Understanding your numbers to improve your results

Understanding your numbers to improve your results

Understanding your financial reports, or knowing your numbers, is critical to business success. It allows you to make better business decisions, measure the impact of those decisions, take corrective action where necessary and, ultimately, enjoy better results.

By understanding your financial reports, you’ll:

  • Know if your business is growing or shrinking
  • Discover trends in your business and be able to respond accordingly
  • Compare your actual results to your expectations
  • Identify areas of strength and weakness in your business
  • Understand the value of your business
  • Make better decisions

How to maximise results from your reports:

1. Ask yourself, is the data ‘clean’? This means that all transactions have been coded correctly and bank statements have been reconciled. Do you have monthly procedures to ensure your data is clean?
2. Inspect what you expect. You must have goals for your business, or targets you expect to achieve. Inspect your financial reports each month to see if you’re on track to achieve your expected targets.
3. Know which reports to use. Each report tells you a different story. Your Profit and Loss Statement measures your income and expenses; the Balance Sheet measures your assets, liabilities and net worth.
4. Conduct both horizontal and vertical analysis. This means comparing the current period with previous periods (horizontal analysis) and calculating each item as a percentage of a base item (vertical analysis). For example, comparing this year’s Balance Sheet with last year’s and calculating each expense item as a percentage of Sales on your Profit and Loss Statement.
5. Understand the difference between ‘as at’ or ‘for the period ending’. An ‘as at’ report, such as the Balance Sheet, shows the balances at the end of a specific period. A ‘for the period ending’ report, such as the Profit and Loss Statement, shows the results over a period of time.
6. Choose the correct date range. Ensure you correctly specify the start and end dates for the period you want to measure. Choose a month end date, such as 30 June instead of 15 June, to ensure all income and expenses have been coded and reconciled for the period.

By understanding the fundamentals behind your financial reports, you’ll know more about your numbers and be able to use that information to make better decisions. Whether you want to grow your business or increase efficiency to free up your time, we can help you interpret your financial reports and set goals for improvement.

Get in touch for our complimentary Guide to Your Financial Reports to learn more.

The importance of Tax planning for Shareholders

The importance of Tax planning for Shareholders

calendar-plannerPaying Tax is something you are likely to see as a necessary (but not hugely enjoyable) part of running your business. But are you doing enough to plan your own personal Tax liabilities?

As a Shareholder, you will pay your income Tax annually on a self-assessment basis. But there are plenty of ways to make this a less costly and onerous task to complete.

Planning ahead when it comes to Tax

By taking a forward-looking approach to your own personal finances, and working with an experienced Advisor, you can start to minimise your Tax costs and maximise the value you enjoy from your own earnings and company profits.

Working closely with us helps you:

  • Know your future Tax liabilities – by looking at factors like expected dividend payments, pension provision and additional income to determine what you will owe.
  • Set up an annual Tax plan – with provision for when payments should be made and when to set aside the funds needed to pay your income Tax bill.
  • Make use of any Tax reliefs – so you can claim the relevant reliefs and Tax initiatives that are available, to bring down the amount of your overall Tax bill
  • Maximise your earnings – by taking your earnings in the most efficient ways and managing your own personal wealth in a proactive manner.

Talk to us about your personal Tax planning

If you are a Shareholder looking to achieve the best results from your earnings, come and talk to us. We can review your Tax situation, create a robust Tax plan, and make sure you are getting the maximum value from your business earnings,

Provisional Tax – how does it work?

Provisional Tax – how does it work? 

If you had to pay tax of more than $5,000 in your last income tax return, you may have to pay provisional tax for the following year. Provisional tax is like paying progress payments on next year’s income tax.

The amount you have to pay relates to your expected profit for the year. In practical terms, the amount of provisional tax you’re expected to pay is based on the tax you were liable for in the previous year, often referred to as residual income tax (RIT).

