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October 1, 2020 Accounts, Bookkeeping, Planning

Demystifying Your Balance Sheet

The concept of balance sheet written on a blackboard

Do you understand the story your Balance Sheet tells about your business? It’s important you understand the components of your Balance Sheet and the key ratios that measure the health of your business.

1. It measures the net worth of your business.
Your Balance Sheet is made up of all of your assets and liabilities; your net worth is your total assets less total liabilities.

Current assets are assets which are expected to be converted into cash within 12 months; current liabilities are expected to be paid within 12 months
Non-current assets aren’t expected to be converted into cash in the short-term; non-current liabilities are long-term liabilities which aren’t expected to be paid within 12 months
Your net worth is the owners’ interest in the business. In other words, if your business was to be wound up this is how much you’d be left with as the owner of the business.

2. It tells you if your business is solvent.
Solvency is the acid test for survival. If your business is insolvent, without immediate action to remedy this, it’s unlikely to survive for long. There are two components to solvency:

Current ratio greater than 1 (current assets / current liabilities)
Positive net assets (total assets – total liabilities)
If your business is insolvent, you’ll struggle to pay bills on time and you may be personally at risk. It’s imperative you seek help immediately if your business is insolvent.

3. It allows you track the strength of your business.
By comparing your Balance Sheet to previous periods, you can track whether your net worth is increasing or decreasing. The stronger your Balance Sheet, the easier it will be for your business to survive a downturn. For example, if your retained earnings are diminishing over time, it’s clear that you need to take action to strengthen your Balance Sheet to ensure you’ll receive value upon the wind up or sale of your business.

4. You can calculate key ratios.
Key ratios not only allow you to compare your results year on year or to industry benchmarks, they also highlight areas for improvement.

For example, calculating your debtor days may show that it takes on average 35 days for customers to pay you. If your payment terms are within 7 days of invoice, it’s clear that your debtor processes need to be strengthened.

Perhaps you calculate how long it takes inventory to sell and see it’s taking twice as long to sell this year than it did last year. Or, maybe a specific product is taking a lot longer to sell than others, which may indicate you should discontinue it. Key ratios calculated using your Balance Sheet can tell a us a multitude of things.

Every business owner should be able to read their Balance Sheet and understand what it’s telling them. If you need help demystifying your Balance Sheet and identifying key areas for improvement, get in touch now!

September 2, 2020 BAS, Bookkeeping

Report PAYGW Correctly to Claim Tax Deductions

If you don’t meet PAYG withholding obligations for your workers, by not withholding tax from their payments and not reporting it to the ATO, you could lose your tax deduction.

This will apply to income tax returns lodged for the 2020 financial year and beyond.

If you withhold tax from payments to workers, you must withhold the required amount and report correctly to the ATO in order to receive a tax deduction for your business.

PAYG withholding and reporting obligations apply to payments for:

Salary, wages and other payments to employees
Directors’ fees
Religious practitioner payments
Labour hire arrangements
Voluntary withholding arrangements
Payments to contractors with no ABN

Withholding rules still apply to cash payments. Similarly, for non-cash payments such as property or exchange of services, withholding rules still apply even if your worker agrees to receive a non-cash payment in place of money.

The payment of PAYGW to the ATO is a separate issue. The new rules are aimed at getting employers to report correctly and on time. Once you have reported an amount to the ATO, they expect payment of that obligation by the due date.

If you make an honest mistake, such as treating an employee as a contractor, you won’t be penalised. You can correct your mistake by lodging a voluntary disclosure

Book in a call with us to review your PAYGW reporting obligations to ensure you maximise your business tax deductions.

August 12, 2020 Accounts, Bookkeeping

Increasing Your Stock Turn In A Slow Moving Economy

If you sell stock or inventory, it’s essential you understand stock turn and how to increase it.

Obsolete or ‘dead’ stock will harm your cashflow and your ability to increase profit, particularly in a slower-moving economy. The longer stock takes to sell, the longer you have your cash tied up in the stock before it can be sold for a profit. The older the stock, the less likely it is that you’ll be able to sell it for its original retail price.

Use the below formulas to calculate your stock turn:

Stock turn = cost of sales / average stock held

To calculate cost of sales: opening stock + annual purchases – closing stock (where purchases includes all variable costs that show in your trading account).

To calculate your average stock:(opening stock + closing stock) / 2.

For example, where your cost of sales is $150,000 and average stock is $45,000, your stock turn will be 1.33 ($150,000 / $45,000). This means that on average, you sell each item of stock 3.3 times per year.

So, how do you increase your stockturn to sell items faster, free up cashflow and increase your profit, particularly in the current economy?

