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If Cash is the King, Cashflow is the Queen

Gone were the days when businesses were operating cash on hand, and now the modern world has bought a new way of receiving cash through direct debits and credit cards. No matter what you call it, at the end of the day you are rich if your bank balance is healthy. The terminology of Cash is the king, still reflects the beliefs of the olden society that no matter what, cash is still the asset of a business.

What is Cashflow?

Cashflow is the flow of money coming in versus money going out. Pretty easy right! Then why is it 80% of small businesses in Australia are forced to shut down businesses due to cashflow problems.

If you have more cash going out than you have coming in – that is where your problem lies.

The common complaints we hear from our clients is “Cash is always tight”. Cash is scarce like water, if not managed properly, there is only limited amount to go around.

 

Managing Cashflow is a nightmare?

Believe me when I say I have lived this nightmare myself. Even though being an accountant, to my surprise, I also had to tackle the challenges of cashflow sometimes on daily basis.

It does not mean that you are bad at business, it just means that there is an obstacle that you need to try and tackle.

Recently, I applied for a bank overdraft facility to manage my cashflow obstacles. To my amusement, the application was rejected based on ability of repayment.

The ego in me questioned the bank manager for the reasons of rejection. To cut the long story short, despite having such a good turnover and net profit, if the cash doesn’t flow in the business, my net worth is nothing. The banks still determine your cashflow as the indicator of loans and not the balance sheet which has high debtor balance sitting ideally.

So, the morale of the story is Cash is still the most important factor of life and business. Liquidity in business is very important and having assets that could turn into cash quickly are the ones you want to focus on when you are faced with cashflow crisis.

 

 

The common myths around Cashflow

 

  • Profit equals Cash. (making vs receiving)

Let me be very clear in pointing out that Profit never equals Cash. There is a difference between making money and managing money. You can achieve a high sales target but if the money is not received in due course, then it can potentially cause cashflow issues. Therefore, forecasting and budgeting tools are important to know when money is coming in and the times it will need to flow out.

 

Factors to consider in Cashflow

Debtor Management – (the money coming in)

If the money doesn’t come in before it has to go out, then this could pose a major challenge for the cashflow management.

If the debtors are too high on the balance sheet, that indicates that money is tied down and you need to put some strategies in place to reduce the debtor balance.

As a real example, recently we changed our terms of payment from 30 days to 14 days from date of invoice. We noticed that on a 30-day term, the client’s payment turnaround was 45-50 days which was causing issues when paying rent and other business expenses.

Most businesses nowadays offer early discounts and repayment concessions. So chose a strategy that works best for your business.

Creditor Management- (the money going out)

We almost always see that bills comes faster than money. My tip is don’t pay before it is due, and if really struggling only pay when you cannot push beyond the limit. Also speak with your creditors, let them know the situation and request to push the limit a little bit.

If you are in a product market especially in product manufacturing and/or distribution from overseas, the biggest hurdle is trying to find a balance between paying your suppliers versus receiving the money from the customers.

The time lapse between the two could be a juggling act of cashflow where money must be invested before you see the end results. In this case, try and find funding from investors if possible or get a bank overdraft facility to ease some pressure off. Nowadays the market is full of credit providers who can provide funds such as line of credit, unsecured business loans (the rates are high) or Debtor Finance which will all come at a cost to the business so evaluate your options properly.

The key to finding the right fit between money coming in and going out is negotiating the terms of credit with suppliers. If you know your debtors are paying around 30days then negotiate supplier terms at 45 days.

A great example of supplier negotiation is Coles and Woolworths, regardless what your terms are, they will only pay you after 60 days according to the rules. Now this is easy for them as they dominate the market, but for small businesses it would be impossible to dictate your own terms. Therefore, the focus should be more on turnover of debtors than creditors.

 

Stock/Inventory Management – (money in transit)

 More than half of the time we see clients holding more stock than needed. If your stock is perishable, get the timing process right from manufacturing to freight to customer.

The higher the stock balance the more money is sitting in your warehouse doing nothing so watch out for the unused stock. If some of your stock is not selling or is absolute, take it out at a cost price or lower. It’s better to cut your losses early and salvage some money than having no dollars.

Minimise Expenses- (reduce wastage)

Don’t spend if not needed. Analysing your expenses with a magnifying glass may be needed if you are making a loss in your business. You cannot control the sales, but you can monitor the expenses. Check how much you are spending on each item and see if you can source it better or importantly outsource the whole task.

 

This is a very common discussion I usually have with my clients who are surprised that they did not make a profit despite sales reaching the heights. The reason I advise clients to reflect on the P&L every month so that you understand the outgoings of the business. Nowadays it is easy to spend money with plastic cards, but when you see the cost to the business that is the biggest eye opener.

 

Go through your expenses on the P&L and think whether the cost is necessary for the business or you could do without. The important items to watch out is your advertising, promotion and Marketing spend. Small businesses are spending way too much on Marketing without checking the ROI and this could be more of a wastage than income generation tool.

 

Understand your cost of sales, the cost to you to produce/distribute the goods. Are there better suppliers who can provide the same input as your current supplier but with better prices? Some of my clients have also changed the logistic companies and sourced better ones that would fulfil the business goals.

 

There is always someone doing better than the other, find those sources and create a good long-term working relationship with them. You usually have no control over your sales, but you have 100% control over your expenses so before spending, think and check.

 

Resale of assets – (use it or lose it)

 

Liquidity in business is very important and the most liquid assets are debtors and stock if managed properly. When we move houses, we are amazed how many things we have accumulated throughout the years and now know that half of the things are unnecessary. The result is either we donate, sell it on eBay or have a garage sale. Same concept applies to assets of business.