Even if you are not required to pay provisional tax, you may still elect to do so, to spread your tax obligations over the year. This can help you manage cash flow and take away the pressure of paying a lump sum at the end of the year.

For a new business, the first-year provisional tax payment can be tough. You must pay last year’s income tax at the same time as the first instalment of next year’s provisional tax. There are a couple of ways we can help you reduce the pain.

If you are self-employed or a partner in a partnership you may be entitled to a discount of 6.7% on your first year’s income tax. This is to encourage you to pay tax early and relieve the financial strain before you must pay provisional tax for the first time.

COVID-19 and provisional tax

In order to shrink compliance costs for smaller taxpayers and allow them to retain cash for longer, the government has introduced some tax relief measures that affect the normal rules for provisional tax:

  • The threshold for provisional tax increased from $2,500 to $5,000 from the 2020/21 tax year. This means any current provisional taxpayers with provisional tax payments of less than $5,000 will have until 7 February following the year they file to pay their tax bill.
  • Depreciation for commercial and industrial buildings is reintroduced from the 2021/22 income year. If you are a building owner, you will be able to adjust provisional tax payments immediately in anticipation of additional deductions that become available.
  • If your business is affected by COVID-19 and:
    • you need to re-estimate your provisional tax as your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds.
    • if you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. You may be eligible for a UOMI (use of money interest) write off.

It’s important to keep your tax plan current. If circumstances change for your business, we need to adjust your plan. Let us know as soon as you can about the situation for your business.

Please ensure you check with your Accountant regarding the information above – they are best to advise you on this.

Understanding working capital to maintain business success

Understanding working capital to maintain business success  

If cashflow is the lifeblood of your business, then working capital is the health check you should regularly undertake to keep your business alive. Regularly checking working capital will play an essential part in maintaining business success during these times of greater economic insecurity.

What is working capital?

Working capital is your current assets minus your current liabilities and measures the surplus (or deficit) you have to keep your business afloat without needing to sell assets, borrow more, or add your own money into the business. The more working capital you have, the easier it is to fund growth or weather any downturns.

To calculate your working capital: Cash + debtors + stock + work in progress – creditors – taxes owing

For example, if your business had the following balances:

Cash $150,000 Debtors $120,000 Stock $100,000 Creditors $45,000 Taxes owing $25,000

Then your working capital would be $300,000 ($150,000 + $120,000 + $100,000 – $45,000 – $25,000).

If the business had an overdraft of $150,000 rather than a positive cash balance, the working capital would be zero. This means the business would have no cash to cover any slowdown in debtor payments or a downturn in sales (which would lead to higher stock levels). Worse, the business could be in serious trouble for trading while insolvent.

It’s likely your working capital has taken a hit due to Covid-19. Now is the time to review your processes and boost your working capital. Consider the following strategies:

1. Build up enough cash to cover at least 2 months’ sales value.
One of the key learnings from lockdown was how important it is for businesses to have enough cash in the bank to get them through a shutdown. Use the average sales value for the last six months to calculate the amount you’ll need, then manage your expenses to build your cash stocks up to this level.
2. Renegotiate your debt.
If your business has an overdraft, could the core debt be negotiated into a term loan? Have you spoken to your bank manager about options for managing your debt as a result of Covid? We can work with you and your bank manager to determine your best finance options.
3. Negotiate with suppliers.
Speak to your suppliers and see if you can negotiate better terms. This might be a discount for early payment or longer payment terms. They’ll be suffering too, so work together to come to the best arrangement for you both.
4. Set aside money for taxes.
Calculate the percentage of sales you need to put aside for taxes and put this aside in a separate bank account so you have the cash to cover tax payments as they fall due.
6. Inject sufficient funds.
If the above strategies don’t boost your working capital sufficiently, you’ll need to invest your own funds into your business to cover your working capital requirements.

Even with the many challenges of a post-pandemic economy, undertaking regular working capital checks is an effective way to help increase your business’s cashflow. We can help you calculate your working capital requirements and identify strategies you can implement to increase your working capital.