Reduce your stock levels. In the above example, if stock was reduced by $10,000, stock turn would increase to 4.3, you would free up $10,000 of cash, and increase your margin.
Buy stock on consignment. This means you only pay for it when it sells.
Order ‘just in time’. For example, if it takes two days to receive an item after the order is placed, and you sell an average of five items per day, only hold a maximum of 10 of that item in stock.
Use display stock. If a customer wants to buy the item, have it delivered straight from your supplier to the customer instead of holding multiple items in store.
Use a catalogue. Reduce the stock held in store and provide customers with a catalogue to order from.
Reduce ordering levels. Ideally, calculate the stock turn per item (use the above formula for each item). You’ll then be able to identify the slow-moving stock so you can reduce how often you re-order it.
Stop stocking slow-moving stock altogether. It’s just tying up your cash for longer. Reassess whether you should be selling these items at all.
Encourage your sales team. Tell them which items sell more quickly and encourage them to sell more of these items.
Get rid of obsolete or dead stock. You’re better off to have cash from a discounted sale reinvested in faster moving stock.
Ask us for 10 more ideas! There are numerous ways to increase your turnover, get in touch and we’ll help you identify the best ways for your business.

July 15, 2020 Accounts, Bookkeeping, End of Financial Year

The Fundamentals of a Business Budget

A business budget is one of the essential tools in managing your business finances and actively building your business.

A budget shows what you plan to do with your cash over the next year.

For a complete picture of your business health, you need to review the profit and loss statement, the balance sheet, the cash flow forecast and the budget. Taken together, these reports allow you to make informed business decisions and monitor performance.

Why have a Budget?

Forecast sales and expenses according to monthly or quarterly variations.
Evaluate performance over time, including changes or patterns.
Get really familiar with where your money goes and where it comes from.
Clarify targets and goals and use the budget to help you focus and achieve those goals.
Comparing actual figures to budgeted figures allows you to see potential problems early and plan for unexpected costs.
A budget will help you to see the big picture and stay motivated over the long term.

Where to start

A basic budget takes known income and expenses, then makes certain assumptions about the timing of income and planned expenditure. The basic budget is based on cash in and out of the business.

Over time, as you start to see the benefits of using a budget, your budget should evolve into a more sophisticated version that includes non-cash elements such as provisions and depreciation.

Most businesses will start with one budget but soon move to having three budgets.

Business as usual – the next year’s budget is based on current year income and expenses, with perhaps a small adjustment for consumer price index increases.
Worst case – budget is based on a pessimistic view of next year’s performance.
Best case – budget is based on an optimistic view of performance over the next year.

A budget is usually for a financial year, but you can also set up budgets for two to five years.

Once you have one budget (or more) set up, you can then run your current financial reports against the budget to see how you are tracking. This allows you to make rational business decisions in real time to adjust accordingly.

You can run your financial reports monthly and adjust your budget as needed.

What Next?

Now is a great time to put a budget into place for the coming financial year. Book a time with us to help you create a meaningful budget in your accounting software so that you can use it as a proactive part of your business management, strategy and your success.

June 3, 2020 Accounts, BAS, Bookkeeping, End of Financial Year

Get Your Business Records Ready for Your Tax Return

Whilst it is not exactly business as usual right now, you still need to prepare for your business tax return. Organising your documents now will mean you can get your tax return completed earlier and access any refunds due or start planning for tax payments.

Getting your business records up to date and accurate will allow us to work with you proactively to plan for the coming year, which will continue to be unusual (and possibly difficult) for many.

It will also be one less thing to do when your normal business activity resumes later in the year.

What Records do you Need to Have Ready for the Tax Agent?

Have you bought or sold assets? If so, you need full details of acquisitions and disposals.
Have you taken out a new loan or other finance? You must have details of the finance arrangements and statements of monies owing at 30 June.
Check that any bonds or deposits paid or received have been allocated correctly.
Have you prepaid for insurance or other large business expenses that need to be apportioned to the following financial year? Make note of the portion applicable to the current financial year.
Do you carry stock? If so, you need to perform a full stocktake at 30 June (unless you qualify for the simplified trading stock rules).
List any doubtful or bad debts to be written off.
Review your debtors and creditors (accounts payable and receivable). Is the list current and correct?
Do you have loans with related entities? Reconcile the loans to and from each entity to ensure the same value is reported in the accounts of both entities.
Ensure that all payments to company directors have been correctly captured. Talk to us now if you want to make director payments before 30 June.
If contact details of business owners and key personnel have changed let us know.

