< Previous20 East Midlands Business Link www.eastmidlandsbusinesslink.co.uk TAX Budgets – why you need them now more than ever and how to set them up in Sage 50, Xero and QuickBooks By Sarah Leonard, Director at Streets Chartered Accountants We have always promoted the importance of setting budgets, but in the current economic climate they are now more important than ever. If you have applied for a COVID loan you will no doubt have been asked for a budget or forecast, but budget setting should be something you look at on a regular basis. Budgets help you keep your eye on the results, create accountability, and ensure you know how your business is doing. Budgets can also help you question why things didn’t turn out as planned or what unexpected successes occurred. Budgets can also be used to set targets for sales or restrictions for expenditure. Budgets or forecasts? These words often get used interchangeably, but the main difference is that a budget is a plan for what you hope will happen and a forecast is what you think will happen. A budget is normally set for the year ahead and is fixed, whereas a forecast is amended as the year progresses and you have a better idea of what is happening. Consider a budget set January 2020 and how different this will look, for most businesses, compared to a forecast prepared in April 2020 as the impact of COVID-19 becomes apparent. Budgets (and forecasting) in accounting software The three software packages we deal with most frequently (Xero, Sage 50 and QuickBooks) all have in built budgeting options to allow you to build and track budgets, either at top level (by nominal codes) or more detailed (by departments/tracking/classes). These are designed to be used for Profit and Loss budgets which can then be compared to actuals. Some businesses like to compare their actual results to the original budget. Others like to amend the budget periodically and treat it more like a forecast of what they expect the year end results will look like. Cashflow forecasting Cashflow forecasting takes the profit and loss forecasts of a business and turns them into a projection of cashflow. This can be a complicated exercise as this requires the factoring of timing differences such as the delay between billing customers and being paid, the delay between vat on sales and bills and the actual VAT return payments to HMRC, planning for capital expenditure and future payments of corporation tax. The preparation of strong cashflow models require either dedicated cashflow software or complex excel modelling. As such, a lot of our clients turn to us to support the preparation of cashflow forecasts, which we can then update periodically as required. However, the starting position is always the same – what is your budget for the up-coming year? 20-21.qxp_Layout 1 03/09/2020 12:56 Page 120-21.qxp_Layout 1 03/09/2020 12:56 Page 222 East Midlands Business Link www.eastmidlandsbusinesslink.co.uk FOOD & DRINK INDUSTRY SPOTLIGHT © Shutterstock /asharkyu Investing in the future of food production To boost productivity, meet demand, address industry challenges, and remain ahead of competition, companies in food and drink manufacturing must invest in technological and digital innovation. 22-25.qxp_Layout 1 03/09/2020 12:58 Page 1www.eastmidlandsbusinesslink.co.uk East Midlands Business Link 23 FOOD & DRINK INDUSTRY SPOTLIGHT 24 Á The UK’s largest manufacturing sector, the food and drink industry contributes £31.1 billion to the economy annually and employs 450,000. The East Midlands employs the highest number of people in the industry - 61,000 - and produced £3.86 billion of added value for the economy in 2018. The industry is facing a vast variety of challenges, from the war against plastics in packaging, to concerns over wider sustainability, health and obesity, calls for heightened transparency, and a general growing demand for goods as the population booms. Meanwhile, Brexit and trade deals continue to cause alarm, and extra pressure has come down on the industry in 2020 with coronavirus. The pandemic has impacted supply chains, whether that be in picking produce, processing, or transport, saw companies scrambling to redirect products as the hospitality sector closed its doors, and exports have dropped, whilst manufacturers had to deal with forced site closures due to the lockdown, and now back up and running, factory outbreaks are harming reputations. Moving forward, in a time of change, in order to thrive, meet consumer demands, and boost productivity, food and drink firms must invest in technological and digital innovation or fall behind competitors, both within the UK and abroad. The Made Smarter Review (coming up to its third birthday) indicates that the UK has a strong R&D base for food and drink manufacturing, outlining a potential £55.8 billion value to the industry through the adoption of known digital technology over the next decade. The industry however is