Understanding Your Balance Sheet

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.

 

Millennial employees – why you need them

Millennial employees – why you need them 

7 ways to retain millennials that will benefit the whole team

Much of what we hear about the ‘Millennial mindset’ is not flattering. There’s a perception that they’re entitled, avocado-smashing, job-hoppers wanting life-work balance (not the other way around).

Painting 35% of the workforce in this light (over 50 per cent by 2025) is both unfair and pointless. It’s also pessimistic and fails to recognise the exciting and unique skills and attributes millennials bring to the workforce.

Here are seven ways to engage Millennials that will benefit everyone at work:

1. Make the workplace supportive and autonomous.
You don’t need a Nintendo Wii, but you do need to create a culture where the team support each other. This means open-door policies, encouraging collaboration and innovation, and allowing people to self-manage.

Set goals and deadlines for projects, but encourage your team to decide how they accomplish their mission. Adopt an abundance mindset and have faith that your team have got this! This will encourage everyone to show initiative and step up.

2. Create a culture of learning.
Lack of training and development has been cited as the top reason Millennials search for new jobs. It’s cheaper now with online learning platforms, online mentoring, and of course the more traditional workshops and courses (many of which can be partially funded by government grants). Paying to upskill your team is typically a sound business investment, it’s also an opportunity for you to delegate more tasks!

3. Utilise their digital literacy.
Millennials have grown up with technology at their fingertips. They bring with them knowledge and experience using some of the newest and most exciting software. They’ll likely know of a number of apps to streamline processes, increase efficiency, and manage risk. Allow them to teach older team members a better way of doing things.

4. Praise high performance.
Millennials are used to getting praise, they grew up with participation certificates and trophies for trying. Recognise your team members when they’re performing well. Praise leads to engagement and empowerment. If you don’t praise your team, it’s likely most of your interactions will be negative in nature, which is not great for culture.

5. Share information.
Transparent leaders empower their teams. While some information may be too sensitive to disclose, your vision and goals should be clearly and frequently communicated. This builds a sense of ownership for everyone; sharing your goals and aligning your team’s individual goals with the business’s vision will make your team feel that they’re contributing to something bigger than themselves and have a valued role in the business.

6. Be flexible.
Everyone wants the ability to choose how and when they’ll work. Ask your team what their ideal working arrangement would look like. You can only be as flexible as makes sense for your business, but give your team the opportunity to express how they would like to work. Would they like to work four ten-hour days? Can they work remotely some days? These arrangements don’t just appeal to Millennials, they appeal to anyone with a life outside work.

7. Put your purpose before profit.

Millennials want to stand for something. Clarifying your business’s purpose or ‘why’ – that is why you exist for your customers – will help engage everyone in their role and build loyalty.

Studies show that businesses who put their purpose before their profit end up outperforming others on profit anyway. Having a clear purpose helps you differentiate your business from competitors and attract more suitable customers and team members who will be loyal to your brand and openly advocate for you.

Thinking like a Millennial isn’t just about keeping top young talent happy – it’s about recruiting and retaining talent of any generation.

“A team is not a group of people that work together. A team is a group of people who trust each other.” – Simon Sinek

Keeping on top of overdue accounts

Keeping on top of overdue accounts 

How long do your customers take to pay you?

A Xero Small Business Insights report showed that late payments to small businesses are improving. But overall, payments often still arrive after due date.

Keeping on top of overdue accounts is vital for cashflow. There are some easy things you can put in place today to reduce the payment time-frame in your business.

Send your invoices straight away – give your customer the ability to pay you promptly.

Include all the details your customers need, in order to make the payment – such as a customer purchase order to make their administration easier. Make sure you include your payment due date.
Consider a prompt payment discount – even if it is a small percentage, it can be a motivating factor.

Follow up straight away – if your invoice is overdue, send a friendly reminder straight away. You can set this up in your cloud accounting software, so it’s automatic. The longer you leave your follow up reminder, the easier it is for your invoice to drop down the priority list.

Make sure you are talking to the right person – if you creditor is a business, find out who is responsible for accounts and build a relationship with them.

Pick up the phone – If the invoice is overdue, a friendly chat may have more impact than another email in the inbox. After your phone call, follow up with an email to confirm what you agreed.
Be ready with a solution – to clear the debt, can you start with part payment? Does the next order get part paid up front?

Reducing the average time-frame on payments for your business will help with your overall business health. Start with a straight forward system, clear credit terms and good communication with creditors.

