From The Director
I read something interesting about writing your goals down and how it significantly increases the chances of actually achieving your goals.
I was thinking about this in relation to budgets. What would happen if a small business spent a couple of days working out a proper budget and wrote it down.
From my knowledge very few small businesses actually have a budget. So if you do a budget and write it down you are ahead of the pack.
If you then go and review the budget every month you are probably starting to lead the pack.
Reviewing your budget on a monthly basis is a great idea as it lets you know how your business is going, it also lets you know if market conditions are changing. You have heard of working on your business and not in it. Budgeting is definitely part of working on your business . Doing a budget might take you a day or two and a monthly review might take you half a day but the results might make your business more profitable as you will be thinking about your business.
The way I would set out the monthly review is to break it down on a spreadsheet. I would compare the actual monthly figures against last years figures and also the budget. I would also compare the year to date figures against the budget and last years figures. Monthly figures can vary due to various factors but usually flatten out over the year.
I used to agree with this saying, if something is working why change it.
However over the last 10 years I have had to change my opinion. I have seen so many industries change over the last 5 years.
You have the mining industry go from a robust driver of economic growth to the shutting down of various mines.
Even Woolworths being the darling of the stock market losing ground and market share to Aldi.
It is not all doom and gloom though.
You have an Australian company called Atlassian which started in 2002 with $10,000 of credit card debt listing in the USA now worth $7.97 billion dollars or the same size as Qantas or James Packer’s Crown Resorts.
Technology, the Australian dollar, the price of metals and competition have all changed considerably over the last 10 years. Has your business changed? Has the technology you used changed? Has the market place your business is in changed? No one or very few people want to be on the bleeding edge of technology but if you are still doing the same thing as you were 5 years ago you are probably in a really niche market or your business is slowly dying.
Technology is changing and so should your business. Anybody still advertising in the printed version of yellow pages? In the accounting field technology has changed considerably. Accounting systems are in the cloud now and bank statements download directly into accounting software. This has allowed our firm to spend more time helping clients rather than just doing compliance work.
I think it is important that businesses ask themselves where their industry is heading and what part of that future do you want. Spending time checking out the latest in technology, changes in the market place and keeping an eye on the economy will not only save you time and money, it could save your business.
If cash is king then debtors are attacking your kingdom.
It is so important to get debtors under control.
If you have a turnover of $2 million dollars and debtors take 45 days to pay you then you probably have around $250,000 of outstanding debtors.
A lot of businesses go broke because of cash flow, not because they are not profitable.
If you or your staff spent a bit more time chasing debtors and could reduce the debtor days down to 30 days, you would find your bank account would go up by $83,000. I don’t know about you but I would rather see that money in my bank account than someone elses.
If all your clients paid by credit card on the day of the invoice your bank account would go up $250,000. However you would probably end up paying $40,000 to the banks in merchant fees etc on a turnover of $2 million and that hurts big time. You might not have a cashflow issue just a profitability issue.
Finally if you are thinking about going into debtor finance then don’t. Debtor Finance or Invoice Financing is where a company pays you for an invoice as soon as you issue the invoice. Which sounds great. You invoice your client and receive the money straight away. However this can be more expensive than having your client pay by credit card. Also if your client ends up not paying the invoice for whatever reason then you need to repay the money to the finance company.
Capital gains tax concessions and negative gearing have been the way for Australians to make money over the last 20 to 30 years and I will be sorry to see them go but they will go.
Times have changed dramatically over the last few years. The global financial crisis has brought about major changes that are just beginning to be felt today.
Capital gains are great when there is inflation but with low inflation rates and low interest rates there will be low capital gains.
Yes I know house prices went up in Sydney and Melbourne but there are a couple of reasons for this which have now changed.
Low supply of stock, in previous years we have had low supply of units and houses but we are now entering an oversupply of stock of units which many people think will bring down the prices of units and potentially houses. The other impact has been the falling Australian dollar, this has made investing in Australian real estate a cheap option for overseas buyers. The Australian dollar’s direction is anybody’s guess but I would not think it will be a major impact from now on in relation to house prices.
Negative gearing was a great way to invest and save a bit of tax. But if capital gains does not occur then there really is no reason to negative gear.
So then you have to ask yourselves why does the government not want to get rid of capital gains tax and negative gearing.
- It will scare the public which could reduce housing prices and therefore send the country into recession.
