Introduction to Cost Structure

NatWest Business Builder: Cost structure

In this module we’re going to explore the viability of your business model, specifically looking at the cost structure. When looked at in conjunction with your revenue streams, it will give you an overall understanding of the profitability of your business.

In this module, you’ll explore:

• Different types of cost structures
• The key costs within your business
• Fixed and variable costs
• How to use costs to your advantage

Start by downloading and saving the workbook to your computer, to use throughout the module, capturing any key takeaways and completing the exercises at the end of each chapter.

What is a cost structure?

In this first chapter, we’ll start by looking at what a cost structure is, different approaches to cost and why it’s such a crucial element of building a viable and scalable business. Use your workbook to help you identify the costs within your business – and don’t forget to keep a note of any assumptions that you make so you can continue to test and validate these going forward.

Understanding your costs

Now that you’ve started to identify key costs within your business, one fundamental priority for every business owner is to then understand which costs are fixed and which costs are variable. In this chapter, we’re going to understand what constitutes a fixed cost or a variable cost and apply this to the costs you identified in the previous chapter.

How to use costs to your advantage

In the final chapter of this module, we’re going to look at how you can use costs to your advantage, first understanding the concept of breaking even and how economies of scale and scope could ultimately help increase the profitability of your business. We will also hear from some entrepreneurs about the cost challenges within their businesses and how they’ve worked to reduce these further.

Further Reading

• Smart savings for start-ups
• SME growth: when to spend
• SME Tools: eight ways to rein in business costs
• Managing cash flow: procurement

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

Price Bailey

UK small and medium-sized businesses are owed an estimated £32.4 billion in late payments from debtors, according to a report by Bacs Payment Schemes (Bacs).

Cash is the lifeblood of your business, and there is little profit to be made from empty promises of payment. Of course, there’s an inevitable element of risk in sales – you can’t confine yourself to just ‘safe’ customers – but you can go a long way to limiting the risk.

• Thoroughly research the background of the customer. This could be as simple as speaking to other people who’ve dealt with them.
• Ask for cash in advance or on delivery (although this might not be practical with larger companies with strict payment procedures).
• Send the customer your terms and conditions, and ask for approval – before you start working with them.
• Get to know how each customer’s payment system works. This can be especially important with big companies, who might have very formal procedures in place and could refuse to pay without a purchase order.
• Introduce yourself to the person who’s responsible for drawing cheques and making payments.
• Offer prompt or early payment discounts. But be careful how much you give – you don’t want to eat into your profit margins.

We can offer you an outsourced credit control service, helping you maximise cash flow, reduce your need for bank borrowing, reduce bad debts, and concentrate on running your business.

Price Bailey

The growth and development of technology in business during the last decade has completely transformed business. In a relatively short period it has revolutionised every business activity in almost every sector, industry and market, resulting in greater efficiency and cost savings.

This transformation and reliance on digital systems has however placed a huge reliance on the integrity of the technology, the internet and the systems in place to secure businesses’ online assets. It is this integrity, or rather the lack of it, which is fuelling an exponential rise in cyber attacks on businesses which may not only affect performance but can lead to total business collapse.

No company too small

Attacks are not limited to large businesses however. No company is too small to be the victim of a cyber attack. Hackers don’t just want to steal money from the company they are targeting, they may be looking to step onto a larger company and 80% of hacks at larger companies start in the supply chain.

These suppliers provide an easy route into the larger companies because the defences between the main company and its supplier will also be weaker than the external protection of the larger company.

Spoofed internal emails

One of the most common and simple attacks involve bogus invoices or requests for payment. Huge damage can be created with a stolen or ‘spoofed’ email address. For example, the financial department receive a ‘spoofed’ email supposedly from a senior board member asking for a cheque to be paid into a certain account.

The financial department doesn’t query the request as it appears to be from a senior executive and the cash is transferred, never to be seen again. A recent IoD report claims that 72% of businesses have been the victim of bogus invoices.

The perception that the majority of cyber attacks emanate from Eastern Europe or China is far from true. Insiders are responsible for as many as 60% of all data breaches courtesy of either good old human error or deliberate action.

Measures to protect your business

In addition to awareness of the threat and internal vigilance what can you do now to protect yourself further? Proactive management, education and a company-wide security culture will go far in countering the threat, while at the same time ensuring more trained eyes to help counter potential attacks and enhance overall business resilience. Specific measures you should consider include:

1. Having a cyber insurance policy: This makes good sense, but it is by no means a silver bullet and may not cover all outcomes such as reputational damage.

2. Contingency planning: Boards should plan how they would react to different scenarios and have a mitigation plan for when their business is hacked or compromised. It is important that all departments are involved in this; cyber security is as much an HR issue as an IT one.

3. Awareness: Senior managers should ensure all employees are cyber aware and alert to scams and social engineering, including not sharing passwords or memory sticks and are aware of public Wi-Fi risks.

4. Supplier Integrity: Cloud and IT providers must demonstrate the integrity of the security protocols they have in place and their disaster recovery plans.

5. Audits: Conduct a data audit to classify your most sensitive data.

6. Antivirus: Always have up-to-date antivirus software and check that all mobile phones and tablets have antivirus software installed.

