Keeping your business cash liquid – the difference between cashflow and profit
The foundational goal of any business is to make a profit. As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise. But how does profit differ from cashflow? And why is cash king?
How do profit and cashflow differ?
To really understand the difference between generating profit and managing cashflow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cashflow is an invaluable business skill.
Let’s take a look at the differences:
- What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It’s driven by creating a profit margin and generating value from your products and/or services.
- What is cashflow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.
Why is positive cashflow so important?
‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cashflow then the business may not survive as long as the end of the year.
What’s needed is good cashflow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.
A business can generate high revenues and big profits, but still be cashflow poor. In other words, it can have profits at the end of the period, but have very little liquid cash to fund it’s day-to-day operations over the course of the period.
Talk to us about improving your cashflow management
Good cashflow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cashflow’ you need to proactively work to keep your inflows higher than your outflows.
As your adviser, we’ll help you set up detailed cashflow reporting and forecasting, so you can keep the business in that ideal positive cashflow position. And we’ll also look at key steps for keeping your revenues high, margins profitable and meeting your financial targets.
Get in touch to talk through your cashflow management.
Happy Holidays (finally!)
We’ve created a short Christmas eBook for you to enjoy over the Christmas holidays.
Enjoy! Read our GoFi8ure Christmas eBook 2021
5 apps to help you run your small business
Being a small business owner means being a jack of all trades – but these days, there are some apps to help you handle a few of the day-to-day tasks. Here are five of the best types of apps for small businesses:
Automatically track how much time you’re spending on each customer, including tasks, research, phone calls and emails. Time tracking apps use artificial intelligence to make it as effortless as possible to track your time. It can produce a timesheet automatically so you can manage your time more effectively.
One to try: Timely (by Memory AI)
When you’re driving around in order to meet up with customers or suppliers, it’s important to keep track of your mileage. Paper logbooks have long been superseded by vehicle logging apps, which are so easy to use and inexpensive. Create an electronic logbook that records your driving on your phone.
One to try: Logmate (NZTA approved)
Making it easy for your customers to give you money is just an all-round excellent strategy. An app can provide you with a way to accept payments online and in person, from anywhere in the world. It can also manage subscriptions or even run off a terminal. Most will use a pay-as-you-go pricing system, so you only pay when customers use it.
One to try: Stripe
For retailers, spend less time on stock tracking and more time on strategising with point-of-sale software. A POS platform allows customers to buy from your store, or online, and lets you manage inventory seamlessly. You’re collecting information as you go, giving you valuable insights into your business.
One to try: Vend
If you’re not using accounting software already, you’re probably spending far too much time invoicing, chasing invoices and reconciling your accounts. Accounting software is cost-effective, scales up with your business and makes perfect sense when you’re trying to grow.
One to try: Xero
Talk to us – we are here to help
We have clients across a wide range of industries, using all types of technology – we might know the perfect app for you. Get in touch if you’re looking for fresh ideas!
New rules for Trust Compliance
With a new top tax rate of 39% now in place, other tax rules have also been tweaked to make sure they all align.
Trusts now have new rules on disclosures, in an effort to prevent people from using trusts to avoid paying additional tax.
Previously, trusts have not needed to file financial statements or details of non-taxable transactions. This has now changed. Inland Revenue will now be collecting more information so it can keep a closer eye on how trusts are being used.
Trusts now need to provide more financial information
From April 2021 onwards, all annual returns for trusts will need to include:
- Financial statements
- Details of settlements
- Details of distributions, taxable or not
- Any other information required, like loans and transfers involving associated persons or related parties.
Charitable and non-active trusts are exempt, since they don’t need to file a return.
You can read more about the new taxation bill here.
If this looks daunting, don’t worry, we can help you work out what information is required and how you can supply it. It is vital to make sure you comply with the rules so your trust isn’t declared a sham – if that happened you would lose any advantages that the trust provides.
Compliance costs are increasing
This is a large step up in terms of what trusts must provide in order to be compliant. It’s important that you start collating this information so you can supply it to Inland Revenue. This will probably be time-consuming and may have additional costs, particularly in this first year. Hopefully it will get easier as we all learn to navigate the new rules.