recognised as slow to employ new technology. According to a Loughborough University report, experts studying food manufacturing say taking advantage of digital technologies is vital to the prosperity of the industry and requires immediate action. The use of automation, robotics and digitised processes are set to advance food manufacturing. Facility wide automation is a necessity to boost quality control, improve performance, production speed, precision, consistency, agility, and profitability, and many new automation systems are centred on flexibility to adapt to customer demand and can retool quickly. More automation is being designed into processes as labour becomes harder to find, especially now when a limited worker pool has been further diminished by the pandemic cutting staff from production lines. Automation is also hailed as a possible solution as recruitment is set to get worse with Brexit impacting half of the food and drink manufacturing workforce, who are from the EU. The Food and Drink Federation now estimates that an extra 140,000 workers will be needed in the UK to fill the EU worker gap. When it comes to robotics in the UK, which ranks 22nd in the world for robot utilisation, there is much room to grow, and in the food industry there remains potential for robot use throughout production. While currently robots are primarily kept in later stages such as packaging, more complex primarily and secondary processing are set for an influx of robotics. Offering faster production alongside the added benefits of high precision movements, minimised error and contamination, past what is possible with human employees, robots also remove workers from unsafe environments (from cold stores to those involving sharp tools) and monotonous roles to be transferred to tasks with added value. Though it should be noted that these jobs are also dealing with a talent shortage. Robots are being invested in to raise productivity, address quality and output issues and boost operational efficiencies, and as they do not need breaks, are permitting cost savings and increased throughput. Continuous improvements in 22-25.qxp_Layout 1 03/09/2020 12:58 Page 224 East Midlands Business Link www.eastmidlandsbusinesslink.co.uk FOOD & DRINK INDUSTRY SPOTLIGHT engineering robots for the food industry are widening their reach, with advanced grippers and vision systems for example enabling the quick and gentle handling of sensitive products and faster, sophisticated and detailed processing of images. These grippers are overcoming problems in which tasks requiring a delicate touch and dealing with irregular shapes were previously difficult to automate. Now, however, soft gripper technology can mirror human touch and ensure goods are not damaged while completing tasks more efficiently than flesh and blood workers. Advances in hardware and software has enabled these improvements with machine learning facilitating better decision making. Food companies and automation and robotics partners are coming together to refine and develop novel technologies for optimised precision with new sensors, vision tech, grippers, and AI. Meanwhile, flexible cobots have been engineered to bypass cages and protection necessary for typical robots, to work in harmony with humans, programmed to stop when encountering obstructions and use proximity sensors to adjust speed when people get close. Reducing costs of robotics and installation, simplified programming, and decreasing size are pushing adoption further, however more work remains essential to truly progress the next generation of robots that can be employed across the entirety of food processing. Industry 4.0 and the Internet of Things (IoT) cannot be ignored when considering robots, automation, and the general advancement of the food industry, with firms now requiring connected and intelligent automated systems and machines to remain ahead of the game. The digitisation of the manufacturing process is key to this and enhancing all the benefits printed on the automation label. Important is the collection of equipment and production data and subsequent data analytics. Facilitating this is the integration of connected devices, technologies like sensor networks and data sharing through the IoT. Wielding data, production, environment, and equipment can be monitored alongside food quality and consistency. This also comes in handy when evaluating machinery maintenance and performance. Sensors and their associated data can be used to 22-25.qxp_Layout 1 03/09/2020 12:58 Page 3www.eastmidlandsbusinesslink.co.uk East Midlands Business Link 25 FOOD & DRINK INDUSTRY SPOTLIGHT © Shutterstock /El Nariz track equipment, identify anomalies, and when AI prognostic algorithms are utilised, preventative maintenance can be initiated. This reduces maintenance costs, increases uptime where a broken machine could prove costly to food and drink businesses and see significant product waste, and