Business Finance Planning
As a business owner, you're always making plans for your future. You're planning ahead on a daily, weekly and monthly basis, looking ahead to anticipate challenges and opportunities. Whether your business is in its early days or it's become established in its market, you'll always be thinking about tomorrow and what comes after.
A vital part of that planning is around finance - how you're going to pay for the people, the stock and the infrastructure you need not just to keep going, but also to grow the business. You want to avoid running out of working capital - cash - because that's the lifeblood of commerce. It's cashflow that makes or breaks a business.
For many, finance planning isn't the most exciting part of running your own business. But it is perhaps the most important task, and certainly one of the most rewarding when you get it right. Investing time in finance planning can literally pay dividends in the form of better cashflow and improved profits.
If you're undertaking any major new project in your business, such as launching a new product range or expanding your geographical market, you expect to put together a business plan. This covers all aspects of the project, including the financial element - this is your finance plan.
Here are our suggested steps for putting together that business finance plan.
Step 1 Know what you need and why
Most planning starts with having the end in mind. You have a vision for where you are going - such as opening branches in new locations, increasing turnover by a specific amount or becoming a recognised brand in a new market.
In your business plan you'll set out the steps you need to reach that destination. You'll identify your current strengths and weaknesses, also the opportunities and the threats.
The business plan will detail the actions you need to take, along with their anticipated costs. These are likely to include:
- Purchase of stock or equipment
- Marketing costs
- Employment costs
Your planning will also factor in the impact of new revenue streams, when your investment in growth begins to generate new sales. This should lead into a cashflow plan, where you document projected income and costs over time. The cashflow plan will help you to see how much funding you need and over what period of time.
Step 2 Understand your current numbers
Having planned for the future, you also need to have a strong grasp of where your business is today. Without a realistic understanding of current income and costs and the cashflow associated with these, it's hard to plan for the future.
However, you also need to be aware of other numbers in your business, such as the value and type of assets that you have and the existing levels of debt and their associated repayments.
Most businesses carry some form of debt, such as an overdraft, a loan or credit cards. Alternatively, there could be an obligation to repay an external investor, such as a business angel. While the expectation of repayment may still be some way in the future, it should be factored into your numbers and planning.
If you're looking for funding for a major new initiative that will grow or transform your business significantly, this presents an opportunity to restructure your firm's finances. You could consolidate existing small debts, or even do away with them entirely by taking on funding in a different form.
Step 3 Research your options
When you're raising funds to grow your business there are a number of routes you can take. Your choice depends on factors that include:
- Your credit rating
- Your attitude to risk
- How much control you're willing to give away
You should consider taking professional advice about raising finance for business growth, drawing on the knowledge and experience of others. Be sure to take into account the impact of taxation on your decisions. Take a look at how similar businesses are financing their projects.
It's possible that some of the assets your business owns can be used as collateral for finance, or used in another arrangement to release capital, such as a sale and lease back.
Where appropriate, involve others with a role in the management of the business, such as directors and other senior staff.
One major decision will be whether you decide to raise debt finance or equity finance. If ethical or Sharia-compliant funding matters to you, it's worth taking time to explore halal investing options before you commit to a route.
The more information you can gather at this point, the better informed your decision will be.
Step 4 Create your finance plan
As you pull together all the information you can start to make a finance plan based on your preferred funding options.
At the heart of your plan will be a cashflow forecast, which sets out the incoming and outgoing cash movements over time. This can be built in a spreadsheet or in a dedicated finance modeling app. Building the plan in a spreadsheet or app should allow you to adjust it based on different scenarios, helping you to assess the impact of various changes.
You may want to create alternative plans, based on different approaches to raising the finance - such as taking out a loan over several years versus receiving investment from a business angel.
Step 5 Review your plan in detail
Share your financial plan with others to get their feedback. Encourage them to question your assumptions and to suggest alternative options. The larger the project, the more important it is that you have a finance review by a professional, such as your accountant. An objective opinion from someone outside your business can be hugely valuable, particularly when they have experience of finance planning for similar projects.
Step 6 Source funding providers
Having thoroughly researched, built and tested your finance plan, it's time to approach potential funders. This could be a bank, a venture capitalist or a business angel, or some other provider of business funds. Your planning will have helped you identify at least one, and possibly several, funding options.
Depending on the scale and basis of the funding you're looking for, potential providers will have different questions and require specific information from you. This can include:
- Your firm's past financial performance
- How your business is managed
- Projected future cash flows
This information, along with other details about your proposed project, will be easy to supply if you've done a thorough job of your finance planning.