Send us a message to find out how we can help you manage your debtors.

Changes to NZ GST rules for low-value imported goods

Changes to NZ GST rules for low-value imported goods 

In an increasingly disrupted world, the laws surrounding consumer processes sometimes need to play catch up. The government proposes changes to GST rules for overseas businesses selling low-value goods to consumers in New Zealand.

In an increasingly disrupted world, the laws surrounding consumer processes sometimes need to play catch up.

From 1 December 2019, overseas businesses selling low-value goods to consumers in New Zealand may need to register for, collect and return NZ Goods and Services Tax (GST) of 15% on goods valued at or below $1,000.

Low-value goods are those valued at NZ$1,000 or less (excluding GST). Examples include books, clothing, cosmetics, shoes, sporting equipment and electronic items. New Zealand Customs Service will continue to tax goods sold for more than NZ$1,000 at the border as they come into New Zealand.

With the significant growth of online shopping in the everyday lives of New Zealanders, this proposal by the Inland Revenue seeks to level the playing field so that offshore firms cannot undercut our domestic retail sector.

This is good news for retail businesses in NZ. The Inland Revenue will have greater transparency of the transactions between New Zealand customers and offshore suppliers.

Businesses must register for GST if their total sales, including services, digital products and low-value goods, to consumers in New Zealand exceed or are likely to exceed NZ$60,000 in any 12-month period from 1 December 2019.

The rules apply to overseas businesses selling low-value goods directly to New Zealand consumers, as well as online marketplaces and re-deliverers.

From early September 2019, overseas businesses will be able to register.

You can find out more in the IRD policy update

Dividends and paying yourself as a Director

Dividends and paying yourself as a Director

Want to achieve the best results from your earnings as a Director?
 
As the Director in a limited company, dividend payments are the usual way for you to take money out of the company – and see a financial return on your investment into the company.
 
Dividends are payments made to the company’s shareholders when the business has made a profit. What is not re-invested into the company can be paid out as dividend payments to your Shareholders, of which you are one. But what’s the most effective way to do this?

Dividends as a part of good wealth management

As a company Director, the company’s finances aren’t your only concern – you also have to make sure you’re managing your own personal finances in the best way possible.

Good wealth management is essential as a Director, and that means taking an informed, long-term look at the ways in which you are paid, the financial vehicles you are using and the tax planning you are carrying out across the year.

To make your personal finances work effectively:

  • Split your finances into business and personal wealth – it’s vital to create a clear divide between business cash (money in your limited company’s bank account) and your own personal cash (money in your personal current account and investments). Any profit you create is not ‘your money’ until it’s paid to you by the business.
  • Ensure you’re being tax efficient – Once a dividend is paid to you – and that money is now yours – you’ll be liable to pay income tax on that income. The rates of income tax in most territories will be higher than the rate of corporation tax. So it’s usually a good idea to keep your profits in the business for as long as possible, minimising the amount of income you’ll have to pay when you file your annual personal tax return.
  • Pay your dividends at the right time – the timing of WHEN you pay a dividend is important. If you pay a large dividend at the end of the tax year, it may take you over your tax allowance for the year. And if your total dividend income is too big, you could end up paying more higher-rate tax than you need to.
  • Look at other ways to be paid – dividends are not your only option when it comes to getting paid as a director. You could put yourself on the payroll and take a small ‘living wage’. Or you could have your profits paid out as pension contributions into a personal pension scheme. So it’s sensible to consider all the tax-efficient alternatives.

Planning your directors’ pay

If you want to get the most from directors’ pay, come and talk to us. As your trusted business advisor, we will work with you to maximise your earnings. This includes helping you forecast your earnings and profits, planning out your dividend payments from the company and setting up your finances so you are being as tax efficient as possible.

Get strategy at the heart of your successful business

Get strategy at the heart of your successful business

Putting strategy at the heart of your business activity should not only give your business greater direction and focus but lead to stimulating, profitable fee opportunities too.

Businesses that have clear objectives or goals, robust accountability and a shared sense of purpose should always outperform those that just show up and go through the motions.

Strategy lies at the heart of most successful businesses. To achieve this you need to resource and execute with purpose. Few businesses have a strategic plan or a robust planning process. Changing this situation should be a top priority! Here are two top tips for business owners.

1. Process Creates the Plan

Getting strategy at the heart of your success will require you to carve out some time, get a process started, and shake things up. There’s no better time to review and tweak your business model, future-proof compelling services, and to get your strategic building blocks in place.