extends machine lifespan. It also allows spare parts to be ordered ahead of potential breakdowns or maintenance. Data analytics and AI are also being used to better address inventory and forecasting in food processing, to gain a better understanding of customer needs and predict seasonal demand. AI makes probabilistic forecasting in particular easier, assessing large amounts of data from news, events, and weather amongst other sources to predict demand more confidently. When it comes to innovation in the food industry, our region is a leader in the nation, housing for instance the National Centre for Food Manufacturing, a satellite campus of the University of Lincoln, in Holbeach. Not only helping food industry employees advance their careers it is also committed to helping the sector innovate, and works with employers towards this goal, aided by partnerships with leading equipment suppliers and its specialist facilities, food factory, and cutting-edge automation. The centre recently led a University Enterprise Zone Fund Programme in which food and drink manufacturers had the opportunity to access a capital grant of up to £20,000 and specialist advice. David Thorpe, UEZ Fund Programme Manager, said: “The food manufacturing sector is huge, and one that supports thousands of jobs across the UK – and as we move into a digital revolution within the food sector businesses need to be as innovative as possible, and ensure that they are maximising their potential.” The East Midlands also recently received a boost for food manufacturing as the government agreed to provide £12 million to help launch a revolutionary high-tech food manufacturing campus in Derby. The new £300 million campus is to be developed and operated by SmartParc. The company’s approach would bring food producers together to cluster knowledge and investment – reducing food waste, lowering carbon outputs, and increasing UK food security. 22-25.qxp_Layout 1 03/09/2020 12:58 Page 426 East Midlands Business Link www.eastmidlandsbusinesslink.co.uk FINANCE © Shutterstock /Andrey_Popov cashflow Improving 26-29.qxp_Layout 1 03/09/2020 13:00 Page 1www.eastmidlandsbusinesslink.co.uk East Midlands Business Link 27 FINANCE Many financial issues have been heightened in the wake of the coronavirus outbreak, leading businesses to secure finance to fill the shortfall, and take measures such as redundancies to improve cashflow. There are many challenges and potential pitfalls to overcome for businesses as the furlough scheme comes to an end and the pandemic continues to depress the economy. Although some of these issues have arisen as a direct result of the coronavirus crisis, the outbreak has exacerbated many pre-existing financial burdens, making difficult trading conditions more hostile for businesses. One of the biggest threats is that – post-furlough – cashflow is weak as outstanding and uncollected invoices build-up and there’s a halt in the movement of products and services. Since lockdown, many businesses have been more cautious and have made cost- saving measures – such as searching for cheaper suppliers or letting go of some suppliers altogether. Elsewhere, companies have lost contracts and longstanding clients as other companies seek to reduce overheads or have been forced to shutter their operations in the wake of the outbreak. On its own, this weaker cashflow would be a major hindrance, but it comes amidst an already established culture of late payments that has pervaded the corporate world for years. A study from the Federation of Small Businesses (FSB) shows that sixty-two per cent of small businesses have been subject to late or frozen payments in the wake of the outbreak. Only ten per cent of those 28 Á 26-29.qxp_Layout 1 03/09/2020 13:00 Page 228 East Midlands Business Link www.eastmidlandsbusinesslink.co.uk FINANCE firms surveyed have agreed to payment terms with clients, meaning most of this fresh wave of poor practice has not been formally signed-off by creditors or debtors. Indeed, late payments contribute to 50,000 insolvencies every year, costing the economy £2.5 billion. If it was an issue that businesses were contending with before the outbreak, it’s only been heightened in this ‘new normal’. However, there are ways in which a company can secure funding to cover the gap in cashflow posed by late invoices. Chief among these is invoice finance. This is the simplest means of releasing cash tied up in a businesses’ outstanding invoice. It sees a business sell its invoices to a third party who will advance some of the funds it is worth up front for a cut. Thousands of businesses already rely on this kind of financing to maintain a healthy cash position, whilst others use it to take back control of cashflow issues that arise from late and unpaid invoices. Perhaps the biggest draw is that businesses can be paid most of an invoice within forty-eight hours instead of the typical thirty-day period specified