Managing Money
It’s About the Investment-Not the Tax
David Balwin
CPA | Accountant | Business Advisor
I am forever hearing small business complaining about the tax they pay and asking how to reduce their liability. I find this very interesting as if these business owners spent as much time focusing on increasing revenue then the tax issue would not be such a focus.
I agree … No one likes to pay tax … but at the end of the day Government needs taxes to fund services to the community like police, education, health, roads etc.
The point a lot of small business owners forget is that the main focus of any business decision should be based on the return that the investment is going to provide. If the investment does not stack up then any potential tax advantages are not worth considering.
I suggest that the first criteria when considering making an investment is – does the opportunity provide a suitable return for the risk you are taking e.g. if you were to invest $100,000 purchasing a business what return would you want to make on your investment. A simple starting point in considering the return on investment is to look at what would one of the big four banks offer you to invest the money with them – (somewhere between 3% and 5% depending on the period the money was invested for etc).
So, if the bank was offering say 4% with minimal risk, then what is the risk/return you should be seeking from a business that does not have a credit rating, may have little management skills and lack policies. Maybe a 20 to 30 percent return would not be unreasonable, for if you were not to achieve this type of return would you simply invest your hard earned money in one of the banks or government bonds where risk is low.
Same applies if you are looking to invest in, for example, property. For example, if you were considering purchasing a commercial unit in Strathpine on Brisbane’s north for say $250,000 you would need to consider the return on investment, tenancy trends, out-goings etc and see how it all stacks up well before considering tax benefits.
Having said this, once you have determined whether the investment is sound from an economic return perspective, then look at how tax can be minimised within the boundaries of the legislation.
The bottom line to any business decision should therefore always focus on expected returns for risk first and only then look at the tax consequences before making a final decision.
4 Things to do NOW for your Business
David Balwin
CPA | Accountant | Business Advisor
With 30 June fast approaching, now is the time for Business Owners to prepare for the next financial year. Here are the four main activities you need to be doing right now to position your business for another successful year.
1. Tax Planning
Make an appointment TODAY with your Accountant for Tax Planning. Tax Planning looks at a financial situation or plan from a tax perspective with the aim to align financial goals with tax efficiency planning. Basically, tax planning looks to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. However, a word of caution – while tax planning is an important element in any financial plan, it is important not to let the “tax” tail wag the financial “dog.” As most financial actions have some tax implications, decisions on financial actions need to be made having regard for all matters and should not be avoided solely on the basis of tax.
Undertaking tax planning now can look at any actions to be undertaken before 30 June as well as actions for the next financial year. As planning can be a bit involved depending on individual circumstances, give your Accountant a bit of time to do the best job and don’t leave it to the last minute.
2. Setting Next Year’s Goals and Targets
Now is the time to start reviewing your business plan. If it is sitting in a draw (or on the computer) and hasn’t seen light of day for awhile, get it out, dust it off and have a look at what was planned for the business this financial year and what was achieved. Did things happen as planned? Were goals and targets met (or exceeded)? Did projected costs occurred or did they blow-out or result in savings?
Looking at this information, it is now time to update the business plan for the next 12 months. What goals and targets need to be set? What timeframes need to be identified for actions to achieve goals? What research and reviews need to be undertaken in relation to improvement of costs (eg, can you get a better deal on telephone accounts or stationery/office supplies)?
Planning is a vital exercise for all businesses. It underpins decisions and behaviours as a road map to achieve what you have set out to achieve.
3. Setting Next Year’s Budget and Cashflow Projections
CASH IS KING – the mantra for all business owners. If the business is not making money then it shouldn’t be in business. But more than that, the business needs to make enough money at the right time to cover expenses. Now is the time to use the information at hand to set the business’s budget for the next financial year and look at cashflow projections so you know how much money needs to be in the bank and when to pay the bills.
4. Ensuring Pricing of Goods and Services is Right
This is also the perfect time to review the revenue side of the business. Look at the pricing of your goods or services and see if any changes need to be made over the next financial year. Are you competitive with your prices compared to your competitors? Does CPI increases need to be factored in? Are your prices positioning you in the market where you want to be?
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. For more information on this topic, refer my previous Blog – Increase Price –v- Increase Sales – what to think about.
Call the Balanix Team (3264 4783) today – we can help!
8 Bad Money Habits to Kick – Final 2
David Balwin
CPA | Accountant | Business Advisor
Welcome to the final blog in which we look at 8 money habits business owners should make sure are NOT occurring in their business.
Funding Tax liabilities at the last moment.
All business owners are certain of two things …. Cashflow will have ebbs and flows and there is always a tax liability in some shape or form.
Depending on the nature and size of the business various tax obligations and liabilities may apply. There is company tax, goods and services tax (GST), payroll tax to name but a few.
Unfortunately, some business do not plan for these liabilities and find themselves stressed and unsure where to find the money when the taxman comes knocking.
Like all good business practices, plan the business’s tax obligations and set up a process of putting the money away on an ongoing basis so it is there when payment is due. If need be, set up specific bank accounts for GST and long term liabilities so the money goes out of sight thereby reducing risk of spending by accident.
Saving what’s left after paying everyone else.
Debts have to be paid. Businesses need to establish good credit profiles in order to maintain good suppliers and financial arrangements. With cashflow in and required cashflow out not always dancing in harmony, business owners need to save along the way to ensure adequate funds when needed. Set a percentage of income to be saved on a regular basis and don’t rely on scraps if and when there maybe some. Also, manage the payment of bills ensuring they are paid on time but not necessarily the minute they come through the door. Budgeting and forecasting is another tool to stay on top of cashflow and the financial health of the business.
Need help – Call me today – 07 3264 4783
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
