Financial Management
Choosing a Bookkeeper – Part 2
David Balwin
CPA | Accountant | Business Advisor
In the previous Blog we looked at how to make sure your bookkeeper has sufficient accounting knowledge and skill to accurately look after your books. In addition, good bookkeepers should be a member of an accredited industry body (eg. CPA Australia, Institute of Certified Bookkeepers) and can demonstrate commitment to continuous development so they are up to date in their knowledge and skill. If a bookkeeper will be preparing your BAS they need to be registered with the Tax Practitioners Board and comply with all their requriements. Good bookkeepers will have appropriate insurances (eg, professional indemnity) and conduct themselves professionally. Questions to ask a prospective bookkeeper are:
- are they members of an accredited industry body.
- are they a registered BAS Agent.
- can they demonstrate commitment to continuous development.
- do they have appropriate insurances.
In the final installment in this series, we will look at the value add a bookkeeper should be providing to a business owner/manager.
Click here to find out more about Balanix Solution’s bookkeeping Services.
Keeping the Eye on the Ball
You are working long hours and very hard … that must mean the business is doing well – shouldn’t it?
With 24% of business’s failing in their first year, it is vital that owners/managers keep an eye on the ball …. which means regularly looking at and understanding some key financial reports. It is continuously surprising the number of businesses that either do not regularly produce nor review financial reports. So how do the business owners/managers know where they are at and where they are heading? The simple answer is ….. they don’t.
Following are the suggested minimum reports to produce and review.
Profit & Loss: This report indicates the revenue and expenditure, and therefore the net profit or loss, for a specific period. When preparing the Profit & Loss, not only is the bottom line important, but equally critical is the percentage of each expenditure to sales (not wages to sales).
Cashflow: The cashflow statement shows all sources and uses of a business’s money during the accounting period. Businesses that have not or do not produce cashflow statements are unlikely to know of cashflow problems until they physically happen. This statement is fundamental to the good health of any business.
Balance Sheet: The balance sheet is based on this equation: assets = liabilities + owners’ equity. It lists everything the company owns (assets), everything the company owes (liabilities) and the value of the owners’ ownership stake in the company (owners’ equity, or capital).
Budget: Budgeting is the process of trying various mixtures of resource allocation, until one particular combination emerges which best meets the spirit, direction and outcomes in view of the goals and objectives of the business. When a budget is completed (refer “At a Glance” (in the margin left) for tips on developing a Budget) it is critical to monitor progress against the budget to make any necessary adjustments sooner rather than later (when their may not be sufficient resources to allocate). With history, budgeting becomes more robust in businesses as fixed costs become more routine and planning for potential recurring costs more sound.
Debtors: Debtors are people who owe the business money (also referred to as “accounts receivable”). It is important to monitor debtors particularly those not paying. Good business practice includes communicating the terms of debtor arrangements clearly before allowing a payment on credit. All businesses have a clear legal obligation to be able to meet debts as they occur. Therefore, it is critical that all businesses have funds available to meet their costs. If businesses have debtors outstanding for lengthy periods, then businesses’ ability to pay its debts is strained.
Balanix Solutions Accounting Services
Why Manage Cashflow
CPA | Accountant | Business Advisor
One of the biggest issues many small businesses will face is their failure to plan how much cash they will need in the foreseeable future. Therefore, planning needs to occur in relation to how much cash the business will need (preferably over the next 12 month period) and how the business’s current practices can be improved to enhance the forecasted cashflow. As a starting point business owners need to sit down and map out, on at least a month to month basis, what the expected cash the business will need to meet commitments and what the expected cash the business will generate from sales or services. Businesses need to be as honest and as accurate as possible, including all revenue and expenses items; for example,
List Revenue (including cash from):
- Sale of goods and/or rendering of services;
- Royalties, commission, fees;
- An insurance entity for claims, annuities and other policy benefits;
- Tax refunds;
- Receipts from contracts;
- sale of property, plant equipment,
- sales of equity; and
- receipts from repayment from loans made to other parties;
List Expenses/outgoings (including cash for):
- payments to suppliers;
- payments for bank charges;
- payments to employee including PAYG, superannuation, leave loading and long service (if taken in forward period);
- payments for insurance policies for building/contents/stock/loss of wages, workers compensation;
- payments due under contracts;
- payments to acquire property or equipment;
- cash advances or loans made;
- payments to owners where redeeming equity; and
- mortgage, lease payments.
This list is not exhaustive, however, hopefully gets the thinking juices going about where businesses’ money can go. A great resource for working up these lists is the last 12 months cashflow of the business.
Also, make sure the one-off payments and receipts are not forgotten – they could, in the case of receipts, get you over the line in a tight period or, in the case of a payment, cause the business severe stress if not planned for and suddenly appears.
Once expenses/payments and receipts have been allocated to the relevant month the business is now in a position to see where it stands.
How does it look? Is enough revenue being generated to cover costs over the period (including salary for the business owner/s)? Are there any months where expenses are greater then receipts and has the business sufficient reserves to meet the shortfall?
If the business needs short term funding for a period during the year, now is the time to plan the best way to meet the shortfall: not when it happens! By planning and researching options, the business will have a far greater chance of securing the required funding at the best rate, in time to meet payments.
Remember, even though things are good and the business is generating positive monthly revenue, there maybe something lurking around the corner that is out of direct control. By ensuring access to other funds (e.g. overdraft/loan) or even better still the business’s own reserves that have been put aside during the goods times, the business has a far greater chance of surviving.