Funding your business project with Qardus
We work with owners who are looking to grow their small or medium-sized business. Having already proven their product and their process in the market, they're now seeking funds for major growth initiatives.
The funding we provide is from £50k to £200k with terms of between 6 and 36 months.
We're different from banks and most other UK finance providers because we don't charge interest. Our funding arrangements are rooted in Islamic community principles and are certified as Sharia-compliant. This also means we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is proving a popular choice not only with Muslim business owners, but also with others committed to ethical and community values.
Talk to us about getting access to fast and flexible growth finance.
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The COVID-19 pandemic has not only resulted in a public health crisis, but has also increased poverty levels and accelerated inequalities across the world. According to a recent survey of 37 countries[1], since the start of the pandemic:
- 3 in 4 households suffered a reduction in income with 82% of poorer households affected.
- Gender inequalities are on the rise due to consumer-facing industries being hit the hardest.
- Minorities in high income countries have been hit hardest as they live in areas that have been most vulnerable to the health and economic impacts of the pandemic.
- Inequality is also rising between countries as high-income countries have been better placed to provide financial & social safety nets to counter the crisis relative to poorer countries.
On the other end, the wealth gap is also widening as billionaires saw their wealth rise 27.5% to £7.9trn between April to July this year with their total numbers increasing to a record 2,189 (2,158 in 2017)[2]. This generally reflects the strong performance in global stock markets since the start of the pandemic.
As nations across the world attempt to cope with the crisis, they might be able to draw upon mechanisms that were used historically in the Muslim world in order to reduce poverty and income inequalities. Some of these mechanisms highlighted below, when used correctly, might serve to soften the blow by allowing for the systematic redistribution of wealth in society. These include amongst others access to a unique financing type as well as well as other mechanisms for income redistribution:
- Qard Hasan (benevolent loan) is a loan that is extended from a lender to a borrower for social welfare purposes. Through this mechanism the rich are encouraged to extend loans to the needy. The lender has no right to demand any amount in excess of the original principal amount as that would violate the prohibition on Riba (interest or usury). When used on a broad scale, this type of financing serves as a tool to not only reduce income inequality and alleviate poverty but also promote financial inclusion.
- Zakat and al-Khums (compulsory charity) and Sadaqa (voluntary charity) are mechanisms for income redistribution from the rich to the poor. Zakat, for example, a mandatory almsgiving that requires Muslims who own wealth at or above a certain threshold to donate a portion of it, typically 2.5%, to those who are eligible.[3]
- Historically, Awqaf (endowments) or the waqf (singular) played a pivotal role in socio-economic development across the Muslim world. They were important Islamic financial institutions that mobilized and facilitated the flow of funds towards philanthropic causes such as in order to fund education, health & libraries amongst others.
To varying degrees, some of these mechanisms are currently being used in various parts of the world, whereas others (ex. Waqf) are no longer as prevalent as they once were. Having said that, more has to be done as nearly all economic indicators suggest we have reached a tipping point with high levels of poverty and income inequality across the world. Efforts by policy makers to address these issues by preempting them could involve integrating such mechanisms as well as others in order to allow for a more equitable distribution of wealth and income. This in turn would create the foundations for resilient systems that are better able to cope with shocks as they appear.
[1]https://www.weforum.org/agenda/2020/10/covid-19-is-increasing-multiple-kinds-of-inequality-here-s-wh...[2]https://www.bbc.co.uk/news/business-54446285[3]https://nzf.org.uk/about-zakat/purpose-of-zakat/
Halal Investments
When it comes to investing, many Muslims (and non-Muslim investors) are on the search for stocks and investment products that are deemed to be halal stocks. Halal stocks refer to those stocks that emanate from companies that comply with Sharia principles.Sharia rules about investment encourage investors to find a balance between the society and the individual. The foundation of halal investing rests on being socially responsible and making sure your investments comply with Sharia rules about what is halal and haram.In very basic terms, Sharia compliant stocks should :
- be based on ethical profit sharing
- prohibit interest
- not be linked to prohibited activities and industries
- uphold ethical values
Guidelines For Halal Investments
Halal investing requires investors to ensure their investment decisions are based on what is permissible under Sharia rules.
Any business that engages in so-called haram (non-permissible) activities should be avoided as the stocks will not be halal. For example, companies that are involved with alcohol, pork, gambling, porn, tobacco, and drugs are not permissible when it comes to investing or the purchase of stocks.
Instead, look for businesses that are involved in technology, science, energy, transport, education, regeneration, retail, property, and textiles.