We will let you know if there are other matters to discuss with us before completing your tax return, such as capital gains, vehicle usage, private usage apportionment or superannuation. This year, there may also be new elements to discuss if you have received refunds, credits or deferrals of business expenses and liabilities.Remember you need to keep all your business records for seven years, so store everything securely and where possible electronically for safety and ease.

Once you have all your records for the 2020 financial year, make an appointment with us to schedule in your tax return for prompt lodgement.

April 21, 2020 Accounts, Bookkeeping

How Do You Invoice During A Crisis?

It’s not easy to request payment right now, but it is important to keep cash flowing into your business so you can cover expenses and meet your obligations to others. As with all business dealings right now, a little empathy and a lot of open communication can go a long way.

The following tips might be useful to keep in mind when you are asking for payment.

Communication – Connecting with your customers is important. Try to make it personal to their situation rather than a one-size-fits-all email. Connecting on a more personal level shows you value them and are conscious of the impacts that the current situation may be having on them. The empathy you show now will also be remembered when business returns to normal. Be proactive – early communication will help you stay on top of cash flow and will also alert you, if you need to account for late payments.

Add value – Use your expertise to give something back. Surprise and delight your customers by offering something over and above your usual services. It could be as simple letting customers know you want to help and being open to requests, offering a one-off discount or an offer just to chat one to one.

Offer flexible payment options – for customers who can’t pay in full, consider breaking invoices into multiple payments with payment terms moved to a longer timeframe. Set up a credit card facility to give customers other options for payment. After all, the easier you can make it for them to pay you, the quicker you will get paid. If you don’t have payment services set up in your Xero account, we can help you do this. Offering a discount for early payment might provide the incentive for customers who can settle, to pay your invoice before others.

Keeping cash flow going is vital for your business so the earlier you can communicate with customers the better.

February 26, 2020 Accounts, BAS, Bookkeeping

Common BAS Errors Will Impact Your Business

Most activity statement errors are unintentional – even so, such errors can have a big impact on your Business Activity Statement. Unintentional errors may result in you paying too much GST or not enough. Whether you lodge the BAS yourself or whether you use our services to lodge, it’s useful to understand some of the inadvertent inaccuracies that can happen.

Here are some tips to help avoid the most common mistakes we see on the BAS.

Before preparing the BAS

Allocate all transactions in your accounting software to the correct expense or income account.
Make sure you reconcile your accounting software to your actual bank balance to ensure you haven’t missed or duplicated transactions.
If you use point-of-sale software and clearing accounts, check that you are not declaring the same income twice.
Set aside time to prepare the BAS so you have plenty of time to manage cash flow obligations ahead of the BAS payment due date.

Reviewing the BAS

The most common errors involve incorrect tax codes. Bank fees, donations, certain registrations, interest and ASIC fees are GST free.
Check overseas purchases; many well known online vendors are now registered for GST in Australia, however many of the smaller overseas vendors may not be, so they should still be GST free.
Similarly, some payment gateway services have GST on their fees and some don’t; check if you can claim GST.
Check that you have included stamp duty on insurance policies; as this is a government duty, no GST is payable.
If you have bought a vehicle, check that you have not claimed more than the ATO car limit of GST for this financial year.
Make sure you haven’t double claimed GST on both the vehicle purchase and repayments.
Don’t include salary, PAYGW or superannuation as a purchase on your BAS. Salary and PAYGW are reported separately on the BAS. Superannuation is not reported on the BAS at all.
Do include cash purchases and income. Cash transactions should be recorded in your accounting software.
Check the GST registration of any contractors you pay and check that you have not claimed GST if they are not registered.
If you transfer money between related entities or bank accounts, check that these transactions do not have GST as they are excluded from BAS reporting.
Although your business may purchase goods and services for private use, you may not claim GST on these.
Remember, you need a valid tax invoice for every business purchase over $82.50 including GST.

Accurate Activity Statements

There are many more potential issues with BAS reporting, but these are the most common and easily fixed. If your business is growing in complexity, or if the compliance obligations are becoming challenging, we’ll help you make BAS effortless and accurate every time.

Contact our team of professional bookkeepers now.

February 5, 2020 Accounts, Bookkeeping

How Healthy Is Your Working Capital?

We all know that cash is king when it comes to business success, but what exactly is ‘working capital’ and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It’s worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It’s possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can’t readily convert your assets into liquid cash, it’s a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you’ll need to:

Proactively manage your cashflow – cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it’s vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.
Monitor and forecast your financial position – running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don’t end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.
Use additional finance when required – if working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Talk to us about optimising your working capital

Working closely with your bookkeeper is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

Get in touch to start maximising your working capital.

