Playbook
Can We Afford It?
The question underneath most other questions, answered in order: see when the cash actually runs short, work out what the purchase has to earn to pay for itself, read what the accounts say you can carry, then weigh it against the other things that money could do.
On the helpline the question always arrived as a tax question. Could I claim this, what happens if I do that, is there a way round the other. It was almost never a tax question. Underneath it was the one every owner asks and most are embarrassed to say out loud: can I afford this? Twenty years of running my own practice taught me the shape of the honest answer, which is that affordability is four questions wearing one coat, and the coat hides the fact that you have to ask all four. The first is about timing: will the money be in the account on the day the bill lands? That is the cash question, and it is the one that closes businesses. The second is about earning: what does this thing have to bring in before it stops costing me? The third is about strength: how much weight can the business carry, going by what the accounts say rather than what I hope? The bank will ask that one whether or not you have. The fourth is the comparison: what else could that money have done? People reach for the fourth first, build a beautiful business case, and find out in March that the answer to the first was no. Ask them in this order.
Finance
Cash Flow Forecasting
For seeing when you will run short of cash, month by month, even while the profit figures look fine. Leave it alone when you want to know whether you are profitable; this measures cash, not profit. Instead Financial Ratio Analysis, which reads profit from the accounts; the forecast only tells you whether you can pay the bills.
Start with cash, because profit does not pay wages and a business can be profitable on paper and overdrawn on the day it matters. Lay the purchase into a month-by-month forecast and look for the trough, not the total: the month when the new outgoing lands on top of the VAT quarter and the big customer has not paid yet. If the trough breaches the facility, the answer is no for now, however good the case, and the rest of this sequence is about making it yes later.
Watch forA forecast that places income on the invoice date rather than the day the money clears. That single habit flatters every forecast that later goes wrong.
Finance
Break-even Analysis
For finding how much you have to sell before you stop losing money, and how much room the plan has to be wrong. Leave it alone when costs cannot be split into fixed and variable, as in a business where every job is priced from scratch. Instead Unit Economics, job by job: what each one earns after what it costs to deliver.
Now ask what the thing has to earn to pay for itself, and how much room you have to be wrong. A new machine, a new hire, a second site: each adds fixed cost, and break-even tells you the extra volume that fixed cost needs before it stops losing money. The number that matters is the margin of safety, the gap between the volume you expect and the volume you need. A thin margin means the plan works only if everything goes right, and nothing goes right every month.
Watch forExpected sales taken from the optimistic case. Run the break-even against the volume you would bet your own money on, not the one in the pitch.
Finance
Financial Ratio Analysis
For reading a set of accounts to answer two questions: can we afford this, and is the business actually healthy? Leave it alone when the business has traded for less than a year and there is nothing clean to compare. Instead Cash Flow Forecasting; in the first year the question is whether you will still be trading, not how the ratios compare.
The accounts have an opinion, and the bank will read it even if you do not. Liquidity says whether you can meet what falls due; gearing says how much debt the business already carries; profitability and efficiency say whether the engine underneath is sound. A purchase that is affordable on cash and break-even can still push gearing past what a lender will accept, or expose a business whose current ratio was already thin. Read the ratios before you ask for the facility, so the conversation starts with you knowing the answer.
Watch forRatios read in isolation. Each one is a comparison, against last year, against the sector, against the covenant; a number on its own tells you nothing.
Finance
Cost-Benefit Analysis
For putting every cost and benefit of a proposal into today's money and comparing the totals. Leave it alone when what matters most cannot be priced, such as reputation or safety; forcing it produces confident nonsense. Instead A Decision Matrix, where reputation and safety can stay in their own units instead of being forced into pounds.
Only now, with the cash, the earning and the strength known, is it worth asking whether this is the best use of the money. Put every material cost and benefit into today's pounds, including the ones that are awkward (the owner's time, the disruption, the thing you will not do because you did this), and compare the totals with the alternatives, doing nothing among them. The discipline is the list, not the arithmetic: most bad purchases were never compared with anything.
Watch forBenefits that cannot honestly be priced forced into pounds anyway. Where reputation or safety dominates, say so in words and use a decision matrix instead of pretending.
In the end
You should finish with a month-by-month picture that shows the trough, a break-even volume with an honest margin of safety, a reading of the accounts you could put in front of a lender, and a comparison that says this was better than the alternatives, or was not. The answer is often "not yet", which is a different answer from "no", and the forecast tells you what has to change for it to become yes. Run the four again when it does.