“Change is not a threat, it’s an opportunity. Survival is not the goal, transformative success is.” – Seth Godin

Cash is not profit and vice versa

The purpose of a business is to make money, and that means you have to know the difference between profit and cashflow

Net profit is what you have left after you deduct all your business expenses from all your revenue. You change net profit only by changing the things that affect revenue and expenses.

For example, if:

  • You renegotiate with your suppliers, you may get stock cheaper, or carry less inventory
  • Your staff engage with customers better, you can learn more about what they do and don’t like – and get more business
  • You can roster staff differently, you may be able to run your business more efficiently.

Cashflow comes from various sources. However, it also covers operating expenses, taxes, equipment purchases, repayments, distribution, and so on.

Note that a profitable business does not always have good cashflow. And a business with good cashflow is not always profitable. For example, you can have good cashflow, and loss-making expenses.

To work out how fast you can grow your business, you need to look at your projected cashflow. We can advise you on this.

Keeping cash crowned as King

Your business can’t survive without cash.

The following six takeaways are essential for business success:

  1. Protect your cash position, by knowing what it is. Build a cashflow statement and always keep it up-to-date. If you foresee a shortfall, start at once to fix it.
  2. Create a cash buffer as an insurance against unexpected difficulties.
  3. Protect your cash position against revenue shocks, by maintaining a balance equivalent to at least two months of operating expenses.
  4. Be realistic with revenue expectations. Take action now if it looks like sales are not going to get you to breakeven.
  5. Credit checking up front will reduce the risk of customer non-payment. Make sure you follow up with clear payment terms agreed in writing. Communicate regularly with customers and automate where possible.
  6. Every dollar you spend reduces cash reserves. The best way to protect your cash is to create a budget for the spend you know you need, and stick to it.

Looking to improve cashflow? Make a time to talk to us. We are here to help.

Understanding your revenue drivers

Understanding your revenue drivers  

For your business to make money, you need to generate revenue.

You produce revenue through your usual business activity, by making sales, getting your invoices paid, or taking cash from paying customers. So, the better you are at selling your products/services and bringing money into the business, the higher your revenue levels will be.

But what actually drives these revenue levels? And how do you get in control of these drivers?

Knowing where your cash is coming from is more crucial than ever

As a trading company, you face the multiple challenges of a global recession, an increase in online consumer buying and a ‘new normal’ when it comes to trading, markets and buying expectations. The better you can understand the nature of your revenue and its drivers, the more you can flex, manage and control your ability to generate this income.

This helps your medium to long-term strategic thinking, and your decision-making, allowing you to be confident that you’re focusing on the business areas that deliver maximum revenue.

Import areas to consider will include:

  • Revenue channels – where does your revenue actually come from? Do you create income from online sales and ecommerce, through retail sales in bricks and mortar stores, or through wholesales to other businesses? You may focus on just one of these channels, or it could be that you use a mixture of two, three or more.
  • Revenue streams – your total revenue will be made up of a number of different ‘streams’ So, you might be a coffee shop, whose revenue streams include coffee sales, cake and pastry sales and lunch sales. Knowing which revenue streams you rely on, which are most productive and what return they are delivering allows you to make decisions. If 80% of your income comes from 20% of your products, perhaps you need to tighten up your product range and ditch some of the poor sellers. If you’re selling more services to one particular industry, perhaps you should focus more marketing in this specific niche, or downscale your sales activity in less profitable niches.
  • Product/service split – Do you know which products/services are the most profitable in the business? Which products/services have been resilient to market changes (giving you some revenue stability) and which have adapted well to change? The more you can dive into your metrics and find the most productive and adaptable products and services, the greater your ability is to provide constant and evolving revenue for the business.
  • Value vs volume – Is your revenue based on selling a high volume of products/services at low margin, or low volume at a high margin? Based on this, can you move your margin down to create a more attractive price point (and more value for customers)? Or are their ways to push volume up, shifting more units and boosting total revenue? By diversifying into new channels, new streams or new products/services you can aim to balance value and volume to create brand new sales – and higher revenue levels.