 

Recently, I had a discussion with a client to sell some of the motor vehicles that are now not needed because the sub-contractors are delivering the products. He was reluctant to sell, firstly because he was emotionally attached to them and secondly, he didn’t think it would have any resell value. An asset sitting vacantly was costing him $5000 a year in registration and maintenance that was unnecessary to the business as the asset was not generating any income.

 

When making business decisions, always keep emotions out so that clarity can prevail. If an asset is ideal and occupying the space, and no longer doing its job, sell it. The common assets to look out for is machinery, equipment and motor vehicles.

 

Conclusion

 

Understanding the flow of money will assist you better in making business decisions.

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Home Office Expenses

The business world has come a long way and there are many options now available in regard to workplaces and how the work is completed. Many businesses are now becoming a lot more flexible with their working options and are starting to offer the option to work from home.

This can be an ideal situation for many people who are unable to get into the office each day due to having children, travel concerns or disabilities. Working from home can be very beneficial for the workplace and can improve productivity.

If you are someone who works from home on a regular basis it is important to know what you can claim in expenses. Expenses are the costs that are made for different items. If you are working from home, there are a number of expenses that you can claim.

 

Running Expenses

If you work from home on a regular basis you may be able to claim a percentage of running costs that are incurred within the home. These running expenses can include; electricity, internet, furniture costs and the decline in their value, the cost to repair these items if needed and consumables such as printer ink, paper and stationery.

These can only be claimed in a percentage since you are not using the total cost of these towards your work time. You need to calculate the amount of time that these running expenses are used for a work basis.

 

Phone and Internet

If you are using your personal mobile phone or home phone for work purposes, you are able to claim a percentage of the cost of these as a business expense. The same goes for if you are using your internet for work purposes as well.

Once again you do need to calculate the amount of time that these items are used for work purposes and work out the percentage that you are able to claim. If you are claiming more than $50 for the expense of these, do you need to keep paper records of the amount of time that they are being used for work purposes and keep copies of the total bill amounts.

 

How do I claim running expenses?

If you want to claim at a fixed rate you can use a standard rate calculation of 52c per hour to calculate the amount that you are able to claim. This covers the cost of all running expenses and the total is used to calculate the amount that you can claim back. You need to document at least 4 weeks of running expenses in order to create the overall amount of time that you can claim over the year.

If you want to calculate based on actual hours, you firstly need to have a dedicated work area such as an office in a separate room of the house. From there you then need to work out the floor measurement of the room to give the percentage of the house that is being used for work purposes.

The running expenses for the house can then be divided so that you can determine the amount that is relevant to that dedicated room of the house. This is the overall amount that you are able to claim on running expenses.

 

How do I claim phone and internet?

There are a few ways that you can calculate the amount you can claim. If you are claiming under $50 that you can do a fixed rate for the number of phones calls the phone is used for.

If you want to work, it out based on actual usage this can be done by breaking down your itemized bill and selecting the times and calls that are used for business. If you do not receive an itemized bill than you will need to record the time the phone and internet is used for over a 4-week period in order to determine the amount you can claim back as an expense.

 

Claiming expenses where you can will help with your financial position and help lower the burden of working from home. If you are unsure on the rates, please talk to your Accountant.

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Home-based Business- Subject to CGT

With advanced technology, and increasing rent, most small businesses are run from home to save on cost and travel. Unfortunately, most of the small business owners are not aware that conducting a business from home could be potentially subject to CGT especially if you are a sole trader.

Usually, your family home is exempt from Capital Gains Tax (CGT) as it is your main residence, however, if you are a sole trader running the business from home, you could potentially expose your main residence subject to CGT. The question here is not whether you claimed any occupancy expenses whilst running the business from home, but the fact would be based on whether your were eligible to claim the cost of running your business from home.

The few exemptions are:

  • Businesses run under a company or trust structure will not have the CGT implications.
  • Businesses operated from a rented home will not have CGT implications.

 

So before you start running your business from home, talk to your Accountant or Tax Agent.

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SINGLE TOUCH PAYROLL (STP)

Single Touch Payroll (STP) is a new way of reporting tax and super information to the ATO.The information is sent to ATO either directly from your software, or through a third party – such as a sending service provider. From 1st of July 2019, all small businesses would be required to be registered for STP.

Small businesses can contact they accounting software companies to find out how to register for STP. Major accounting software, such as MYOB, Quickbooks, Reckon, and Xero are all compliant with STP. There are number of payroll software in the market that also provides a free STP payroll system so that small businesses can utilize these functions without incurring hefty cost.

Small businesses do not need to change how and when they pay the employees. Every time a pay period is processed, the information goes directly to ATO. Therefore, 30th of June 2020, there will be no need to prepare end of the year payment summaries as the information will be reported throughout the year.

The new measure is a step forward to better compliance and for ATO to cross check the payroll and super information to ensure small businesses are accounting it correctly.

So are you ready for STP?

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Instant Write off Thresholds

Small business instant write off has just increased. Small businesses can take advantage to claim up to $150,000 from 12th of March 2020 to 31st of December 2020. This threshold applies to each asset irrespective of whether the asset is purchased new or second-hand.

 
Date range Threshold foreach asset
7:30pm (AEDT) 02/04/2019 to 11/03/2020

$30,000

29/01/2019 to before 7.30pm (AEDT) 02/04/2019

$25,000

7.30pm (AEST) 12/05/2015 to 28/01/2019

$20,000

01/01/2014 to prior to 7.30pm (AEST) 12/05/2015

$1,000

01/07/2012 to 31/12/2013

$6,500

01/07/2011 to 30/06/2012

$1,000

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