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Author: Keri

  • Financial Planning with the Time Value of Money

    Financial Planning with the Time Value of Money

    Financial Planning

    Small business owners often focus on day-to-day operations, but understanding a fundamental financial concept – the time value of money – can transform your approach to cash flow management and financial planning.

    What is the Time Value of Money?

    The time value of money (TVM) is based on a simple principle: a pound today is worth more than a pound tomorrow. This is due to three main factors:

    • Opportunity cost (what you could earn by investing that pound)
    • Inflation (which erodes purchasing power over time)
    • Risk (the uncertainty of receiving future payments)

    Why It Matters for Your Small Business

    1. Cash Flow Management

    Understanding TVM helps you make better decisions about when to collect payments and pay expenses. For example:

    • Offering early payment discounts might make financial sense if the benefit exceeds what you’d earn by investing that money elsewhere
    • Delaying large payments when possible (without incurring penalties) can be advantageous if you can put that money to work in your business

    2. Equipment Purchases and Financing

    When deciding whether to buy equipment outright or finance it:

    • Financing may be preferable if your business can generate returns higher than the interest rate of finance
    • Leasing might make sense when technology changes rapidly, preserving capital for higher-return investments

    3. Pricing Strategies

    TVM should influence your pricing models:

    • Subscription models with upfront annual payments can provide immediate capital for growth
    • Payment plans may require higher total prices to account for the time value of foregone immediate payment

    How TVM is applied in Planning and Forecasting

    Practical Tools and Calculations

    Several core TVM calculations can help in your business planning:

    1. Future Value (FV) – What your money will be worth in the future
    2. Present Value (PV) – What future money is worth today
    3. Net Present Value (NPV) – The current value of all future cash flows
    4. Internal Rate of Return (IRR) – The rate at which NPV equals zero

    Practical Tips for Implementation

    1. Use Financial Tools: Many accounting software packages include TVM calculators. Microsoft Excel also has built-in functions like NPV, IRR, and PV. Your accountant will be able to assist with TVM calculations and offer practical advice.
    2. Consider Inflation: When forecasting, account for inflation’s impact on future expenses and revenues.
    3. Review Financing Regularly: As interest rates change, reassess your debt structure and consider refinancing when advantageous.
    4. Apply to Inventory Management: Calculate the true cost of holding inventory by factoring in the opportunity cost of tied-up capital.

    Final Thoughts

    In a small business, cash is king – but understanding when you receive or spend that cash matters tremendously. By incorporating time value of money principles into your financial planning, you’ll make more informed decisions that enhance your business’s long-term sustainability and growth.

    Remember: financial success isn’t just about how much money you make, but when you make it and how effectively you put it to work.

    Future Value Calculator for Cash & Investments

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    Loan Repayment and Amortisation Calculator

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  • Employer NI Contribution changes from April 2025

    Employer NI Contribution changes from April 2025

    With the Employer NI contribution changes from April 2025 fast approaching, it is vital to understand how these changes will impact your staff costs. Employer national insurance contributions are increasing by 1.2% from 13.8% to 15%, whilst the threshold above which employer contributions are paid is decreasing from £9,100 to £5,000. The national insurance allowance, is however, increasing from £5,000 to £10,500 which may benefit small employers with just a few staff members.

    Financial Impact of the National Insurance Changes

    The financial impact of the national insurance changes for an employee earning £35,000 a year, is an additional employment cost of £925. This breaks down as follows:

    Reduction in Threshold

    The threshold above which employers pay national insurance contributions (NIC) on an employee’s salary is decreasing from £9,100 to £5,000. The reduction in threshold means NIC is payable on an extra £4,100 a year. At 15%, this is an extra £615.

    Increase in the Percentage Rate

    The increase in the percentage from 13.8% to 15%, results in an extra £310in NIC. Together, these two changes increase the contributions by £925 a year.

    Increase in the National Insurance Allowance

    The increase in the National Insurance Allowance from £5,000 to £10,500 should benefit small employers with a few staff members earning the minimum wage. For large employers the increase will be insignificant when compared with the total increase in NIC resulting from the combined impact of the 1.2% increase and threshold reduction.

    Illustrations

    The charts below illustrate the impact of the employer NI contribution changes from April 2025, for small and medium size businesses.

    In this example, there are 4 staff members each earning £24,000 a year. While the NIC changes increase the total NIC due, the increase to the NI allowance reduces the overall NI liability by £2,324 from £3,224 to £900.

    Tax year 24/25Tax year 25/26
    NIC per employee£2,056£2,850
    Total NI£8,224£11,400
    Less NI Allowance£5,000£10,500
    Total NIC due£3,224£900

    In the following example, the employee salary is £35,000 (this is around the UK average) and the figures are based on a headcount of 25 employees. The additional cost to the employer in this example is £17,650 or £706 per staff member.

    Tax year 24/25Tax year 25/26
    NIC per employee£3,574£4,500
    Total NI£89,350£112,500
    Less NI Allowance£5,000£10,500
    Total NIC due£84,350£102,000

    It is important to note that not all employers are eligible to receive the national insurance allowance. You can check your eligibility on HMRC’s website: Employment Allowance: What you’ll get – GOV.UK

    With our national insurance calculator you can see the impact of the changes to your business staff costs

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