). Simply identify variances (differences) between your forecast and your actuals by taking one from the other. Try to understand why the difference has happened and, if needs be, take the appropriate action (for example increase sales, employ more staff and so on). If there is a significant change then you may also wish to re-calculate the figures for the remaining months in your budget period.

Always note down against your budget why you may have made changes, so that when you next review it you understand why you make the changes you did.

Business budget or forecast

At the start of each of your trading periods you should set up an income and expenditure account budget or forecast of how you think you will perform. Key areas for consideration will be estimating future turnover or sales (the impact, for example, of price changes, increases in competition, new products or services and so on) and looking at how your direct costs and overheads may change (for example due to inflation, changes in utility supplier, staff pay rises, changes in legislation impacts and so on). This may help you identify, in advance, whether your business will be profitable or not and may give you an indication of any areas of concern so that you can take the appropriate action.

Cashflow forecast

A cashflow forecast is a forecast of when money will come into your business and when money will be paid out. It is different to the business budget or forecast as it does not include non-cash items (depreciation for example) and will not show whether you will make a profit, only showing when money comes in or goes out of your business. However the cashflow forecast will link with the business budget as you should be using the same informed forecasted values for things like sales and costs but convert them into when the actual cash will be received. For example in January you may predict £1,000 of sales however as you allow people 28 days to pay you won't get that money until February and this is where it will show on your cashflow forecast. The potential benefit of a cashflow forecast is that it may show you if you might run out of cash and allow you to take the appropriate action.

linksLINKS to find more information about financial statements and systems


Finance sources

Every business needs money when starting up or when trying to introduce new products or services. It is likely that premises will need to be found, equipment will need to be bought, there will be some staff costs and other expenses (marketing, stationery etc) all before the first sale is made. Once you're trading, you'll need cash to pay the bills and keep the business going.

There are a range of financing options you may wish to consider to fund your business or business development. You might be able to use your own money, or you may need money from an external source or investor - e.g. from banks, family and friends or outside investors. You may also be eligible for grants and government support.

Most businesses use a combination of these alternatives, according to their specific needs and circumstances. For example you may wish to use one form of finance for your large investments or purchase (your fixed assets and equipment say) and another for your cashflow purposes.

You will need to consider what form of financing is right for you. You should always take specialist advice from a professional accountant or business advisor however you may wish to research the options initially for yourself.

linksLINKS to find more information about financial statements and systems

linksLINKS to information about the various funding options


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