By having a proactive cash flow projection based on sound numbers, which is constantly reviewed and adjusted for changes in financial circumstances, the business is in a good position to achieve the desired result. Remember to always seek professional advice from properly qualified people as part of your business strategy. It is always a good idea for the business to discuss any issues or management matters with its accountant, legal advisor, financial adviser, financial institution and/or other business professional, well in advance.
FAQ – Debt Management Solutions
CPA | Accountant | Business Advisor
Q: My Receivables are blowing out with more customers taking longer to pay and the timeframe for payment extending. I am experiencing quite a hit on my cashflow so what can I do to improve the situation?
A: The first thing you need to do is make sure you have terms of trade established with all your customers. What do I mean by terms of trade? Terms of Trade should set out on what basis you are selling your goods/services (eg cash on sale, payable within seven days of invoice date, 30 days after end of month) and whether there are discounts for early payment or penalties for late payment. They should also set out whether the customer will be liable for any costs incurred in attempting to recover amounts owing.
Once you have a policy in place make sure you enforce the terms of trade policy. Remember it is your money and unless you are a financial institution which lends money it is not your business to fund customers’ Cashflow. What you educate customers to do is the way they will respond. That is, if your terms are seven days and you allow clients twenty-one days before you chase them for payment what are you saying to them about your terms of trade? Is it seven or fourteen or twenty-one days? If your customers are educated by your actions (rather than your Terms of Trade) you will have trouble re-educating them as to what you real terms of trade are (but, if you are in this situation, you are going to need to try and change things).
So the day after monies are due (and not paid) send a reminder statement or make a friendly phone call reminding the customer the account is overdue and that you require payment. If reminding by phone, get a commitment from them and record the commitment in your system. If this fails follow up with a letter reminding them of their commitment and what the consequences of non-payment is, as per your Terms of Trade. Unless your client can show some extreme reason why you shouldn’t follow through with the stated consequences – then follow through. You may end up losing a couple of customers but are they reallythe customers you want in the first place?
Also encourage customers to speak to you in advance if they are having problems with cashflow and payment of accounts. Remember we all have problems from time to time and most times we can work through them if there is early communication between the parties involved. Offer a payment plan if this suits your buisness (any money coming in is better than none being chased).
If you need any further help with Debt Management and Cashflow, call me 07 3264 4783 (ask for David Balwin) or drop me an email ( info@balanixsolutions.com.au ) – I’d love to help!
Increase Price –v- Increase Sales – what to think about.
CPA | Accountant | Business Advisor
Pouring over margins and gross and net profit, a common theme is a belief that the way to salvation is through an increase in sales. However, in reality, profitability is driven by the ability to vary price and maintain control over costs.
No matter how hard a business tries, if it has increasing costs and is not able to increase price, then no amount of increased sales will lead to increase profitability – in fact, the business maybe simply increasing its loss.
But alas, I hear you say, “we cannot afford to increase our prices because then we won’t be competitive with our competition down the road”.
If this is really the case then some serious research needs to be done into the competitors to see how they are maintaining profitability. It maybe they are managing their costs better or else they maybe in the process of going out of business.
So, businesses need to differentiate themselves from their competitors so they are not governed by others’ price but by their ability to influence the market that they have a better product or service or something else that they cannot get from the competitors (competitive edge/competitive advantage).
One way of going about this is to develop a simple list of all the reasons why a customer would want to buy from your business. That is, what makes your business unique?
Alas again I hear you say, “but we sell the same goods as the guy down the road”. True, however, the answer may lie in exactly what you are selling – and that could be a million things:-
- the quality of your service;
- the after sales service;
- the way the store looks;
- the attitude of staff;
- the way the goods are presented and packaged;
- the quality of advice given by staff;
- the knowledge of products sold;
- product range; and so on.
Next, you do the same for the competitors ie. what are their strongest selling points? Once this is worked out, a business is in a position to play to its strengths and eliminate or reduce weaknesses while at this same time developing ways to counter the competitors’ strengths.
For most businesses, if this is done well, two things will happen. The business will be able to increase prices based on the product differentiation and if through this process generate repeat business then the controlling of costs will be easier.
Why will costs be easier to control? Simply put, the least costly way of getting customers through the door is by repeat business. They have already experienced the business and don’t need to be convinced to come back and what’s more they will recommend the business to friends and associates (the second cheapest way of getting customers).
Let’s have a look at this by way of example. If a business has a 30% margin and it increases its price by 10%, then sales can decline by 25 % before gross profit is reduced. Whereas, if it discounts price by 10% on the basis that increased sales will help and the business is running on the same 30% margin it needs to increase sales by 50% to produce the same gross profit.
So, when the business has its price and cost structure right, remember, “Cash is King”. Even with high volume sales at the right price, and costs reduced, a business will fail if it does not have good cash-flow and is unable to pay suppliers and staff when due.
Now is a good time for businesses to have a critical look at how they are operating. Reviews need to focus on all aspects of the business including customer analysis and the finances. Questions to consider are – do you know:
- who your customers are and what their spending behaviour is?
- how often do you review this-weekly/fortnightly/monthly?
- when is the last time your bank and credit statements were reconciled?
- the breakdown percentage of your costs?
- your gross profit margin and overheads? and so on.
If you think this is the role of the bookkeeper, think again. Business owners need to keep an eye on the ball, making sure the business stays financial and trends are regularly identified and monitored before you have any significant detrimental impact or conversely so you can’t be taken advantage of.
Of course your bookkeeper and/or business advisor can assist with gathering this information.
Need help or more information – contact us – we can help!
balanixsolutions.com.au/contact-us