Talk to us about exploring your revenue drivers

If you want to boost revenue and increase your overall profitability, come and talk to us. We’ll review the numbers in your business, help you to understand your revenue drivers and will give you proactive advice on enhancing your total revenue as a company.

Get in touch to kickstart your revenue generation.

Maximising your cash reserves

Maximising your cash reserves

The Covid-19 crisis has highlighted the inadequacy of current cash reserves for many businesses. They simply don’t have enough cash to sustain the business in a crisis.

Now is the time to make permanent change to your business processes and cost structure so you can build those reserves. At the same time, business owners need to be part of a world solution, and that means paying our bills on time where possible.

11 strategies to maximise your cash reserves:

  1. Invoice your customers immediately upon supply of products and services. The faster you bill, the faster you’ll be paid.
  2. Shorten your payment terms, e.g. from 20th of the month to within 7 days of invoice. You’ll need to reflect any changes in your Terms of Trade, in key customer contracts, and on your website.
  3. Invoice directly from your accounting software. This can enable faster payment.
  4. Negotiate prompt payment discounts with your suppliers. Don’t be bashful, there is no harm in asking.
  5. Get better at collecting the money you’re owed. Ask nicely to be paid by customers as soon as an invoice is overdue. The fast cash is in the 30-day column, not the 90-day column.
  6. Outsource proactive debtor management to a collection agency. This can be surprisingly cost-effective.
  7. Perform credit checks on new customers and make sure your Terms of Trade give you as much protection as possible if a debt goes bad. For example, put personal guarantees in place.
  8. Develop a personal spending budget and stick to it. This will reduce cashflow pressure on the business.
  9. Take costs out of the business where you can, but only where you should. This is an ideal time to review every line item in your Profit and Loss Statement. The shift to working online may allow you to change spending patterns.
  10. Have clear spending limits for team members who incur expenses on behalf of your business and regularly monitor these.
  11. And finally, prepare a Cashflow Forecast. Know what’s ahead of you and understand how positive changes will improve your cash reserves going forward.

Cash is oxygen for your business. Contact us now so we can help you put a cashflow improvement plan in place.

“The more a business owner knows about their cashflow, the more empowered they become.” – Nick Chandi

Key numbers to focus on in your business now

Key numbers to focus on in your business now 

As a business owner, it’s always been helpful to have an understanding of accounting – but in the post-lockdown world, it’s never been more important to have a good grasp on your finances.

With the business world irreparably changed by the impact of coronavirus, your business is facing a ‘new normal’. Priorities have changed, customer behaviours have mutated and revenue streams have had to evolve and pivot in order to create a viable post-lockdown business model.

To track, monitor and drive your financial performance in this new business world, it’s increasingly important to have a handle on your key financial reports and metrics.

Getting to grips with your financial reports

Whereas in the past, extra cash in the business may have been seen as a surplus that needed to be spent on something, COVID-19 has shown us that having these reserves is vitally important for the survival and long-term health of businesses.

To truly be in control of this cash, it’s vital that you can dip into your accounts, financial reports and dashboards and ‘see the genuine story’ behind your financial position.

So, what are the key reports to focus on? Let’s take a look:

  • Budget – your budget is the financial plan that’s tied in with your strategic plan. In essence, the budget is your approximation of the money it will take to attain your key strategic goals, and the revenue (income) and profits you hope to make during this period. It’s a benchmark you can use to measure your actuals (historic numbers) against, allowing you to see the variances, gaps and missed targets over a given period.
  • Cashflow Statement – a cashflow statement shows the flow of money into and out of your business. Understanding these cash inflows and outflows in detail allows you to manage this ongoing process, allowing you to aim for a ‘positive cashflow position’ – where inflows outweigh outflows. In this ideal positive scenario, you have enough liquid cash in the business to cover your costs, fund your operations and generate a profit.
  • Cashflow Forecast – forecasting allows you to take your historic cash numbers and project them forward in time. As such, you can see where the cashflow holes may appear weeks, or even months, in advance – and that gives you time to take action, whether it’s increasing your income stream, reducing your underlying costs, chasing up unpaid invoices (aged debt) or going to lenders for additional funding.
  • Balance Sheet – the balance sheet shows you the company’s assets, liabilities and equity at a given point in time. In a nutshell, it’s a snapshot of what the business owns (your assets), what you owe to other people (your liabilities) and what money and profits you currently have invested in the company (your equity). The balance sheet is useful for seeing what stock and equipment the business owns, how much debt (liabilities) you’ve worked up and what the company is actually worth – all incredibly useful information to have at your fingertips when making big business decisions.
  • Profit & Loss – your profit and loss report (P&L) Your P&L gives you an overview of the company’s revenues, costs and expenses over a given historic period of time. Whereas the balance sheet is a snapshot, your P&L is more like a moving video. It shows you how your finances are progressing by demonstrating how revenue is coming in and costs/expenses are going out (rather than cash coming in and going out, as you see in your cashflow statement and cashflow forecasts).

Talk to us about accounting and financial reporting for your business

We’ll run you through the key reports in your accounting software, and can help you track performance, take action and prepare your company for surviving the new business normal.

Successfully implement change in your business

Successfully implement change in your business 

Research by Kotter International found that more than 70% of change projects within a business fail. Why is this?

The research findings show that employee engagement is the biggest factor. Whether it is a small change to one or two processes, or a company-wide change, it’s common for staff to feel intimidated by it.

So what can you do for successful implementation of change? Here are the principals from Kotter’s 8-Step Program:

1. Get the team onboard

Build support and create momentum behind the changes you are making by communicating the benefits with the whole company early on.

  • Start honest discussions with your team and give dynamic and convincing reasons to get people talking and thinking about the change.
  • Demonstrate what would happen if you didn’t make the change and what else it could affect in the future.
  • Request support from customers in this instance who may love the product, outside stakeholders and others known in the industry to strengthen your argument.

Kotter suggests that 75 percent of a company’s management needs to support a change in order to succeed.

2. Form a powerful coalition from all areas of the business

Share the support you have from all areas in the business (not just the leadership team). Visible support from key people within the organisation will bring others on board and create a sense of urgency. Give these people key roles in the change process to help progress it.

Once formed, your “change coalition” needs to work as a team, continuing to build urgency and momentum around the need for change.

What you can do:

  • Identify the influencers in your organisation for this change, as well as your key stakeholders.
  • Ensure that you have a good mix of people from different levels within your firm.
  • Ask for a commitment from these key people.
  • Work on team building within your change coalition.

3. Create a vision for change

Create an overall vision that helps everyone understand why you’re asking them to do something.

What you can do:

  • Develop a short summary (one or two sentences) that captures what you “see” as the future of your organisation.
  • Create a strategy to execute that vision.
  • Ensure that your team leading the change are all on the same page.

4. Communicate the vision

Embed this in everything you do so it is not lost in the day-to-day operation but a powerful part of this.

What you can do:

  • Talk often about vision and change.
  • Make sure the vision is applied to all aspects of the operations. For example, ensure it’s added to the training and induction program and is encapsulated into the relevant job descriptions and evaluations.
  • Address people’s concerns and anxieties about it openly and honestly.
  • Lead by example.

5. Remove obstacles

Check constantly for processes and structures that need to adjust to allow you to execute the vision and help the change move forward.

What you can do:

  • Look at your organisational structure, job descriptions, and performance and compensation systems to ensure they’re in line with your vision.
  • Recognise and reward people for making change happen.
  • Identify, or hire, change managers whose core role is to deliver the change.
  • Identify areas or team members that stand in the way of change, and find solutions.
  • Take action to quickly remove barriers rather than letting them fester.