Just as every good strategy has key elements, every good plan needs a step-by-step process. In fact, the process is often just as important as the plan itself. A strategic planning retreat with your core team is a great way to start the process – find a spot offsite to get the creative juices flowing such as a beach, a park, or vineyard, and set an agenda.

2. Key elements of an effective strategy

The key elements in a good strategy normally incorporate:

  • Vision – this is a statement that identifies what a company would like to achieve or accomplish.
  • Values – these are the fundamental beliefs upon which your business and its behaviour are based. They are the guiding principles that your business uses to manage its internal affairs as well as its relationship with customers.
  • Objectives – short term, long term. These should be SMART (specific, measurable, achievable, realistic and timebound)
  • KPIs – stands for Key Performance Indicators. These are measurable values that demonstrate how effectively a company is achieving key business objectives.
  • Actions – what needs to be done to meet the objectives? Make this simple and clear.
  • Owners – delegating tasks to specific owners to ensure follow through and accountability.
  • Deadlines – when your actions will be complete to ensure you make progress.

It doesn’t need to be much more complicated than that, but do invest the time and effort in doing this right. A proactive, value-add strategic model will need fresh thinking, debate, research, and open conversations. Enjoy and embrace the process and you should end up with a good outcome.

Great planning requires a guide, facilitator, and/or professional expertise to be as robust as possible. We can help your business and guide you through the steps.

Putting strategy at the heart of your business activity should not only give your business greater direction and focus but lead to stimulating, profitable opportunities too. It’s time to get started!

How do you collect your debtors faster?

Did you know that you still have to pay tax on your debtors, even if you haven’t yet collected them? So, how do you collect your debtors faster?

– Agree your payment terms at the time of sale.
– Ensure your customer signs your Terms of Trade before you start the job.
– Include a guarantee in your payment terms.
– Invoice as quickly as you can.
– Ask for a deposit prior to starting the job.
– Change your payment terms to within 7 days of invoice or on delivery.
– Send statements with only two columns – current and OVERDUE.
– Follow up the day after the due date.
– Have someone other than the owner be responsible for collection of debtors (owners are usually too soft!).
– Document any changes to your standard payment terms in writing.
– Use a debt collector sooner rather than later – the longer you leave it, the harder it is to collect.
– Don’t provide credit to customers who’ve been late payers in the past, and don’t offer more credit to customers with outstanding payments.

“It’s the squeaky wheel that gets the oil.” – Anon

Need help developing your Debtor Management Policy? We can help… get in touch!

Provisional Tax explained

Provisional Tax explained

Provisional tax is income tax paid in advance of the end of the financial year, or paid as you go. And, it is important to get it right.

If you are employed, your employer deducts income tax from your regular pay and pays it to the IRD.

But if you get your income from other sources such as self-employment, rental income or shareholder income, then you need to pay your income tax to the IRD in other ways.

Generally, after your first year in business, your accountant will finalise your accounts and determine your tax position. If your business has made a profit you will have income tax to pay on that profit. This is also called terminal tax or residual income tax. You have until the end of the following financial year to pay it.

Provisional tax can come into play at this point because if you have more than $2,500 in residual income tax to pay, you will have to start paying provisional tax. Provisional tax is income tax paid in advance of the end of the financial year, or paid as you go (not in arrears).

As a default, provisional tax is generally calculated at 105% of last year’s end-of-year tax (standard option) and usually paid in three instalments over the year (28 August, 15 January, and 7 May).

Talk to us if you think that your income is going to be substantially more or less than last year and we can help estimate a more accurate figure.

Other ways to pay provisional tax are by using the ratio option, where you pay a percentage of your GST return – this can be good for people with fluctuating or seasonal income – or by the AIM (Accounting Income) option, which uses your accounting software to calculate your provisional tax based on your profit (or loss) for the period. You generally pay in line with your GST periods for both of these methods.

It’s important to get provisional tax right. If you under pay or don’t pay on time, the IRD may charge you interest.

Get in touch to make sure you’re paying the correct amount, or to see if there’s a better option for paying provisional tax.

Making data meaningful for your business

Making data meaningful for your business

Data is only powerful with context, it needs to be accurate and organised and you need to be clear on the necessities vs the niceties.

Three steps to ensuring data is meaningful for your business

Raw data describes the facts and figures that a business processes every day. Over time, every business hoards a certain amount of data and it only becomes meaningful to a business after it has been processed to add context, relevance and purpose.