Islamic finance-based investment activity requires the investors to evaluate where the stocks come from, the financial activities of the company, the price being paid, the financial statements and accounts, and the revenue/ sales generated. This level of research means once you are ready to invest you should know a great deal about the company.
Activities such as short-selling are not permissible by Sharia law.
CAN MUSLIMS INVEST IN STOCKS?
The simple answer to this question is yes. Muslins can invest in the stock market and stocks that are deemed to be compliant with Sharia principles.
From an Islamic perspective, as long as the stocks being invested in do not contravene any Islamic finance principles, then investing in them is considered permissible.
That is not to say that investing in all and any kind of stock is halal. Investors looking for halal stocks should be mindful of the companies and the industry they are investing in.
WHAT ARE HALAL STOCKS?
Halal stocks are stocks from companies that are compliant with Sharia principles relating to finance.
According to Islamic finance and Sharia laws, investors should share in profit and loss. Companies you invest in should not be linked to prohibited industries such as gambling and porn, and they should not trade unethically.
Muslims have a duty to ensure that they align their investment activities with Islamic finance principles.
ARE HALAL STOCKS ONLY FOR MUSLIMS?
No, halal stocks are not only for Muslim investors. In the United Kingdom and across the globe more and more investors are looking for more ethical stocks.
Halal stocks will normally fall within the realms of ethical investing given that Islamic finance is based on principles relating to social justice and ethics.
Many Sharia compliant lenders and providers of financial products in the UK offer halal stocks to Muslims and the wider investor community.
Halal Stocks - Factors To Consider
Halal stocks should be screened for Sharia compliance. You should look at the website of the company you intend to purchase stocks of, and check to see what their business operations entail. Further, examine their trading practices and their sources of income.
Before you invest your money, make sure to undertake quantitative and qualitative assessments and screenings of the company's business operations. You'd be surprised at what can contravene Sharia rules relating to business. For example, you might want to invest in a business that deals in the buying and selling of food such as fresh vegetable and fruit.
However, when looking closely, you might find the same company or brand also buys and sells alcohol and this is contravention of Sharia principles. Investing in such a company would not be deemed to be halal.
Another example of a prohibited stock would be investing in stocks belonging to a company that distributes food. On the surface, this might seem to be non-controversial, but if the company distributes all kinds of meat including pork, then the stocks of that company will not be deemed to be halal.
Also, companies whose finances revolve around interest-based activities should be avoided. Under Islamic finance principles, riba ( interest) is strictly prohibited. Any company you buy stocks from should not pay or receive interest in any form. Always check the position of companies you want to invest in by checking out the web page and the service they offer.
An important point to note is that investors in halal stocks should ensure that they keep track of their stocks. Do not assume that just because the stocks started off as halal that they will remain so. Many companies often change their policies and sometimes they can veer from being Sharia compliant, to non-compliant.
Always use trusted sources of information and undertake your own research on any company you want to invest in.
Do not be fooled by companies that are essentially mutton dressed as lamb. This refers to those companies that claim to be ethical and halal but are not. If you have any doubt about the stocks of a company then it is best to refrain from investing.The main things to look out for are as follows:
- Does the company trade ethically?
- Are their contractual terms fair and ethical?
- What industries is the company involved in?
- Does the company deal with any prohibited or haram products, services or practices?
- Are the company's finances linked to interest/ riba?
- Does the company partake in any activities which go against basic Islamic rules and principles?
- What is their business process? what economy do they trade in?
- Does the company have a high level of debt?
There are many products and services online that can help you carry out the compliancy screenings.
Benefits Of Investing In Halal Stocks
One of the main benefits of halal investing is that it encourages an ethical approach to investing and growing your portfolio. Halal investing requires you to undertake due diligence and research the companies you invest in. This leads to a more disciplined and considered approach when it comes to investing your money.
Short term speculation is discouraged under Sharia rules as it flies too close to speculative gambling. This means that your investments are less risky overall and have greater long-term success.
Muslim investors can sometimes find it hard to navigate the complicated investment landscape. Stocks that are Sharia compliant are not always readily available in the traditional bank setup investors might be used to. A great deal of screening is required before stocks can be deemed to be halal, but there are services out there that do all the due diligence for you.
As the Islamic finance market continues to gain momentum, Muslim investors are finding there is a greater choice when it comes to halal stocks.
In recent decades Islamic finance principles have become more mainstream. Two key components in Islamic finance are Islamic banking and Islamic insurance which is also known as takaful.
Takaful is a form of Islamic insurance, but it is different from conventional and western insurance policies. Geared towards a Muslim customer base, takaful involves a pooling system whereby members each pay money into a pool fund and effectively guarantee each other against losses and damages.