- There really is no need to drop capital gains tax concessions and negative gearing if they are not having a major impact on the economy.
- The other side said they would drop capital gains tax and negative gearing concessions.
So where is the next tax effective place to invest your money? The answer is Super even with the new changes announced it still is a great way to invest tax effectively. Anybody you know with $1.6 million in super, no neither do I. Let’s get there together!
I do not know if raising the GST from 10% to 15% is a great idea or not for the economy. I do however wonder how it will effect small businesses and middle income earners.
I am an accountant and I deal with small business who provide services to middle Australia.
Yes I am sure that the people who need to be looked after will be. The pensioners will get bigger pensions and be no worse off, for this I am happy. The rich will be fine, and probably not even notice the 5% increase but as for the rest of us. It will have an impact.
Yes we may see that stamp duty on houses disappear and that is a good thing but we all probably think that house prices will just increase that little bit more, besides how often do we buy a house?
However everthing will increase slightly from our electricity, gas and phone bills right to our morning coffees. You can get bet the large companies will pass on the full 5% to us and we will not be able to reduce our phone or electricity bill. But once all your customers have paid all the things that they have to pay and are being paid the same by their employers. Do you think they will have enough money left over to pay you for your services or products? Or will they just buy them less often?
Are you prepared?
As an accountant, over the last couple of months all I have heard is “how can I reduce my tax?”
Whilst this is an important question and one I am happy to hear from clients. (It means their businesses are going well.)
Isn’t it better to ask the question do I have the information at hand to grow my business profitability?
In the last year has your business grown. If the answer is yes or no you need to know which areas your business is being affected either positively or negatively.
A good accounting system is the start to finding out this information. From this you can get the basic reports such as a Profit and Loss statement. However if you or your accountant have set this up properly you will be able to delve deeper to find out a lot more such as
• Which products are selling and at what margin.
• Which sales person is selling the most and at what margin
• Is there a particular region which or sales channel which is selling more
There are so many areas that the right information from your accounting software will help you focus your attention and help you improve your profits. A role that your accountant should be helping you with throughout the year. This way they can be doing the tax planning throughout the year. Rather than trying to do some very creative accounting as the year comes to a close.
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At this time of year people start to think about Tax.
What can I claim in my tax return? – is a question that I often get asked all the time. Though the better question would be to ask, what tax planning can I do to increase my wealth?
The basic answer is that you can claim expenses you incurred in gaining your income. Unfortunately for most people who work for someone else there is very little that you can legitimately claim.
(No you cannot claim the Sunday brunch you have with a friend for networking purposes as the lady in the table next to me intended to.)
In relation to tax planning strategies there are two main strategies and they work.
. Negatively gearing into property (you can do shares but this has higher risk)
. Contribute more to Superannuation
You may say that I am not telling you something that you do not already know but are you doing it?
Negative gearing helps you buy a property that will reduce your tax and in the long term should be worth more than you pay for it resulting in a capital gain, which you then get a 50% reduction on the tax on the profit.
By contributing extra to super you are potentially gaining 22% tax saving and over a period of years your additional savings and the tax saved will have a major impact on your life after retirement. Do you really believe the government will look after you when you retire?
Tax Planning and Wealth Creation are all about getting the basics correct and then building on the solid foundation. Have you started yet?
For more from Simon Reed, Director at SPR Accounting and for further information visit www.spraccounting.com.au
Other articles by Simon Reed:
An article in the financial review on April 19 2015 by Jeremy Cooper got me thinking, “The brutal reality is a fair price for an age pension in today’s interest rate environment is about $1 million For that amount a couple will get $1,297 a fortnight ..”
A lot of people will be selling their businesses and get nowhere near a million dollars. The calculations being used by accountants and business brokers is that if a small business is a perfect money making machine you will get 5 times net profit. So if a company after paying all the staff and the working directors makes a profit of $100,000 a year, they would be lucky to get $500,000 as most good businesses sell at a multiple of 3 times profit.
So when it comes to retirement is it really worth selling your business to put the money into super to fund your retirement. I expect that a lot of financial advisers out there will say that they will be able to get a better return than the risk free rate used in the pension example, but will they be able to get you anywhere close to $100,000 profit you were getting from your business?
I think succession planning is probably the way to go if you own a small business that is doing OK. Why kill the goose that keeps laying those golden eggs?
Keep an eye out for more from Simon Reed, Director at SPR Accounting and for further information visit www.spraccounting.com.au
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