For example, in a restaurant, every order will be recorded. However, a restaurant won’t learn much by looking at each one in isolation. Analysis of the orders will reveal trends and patterns, such as peak dining days or biggest-selling menu or bar items. Knowledge of the business comes from the relationship between the singular pieces of information. That restaurant owner may know to do their biggest stock order on a Wednesday by analysing their covers and establishing that sales increase by 38% on Thursdays.

The pace of business in today’s technological times requires businesses to be able to react quickly to changing demands from customers and environmental conditions. The ability to be able to compile, analyse and act on data is increasingly important. In some instances, a high volume of data may need to be accumulated and analysed before trends and patterns emerge, like a particular season’s most popular dish.

When you aren’t compiling accurate business data, you can only rely on gut feel and assumptions about past performance to inform your future business decisions.

If your business is already using cloud software for accountancy, project management system or CRM, it’s likely that you’re sitting on a goldmine of data. If properly utilised, this data can greatly aid running a successful business. You’ll have valuable insight into your sales, expenses, profit and staff efficiencies that can help you answer critical questions and drive smart business decisions.

Every business is unique, but here are three quick tips to help you drive data in your business.

1. Data is only powerful if there is context – can you stop to answer these questions?

  • What is your primary objective (business or personal)?
  • What is happening in the business?
  • What isn’t happening?
  • How can you influence what happens?

Figure out what you’re currently trying to achieve before anything else. It’s important to periodically go back and ask yourself these questions and what goals develop from the answers, as answers evolve over time. You may have started out with your primary objective as running the best restaurant in your area. However as time has passed, your primary objective might now be to take time away from the business to spend more time with your children.

2. The only way your data can help you drive your business is if it’s accurate and organised appropriately – ask yourself:

  • Are your financials up-to-date?
  • Do you have any unreconciled transactions?
  • Are you tax compliant?
  • Are your staff trained on what systems and processes to use for different parts of your business?
  • Are your cloud systems being correctly utilised?

The worst thing you can do is to attempt to analyse incorrect data and attempt to make decisions for the business based on it! Tools like Spotlight Reporting can help you with the reports you need for business decisions.

3. Understand what the data necessities are and what the niceties are.

  • What would you most like to understand about your business?
  • What figures pinpoint success for you?
  • What are your objectives over the next six to twelve months, and two to five years?

Remember, to focus on what truly matters and build from there. If you want help with the process, we can accumulate, analyse, report and advise on your data; or show you the tools to use.

How to regain control of your business

Are you feeling like a slave to your business?  

Not all business owners want to grow their business. Some may just want more control. Afterall, your business is there to serve you; you shouldn’t be a slave to it. So, how do you regain that much needed control?
 
There are three essential tools all businesses must have:
 
An annual Business Plan.
An annual forecast.
Ongoing reporting and accountability.
 

The annual Business Plan

Your Business Plan shouldn’t be a lengthy document living in a dusty drawer. It should be on one page and displayed somewhere highly visible so you can review it regularly.

Best developed using an independent facilitator, your Business Plan should articulate exactly what you want from your business; the hours you want to work, the holidays you want to take, and the income you need.

You’ll identify Key Performance Indicators (KPIs) to monitor, vulnerabilities to manage, and opportunities to act upon. You’ll set no more than four key goals for the year, breaking these down into quarterly goals with clear actions to complete in order to achieve them.

The annual forecast

Your forecast will record how cash must flow throughout the year to give you what you want from your business. Too often business owners only create a forecast because the bank has requested one.

The forecast will highlight your business’s weaknesses, when cashflow problems might arise, and how you need to manage your business financially to achieve the goals in your Business Plan. Don’t wait for your bank to request a forecast; it’s an essential tool to ensure the success of your business every year.

Ongoing reporting and accountability

The value lies in the implementation of your Business Plan and annual forecast. Constantly reviewing your progress against your targets is crucial. Ongoing reporting allows you to track actual results against your forecast to ensure progress towards your goals.

The best way to ensure you don’t fail to implement the plan is to be held accountable by someone independent. Every business owner needs a coach. A great coach will work with you to get a result better than you could achieve on your own. They’ll uncover the root causes of problems in your business and empower you to do better. Most importantly, they’ll hold you accountable to getting the important stuff done.

There are no magic bullets to business success. All businesses need these three tools.

Get in touch to discuss how we can work together – to help you gain control of your business.

“Dreams x Goals x Plans x Actions = Your success” – Brad Sugars