Essentially, takaful is a system within Islam of mutual insurance. It is based on the following principles
- mutual assistance
- solidarity
- co-operation
In addition, the takaful system is designed to be fully Sharia compliant and in line with Islamic principles relating to financial transactions.
That means takaful does not include any form of interest (riba), or unjust enrichment (gharar). Members who pool their funds are protected by each other by pooling their respective contributions. These contributions are then used to provide financial cover for those within the group who face a claim or a loss. The system of collection and distribution is an ethical and Sharia compliant experience for the participants.
This article will examine how takaful works, and the main Islamic principles relating to this form of insurance.
Principles Of Takaful
As mentioned above the three main principles relating to takaful are mutual assistance, solidarity, and co-operation that offer protection from losses.
These principles mirror the core Islamic finance principles that centre on ethical funding and social responsibility.
- Mutual assistance: this principle is based on reciprocal help. Participants or members of the takaful fund help each other out, and in doing so they share the risks and rewards of the scheme.
- Solidarity: the takaful system is based on principles relating to social solidarity. This reflects the ethical stance within Islamic finance which focuses on the benefit to society rather than the individual. The social solidarity aspect of takaful fosters and enhances the sense of community among the participants. What this means in reality for customers is that their financial needs are met, whilst they are also helping others.
- Co-operation: As it is based on the principle of mutual support, it is clear that co-operation is key for takaful schemes to succeed. Each member must agree to co-operate with the others for the greater good of the scheme.
How Does Takaful Work
Takaful involves the following components:
- Pooling of contributions - participants all contribute to the fund which is managed by a takaful manager
- Providing insurance coverage - the fund offers participants insurance coverage for specified risks
- Processing claims - the takaful operator manages the claims
- Costs - the cost of administering the takaful system is covered by the contributions made
- Profit sharing - as there are no middlemen (as is the case in traditional insurance products), the profits are shared. This means that if a claim is made the takaful operator uses the funds already in the pool to settle the claim
TAKAFUL - IS IT REGULATED?
In many countries across the globe, there is regulation of takaful schemes. Especially in countries that have adopted Sharia law. In Muslim countries takaful sometimes forms part of government services and policies.
How takaful is regulated depends on the country and region you operate within. Typically, a takaful scheme will be governed by the insurance rules and regulations of that region.
The type of protection on offer includes insurance industry regulations, business regulations, tax laws, and consumer protection laws. You should always check the status of any takaful scheme before joining it.
Benefits Of Takaful Insurance
There are many different advantages of taking part in takaful insurance. The main benefit to Muslims is that they can benefit from an insurance scheme that is Sharia compliant.
Some of the other key benefits of takaful include the following:
- Flexibility: takaful insurance can be tailored to meet the specific needs of an individual or business.
- Ethical Investment: As takaful operates in compliance with Islam and Sharia rules, it means that is it an ethical and attractive option for those who want to invest in a socially responsible way.
- Mitigated Risk: Pooling contributions via takaful insurance reduced risk for all involved and also generates revenue to deal with insurance claims. Overall, takaful offers an ethical strategy when wanting to secure an insurance policy.
- Financial Protection: of course, one of the main benefits of takaful is the financial protection those within the pool are offered. This means policyholders have protection against unexpected events via the insurance policy and their business. product and asset collection can be covered.
Takaful In The United Kingdom
Takaful has increased in popularity in the United Kingdom with the increase in consumers and investors looking for ethical and alternative insurance options to protect assets and manage risk. Globally, there is also a demand for takaful projects, including in Kenya, the Middle East, South East Asia, and the wider African region.
In the UK, takaful insurance products are available and offer protection for a variety of risks such as life insurance, motor insurance, and health insurance. In fact, the UK takaful insurance industry has seen significant growth in the last decade.
Takaful Insurance
Those businesses and brokers offering takaful insurance usually work together with traditional insurance companies to create bespoke insurance coverage for their clients. Conventional insurance and investment products are based on underwriting risk. In contrast, takaful is based on co-operation and the pooling of funds.
Takaful insurance that is offered by brokers and businesses is subject to the same regulation as other insurance products. In the UK, takaful insurance is regulated by the Financial Conduct Authority (FCA).
Anyone looking for takaful insurance in the UK should ensure they approach reputable brokers and those who understand the concept of Islamic finance and Sharia law.
When doing research you can visit the website or online platform of the company offering the takaful insurance so you can assess how the company prices and offers the takaful product and find all the information you need.
Takaful is a great financial planning option for those people who want insurance cover that is Sharia compliant and aligns with ethical values.
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