Technology and the internet have delivered huge benefits, providing huge potential for businesses to flourish and opportunities for new forms of on-line enterprise to enhance our lives. But with the benefits come the risk to the security of on-line resources and assets.

Regulation is on the way to ensure business leaders are taking steps to ensure their on-line resources and assets are properly protected, with sanctions against those who don’t comply. But the largest sanction of all is your business being targeted and disappearing overnight.

 You can view this original Price Bailey blog here

Subscribe

For more insight, events and webinars, sign up to the Price Bailey mailing list…

Sign up

Price Bailey

One thing that you cannot deny throughout the COVID-19 pandemic is the Government’s sustained efforts to try and support businesses and scaffold the economy in a time of significant uncertainty. As the country moves toward a normality that resembles life pre-pandemic, many businesses are asking what support is available for those still feeling the impact and for those who are wishing to maximise on opportunities available to them.  

In March, the Government announced the closure of the Bounce Back and Coronavirus Business Interruption Loan schemes; and introduced the Recovery Loan Scheme to provide continued financial support to businesses across the UK as they trade out of the pandemic. 

The scheme is open to any business that has been affected by COVID-19, and the use of funding is unlimited, provided it is for a legitimate business purpose. Businesses can borrow up to £10m per business (or up to £30m for groups). Businesses will also be happy to hear that you can still access this scheme, even if you have accessed other Government support schemes such as the Bounce Back scheme, CBILS or CLBILS. However, the amount available to borrow under the RLS will be reduced by any borrowing from previous schemes. 

The scheme provides guarantees to lenders via several different facility types:

• Term loan
• Overdraft
• Invoice finance
• Asset finance

It is important to note that not all lenders are accredited to offer all types of facility. 

Businesses seeking to apply for the scheme should ensure they have sufficient debt capacity to take on any additional funding of this kind. In addition, we strongly advise that you (with support from your advisors, if required) take the time to appropriately plan and produce a robust cash flow forecast to ensure that:

1. there is a legitimate requirement for the funding
2. you know to what level funding support is required
3. that the business is in a position to service the debt

This is relevant for any business considering the scheme, but particularly to those businesses that have already accessed other Government support schemes (or other commercial debt facilities) and are yet to understand the true amount of their repayment commitment fully; and/or whose turnover/working capital continues to be impacted by the pandemic and is variable upon the success of the easing of social distancing restrictions. This is also particularly relevant as, as with other external finance applications, you will need to be able to provide a solid business case for the funding, proving you will be able to meet the repayment obligations.

So how does RLS work? 

The RLS will be available through named lenders accredited by the British Business Bank. Further accredited lenders may be added as the scheme continues, and you can view the current list on the BBB’s website. However, lenders are advising that you speak with your existing finance provider first before approaching these lenders, as they may be able to offer you a commercial loan on better terms. 

Key features of the scheme:

• The scheme will remain open until at least 31 December 2021, subject to review.
• There is also no maximum cap set for the amount available to lend to businesses through the scheme – so there is no need to rush to apply if you do not feel you require financial support in the immediate term.
• There is no minimum or maximum turnover restriction for businesses seeking to access the scheme.
• The upper limit of the facility provided to each business is £10m (and up to £30m across a group), with minimum facilities starting at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts. (Please note – individual lenders will set their own minimum and maximum limits within these ranges).
• The scheme gives the lender a government-backed guarantee against the outstanding balance of the facility.  
• The annual rate of interest, upfront fee and other fees cannot exceed 14.99%, and businesses are required to meet all costs, interest payments and fees associated with the facility. 

Term lengths:

• Term loans and asset finance = 3 months – 6 years
• Overdrafts and invoice finance = 3 months – 3 years
• If you borrow £250,000 or less, personal guarantees will not be taken by the lender. For borrowings over £250,000, personal guarantees are at the lender’s discretion. Still, the maximum that can be covered is 20% of the outstanding balance of the RLS facilities after the proceeds of business assets have been applied.
• Lenders can offer an RLS facility to those businesses that would either not gain the funding on standard terms or would do but at a higher rate without the benefit of the government-backed guarantee.  
• In contrast to other Government support schemes, the RLS will not include 12-month Business Interruption Payments (BIP) to cover interest payments. 

Our advice to those looking to access the scheme:

While this next stage of Government support for businesses is being welcomed, business owners should remember that it is still a loan that needs to be repaid. Its purpose is to support with working capital requirements or to support growth. Lenders will be looking for you to be confident in and provide suitable evidence to support that the funding will be used to help the business grow, further benefiting the economy with jobs and supply chain benefits.

It is also worth remembering that there is no cap on the funding available to all businesses. The scheme remains open to applications until 31 December 2021; therefore, there is no immediate need or panic to apply for funding. Instead, it is better to take this time to develop your business’ recovery plan properly, revisit your strategy, and put together a robust set of financials to identify what, if any, funding requirements you have. This may start with improving working capital efficiencies, cutting further none essential spending and equity or other debt funding options (aside from RLS). This will mean that not only will you potentially avoid taking on further debt unnecessarily, but also, if applying for RLS is the right thing for your business’ recovery, you will be adequately prepared for lenders’ due diligence. 

 We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide, and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

You can view this original Price Bailey article here

 Subscribe

For more insight, events and webinars, sign up to the Price Bailey mailing list…

Sign up