on most invoices. Of course, this is far from the only finance solution businesses can draw from. Asset-based finance is a specialised method of providing companies with working capital and term loans that use accounts receivable, inventory, machinery, equipment and real estate as capital – essentially, any loan to a company is secured by one of that company’s assets. This option is commonly used to pay for expenses when there are gaps in a company’s cashflow, but it is also frequently used for start-up financing as well as refinancing existing loans, financing growth, mergers and acquisitions, as well as management buy-outs and management but-ins. Although it’s not suited to meet every business requirement, it can prove useful for those that have stretched their credit limits with vendors and reached lending capacity at the bank. Companies can also take out loans to fill the gap and bolster cashflow, though some companies may already be at their limit with their banks or otherwise don’t meet the requirements for securing loans with traditional lenders. In these situations, companies can turn towards alternative lenders and finance providers. Private equity, for example, is where investors provide long-term equity capital investment in a company in return for either shares, a percentage stake in the business and/or, sometimes, a seat on the board. Although many businesses might be loath to dilute their ownership, private equity does offer a good option of raising capital for businesses that aren’t ready to list on the stock exchange. Another form of private finance is an angel investor – a high net worth individual who makes use of their own personal disposable finance and makes their own decision about making an investment. Angels would normally take an equity stake in a business in return for © Shutterstock /TLaoPhotography 26-29.qxp_Layout 1 03/09/2020 13:01 Page 3www.eastmidlandsbusinesslink.co.uk East Midlands Business Link 29 FINANCE providing equity funds. As well as capital, angels can also provide their experience, knowledge and contracts, making them especially attractive to early stage businesses. Every investor is different and will therefore provide differing amounts, but typical investments range from between £10,000 and £500,000, though deals of up to £2 million are becoming more commonplace as angels group together in syndicates. Although angels are one of the most significant investors in start- ups, that shouldn’t deter more established firms from making enquiries. It’s important to keep in mind that securing an angel can be a difficult and protracted process, as well as being harder to research and contact compared with a private equity firm. Although securing finance of one form or another is a way in which companies can strengthen cashflow, there are other options such as reducing overheads and operating costs and downsizing. Depending on the company and, indeed, the severity of the financial shortfall, this approach may be pursed independently or in conjecture with invoice financing or a loan. In this current financial climate, with the effect of the pandemic, and with the end of the furlough scheme forcing many employers’ hands, a lot of businesses may soon be looking at redundancies as a necessary way to improve and increase their cashflow. Payroll is often the biggest expense for a business so, in times such as these, it’s often one of the first places bosses or financial advisors will look at to save money. It’s a simple but effective method – a company can save tens of thousands of pounds or more a year by letting staff go, be that through shuttering whole departments, or consolidating multiple job roles into one. Although nobody wants to lose their jobs, it’s often necessary for companies to take such measures to stay afloat and to continuing trading through this period of increased economic strain and uncertainty. However, it’s worth noting that there are other ways to cut payroll costs without letting staff go – such as cutting salaries, turning full-time staff into part-timers, cutting bonuses, enacting leaves of absences and shortening the working week. The coronavirus crisis remains an unprecedented and challenging time for businesses. As well as bringing its own unique set of challenges, it has also heightened many existing issues, making cashflow problems a more pressing challenge for businesses. In many cases, it has forced companies to take drastic measures to remain afloat and continue to navigate the ‘new normal’. Solutions include invoice financing and securing loans, be that from traditional lenders, from private equity providers or alternative finance, and making cost cutting measures in-house, such as redundancies. In any case, there exists expert advice to help inform business decision making so companies can make the best decisions to bolster cashflow and continue trading. 26-29.qxp_Layout 1 03/09/2020 13:01 Page 4Next >