6. Create short-term wins

Create short-term targets – not just one long-term goal. Each “win” that you produce can further motivate all the staff especially if it’s a big change requiring a longer process and help keep them on task.

What you can do:

  • Reward people who help you meet the targets.
  • Look for sure-fire projects that you can implement without help from any strong critics of the change.
  • Don’t choose early targets that are expensive. You want to be able to justify the investment in each project.

7. Build on the change

Keep looking for improvements to the system to ensure the long term goals are achieved.

What you can do:

  • After every win, analyse what went right, and what needs improving.
  • Set goals to continue building on the momentum you’ve achieved.
  • Develop a culture of continuous improvement.
  • Keep ideas fresh by bringing in new people to lead the change.

8. Anchor the changes in your culture

Finally, to make any change stick, it should become part of the core of your organisation. Make continuous efforts to ensure that the change is seen in every aspect, giving it a solid place in your organisation. It’s also important that your company’s leaders continue to support the change. This includes existing staff and new leaders who are brought in.

What you can do:

  • Talk about progress every chance you get. Tell success stories about the change process, and repeat other stories that you hear.
  • Include the change ideals and values when hiring and training new staff so it is enforced from the start.
  • Publicly recognise key members and enablers of the change.
  • Create plans to replace key leaders of change as they move on. This will help ensure that their legacy is not lost or forgotten.

Dealing with uncertainty – tips for business owners

Dealing with uncertainty – tips for business owners

Whether you’re in full lockdown, restricted trading conditions or back to ‘business as usual’, there’s still real uncertainty for business owners. We’re trading in challenging times at present. And knowing what step to take next is a key worry. We know that you invest more than simply time and money into your business. It is more than a job but part of your identity.

So, how do you get more clarity around your future plans? And how do you work on the short-term future of the business, when sales, income and cash are in short supply?

Focusing your efforts in the right places

Planning the next business move is difficult at the best of times, but it’s doubly problematic when we have so little clear idea of what a post-COVID19 business world will look like.

It’s difficult to plan when we don’t know what will be possible. What regulations will be in place once you can begin trading? Will the market have changed dramatically? Will you be able to trade over borders and continue to be an international operation? Will you have enough cash to actually operate?

As a business owner, you’ll be continually thinking of new business-critical issues to add to this list – but the reality is that you CAN’T control all these elements. This sense of mounting uncertainty is likely to raise your stress levels and make you more anxious.

So, how do you overcome these worries and find a practical solution?

Try to focus on the things you can control:

  • Identify the things that matter to the short and long-term success of the business
  • Find the things you can control and over which you have some influence.

venn diagram

It’s too overwhelming to try and work on everything at the same time. Instead, try to focus on the one thing you can achieve each day.

  • Review your overheads and costs – one way to reduce your cashflow worries is to reduce your spending. Look at your controllable overheads and see if there are ways to negotiate better terms with suppliers, cut down on expenses or pause any subscriptions.
  • Talk to debtors and creditors – if you can bring down your aged debt, that will help your overall financial health. Talk to any late-paying customers and agree when these debts will be paid. And talk to suppliers about extending payment terms, if possible.
  • Consider alternative revenue streams – if your current business model doesn’t work well in lockdown, are there other online services that you could diversify into? Any new revenue streams will help to bolster your income and cash position.
  • Update your website and marketing – having a great online presence is vital during this crisis, when most goods and services will be purchased online. Give your website a refresh and make it easy for potential customers to find and buy your services.
  • Catch up with your team – maintaining contact with your employees is vital if you’re going to nurture team spirit. The more engaged your team is, the easier it will be to embrace change together.

Talk to us about other strategies for dealing with uncertainty.

If you’re uncertain about the impact of COVID-19 on your business, please do come and talk to us. We’ll help you get in control of your finances, prioritise the right elements of your business and find a strategy that prepares you for trading in the post-coronavirus market.