December 5, 2019 Bookkeeping, Superannuation

New Rules for Salary Sacrificing Super

Salary sacrificing to super allows an employee to forego part of their salary or wages and have the employer contribute this amount to their superannuation fund instead of paying it as cash. It reduces the taxable value of salary or wages, and is therefore beneficial to the employee in both reducing tax payable and increasing superannuation.

Up until now, employers were allowed to calculate superannuation guarantee contributions (SGC) on the reduced amount of salary or wages.

What’s Changed?

From 1 January 2020, SGC must be calculated on the gross amount of salary or wages, before any salary sacrifice amount is deducted.
This means employers will have a higher superannuation contribution to make for any employees who previously had their super guarantee amounts reduced because of sacrificing part of their salary to super.

Example: an employee is paid $100,000 per annum exclusive of SGC and sacrifices $20,000 to super. The employer currently pays SGC on the reduced salary of $80,000, being $7,600. From 1 January 2020, the employer must pay SGC on the gross salary of $100,000, which will be $9,500, an increase of $1,900 per year.
The other big change with this rule is that salary sacrifice contributions will no longer contribute to the compulsory employer superannuation guarantee contributions. In some cases, employers were able to avoid paying any SGC, because the employee salary sacrificed an amount at least equal to the compulsory amount of employer contribution.
Because sacrificed amounts will no longer be counted towards employer contributions, if an employer has not fulfilled their super guarantee obligation and is required to lodge a super guarantee charge statement, the amount of super owing, (and any charges and penalties), will be calculated exclusive of any salary sacrifice amounts paid.

Example: an employee is paid $120,000 per annum exclusive of SGC and sacrifices $15,000 to super. The compulsory employer amount of 9.5% on $120,000 is $11,400. As the employee sacrifices more than this to super, the employer currently would have made no further contributions. Under the new rules, the employer must pay SGC on the gross salary, in addition to any salary sacrifice the employee makes. This means an increase of $11,400 per year.

Revise Employee Agreements and Remuneration Packages Now

We recommend that employers review all employee arrangements that include salary sacrifice to superannuation.

Employment agreements and remuneration packages may need to be revised to comply with the new rules so that it is clear that superannuation guarantee is calculated on the gross salary or wage before any amounts sacrificed.

We can assist with reviewing remuneration packages for your employees so you are not caught out by the new rules.

October 23, 2019 Accounts, Bookkeeping, End of Financial Year

Understanding Your Balance Sheet

To understand the financial position of a business at a specific point of time, look at the balance sheet. The balance sheet may also be called the statement of financial position. Together with the Profit and Loss Statement and possibly other reports such as the Statement of Cash-flow, these reports provide a complete understanding of the financial position and business performance.

So what’s involved? – The balance sheet has three sections: assets, liabilities and equity.

What are Assets?

Assets are things and resources that a company owns. They have current and/or future value and can be measured in currency.

Assets may be subdivided on the balance sheet into bank accounts, current assets, (receivable within one year), fixed assets, inventory, non-current (or long term) assets, intangible assets and prepayments.

These include banks and other financial accounts held, accounts receivable (trade debtors), supplier deposits or bonds, stock on hand, property, equipment, vehicles, investments and intellectual property. All of these can be translated into monetary value.

What are Liabilities?

Liabilities are amounts owed to suppliers and other creditors for goods or services already received. Liabilities may also include amounts received in advance for future services yet to be provided by the business.

Liabilities are generally subdivided into current (payable within one year) and non-current liabilities.

These include accounts payable (trade creditors), payroll obligations (salaries, taxes, superannuation), interest, customer deposits received, warranties and loans.

What is Equity?

Equity includes owner funds contributed, drawings, retained earnings and stocks. The value of the equity equals assets minus liabilities.

Transactions that affect profit and loss accounts also affect balance sheet accounts. For example, providing a service increases the accounts receivable balance, which therefore increases the equity.

The Balance Sheet Equation

The balance sheet must always balance! Asset value = liabilities + equity.

For example, if you buy a new vehicle for the business at say $50,000, having paid a $10,000 deposit and taking out a $40,000 loan, the value of fixed assets increases by $50k, but the bank asset value decreases by the $10k deposit paid. The value of liabilities increases by $40k loan, thus leaving the balance sheet balanced on both sides of the equation.

The balance sheet equation shows you how much money you would have left over if you paid all your bills and debts and sold all your assets at a given date. This amount is the Owner’s Equity.

Note that the balance sheet equity total is not necessarily how much the business is worth at market value. Assets are listed on the balance sheet at their transaction value, which may be very different from the market value. Some assets may be worth more and others may depreciate in value. Business value is calculated not just on the balance sheet figures but many other factors.

Need more information?

Talk to us. Get the complete picture of your business performance and financial position, regardless of what stage of business you are at.

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