If you have doubts about how to comply, we can answer your questions. It might also be a good time to review your entities and make sure your trust is working for you.
Give us a call, drop us a note or text us – we’re here to help!
GoFi8ure are excited to be featured on the Top Reviews NZ website as #7 in their Best Accountants in Wellington review. What an honor and privilege it is to be listed – thanks so much for the nomination. You can visit our review here.
GoFi8ure – your go to accounting specialists. #youdidn’tgointobusinesstotackleyourtaxbutwedid
P is for purpose, not profit
Why does your business exist?
Your purpose is three to seven words explaining why your business exists for your customers; it should be about them, not you. It is a small statement with immense power – your reason for being.
Tesla: To accelerate the world’s transition to sustainable energy.
Netflix: To entertain the world.
Zoom: To make video communications frictionless and secure.
These may be big company examples, but a clear purpose statement is just as important for small and medium sized business.
A well-defined purpose statement is an antidote to narcissistic by-lines of the past… because we know that consumers are wired to take a self-interest and therefore will engage your business if your ‘why’ resonates with them. Thereafter, your purpose will drive the alignment of values and loyalty.
If you don’t focus on purpose, you’re likely to focus on profit.
Guess what? Your customers aren’t interested in you making a profit. They’re too worried about their own profit. They are more than happy for you to make a profit – provided you meet their needs first.
The correlation between a business’s ability to serve a higher purpose and stronger financial performance has been proven. So, defining your purpose is a smart business strategy.
It comes down to engagement with your team and your customers.
Numerous studies have told us that a strong sense of purpose drives team satisfaction, which will help to improve customer loyalty.
Articulating your business’s purpose to your team allows them to see that they’re contributing to something bigger than themselves. Linking your purpose to their tasks and responsibilities allows them to see their connection to the outcome; how their role is contributing to the overall vision of the business and how they’re impacting your customers’ lives.
If we focus on meeting (and exceeding) customer needs, better profitability will be a by-product.
Getting clear on your purpose will transform your marketing. Being able to clearly articulate why you exist for your customers will tie them to your brand and make them more inclined to refer you to others. When that new customer does their due diligence, i.e. they stalk your website and social media, it’s more likely they’ll develop an emotional connection to your business and buy from you.
Your purpose must first be defined by the leaders.
Only when your purpose is crystal clear can you articulate it to your team and then your customers and target audience.
Having a clear purpose is also about sustainability. There is mounting evidence that in these times of change and disruption, having a clear purpose will improve a business’s ability to transform and adapt.
So, what’s your purpose? Need help defining it? We can help.
“People don’t buy what you do, they buy why you do it.” – Simon Sinek
Property and Tax update 2021
On 23 March 2021, changes to tax rules for investment properties took investors by surprise. There has been widespread commentary with more to come as the detail unfolds.
- The bright-line test has been extended from 5 to 10 years for properties purchased on or after 27 March 2021
- The current exemption for the main home changes for properties acquired on or after 27 March 2021, making them subject to a ‘change of use’ rule
- From 1 October 2021 property owners will not be able to claim interest on residential investment property acquired on or after 27 March 2021, and interest deductions on borrowings for residential investment property acquired before 27 March 2021 will be phased out over the next four income years.
Different rules apply for different scenarios:
- For properties purchased from 27 March 2021, the bright-line test period is 10 years.
- If you already own a rental, and, the old rules apply:
- a 5-year bright-line test if you purchased the property on or after 29 March 2018, or
- a 2-year bright-line if you purchased the property from 1 October 2015.
- If it’s a new build, the proposal is that it will be subject to a 5 year bright-line test.
- If you’re in the middle of buying a residential rental property, it’s more complex. Generally, if you entered into a binding contract to purchase a property before 27 March, you are within the old rules and the 5-year bright-line test applies. However, depending on variables around when the offer is accepted or the exchange and timing of counter offers, the 10-year bright-line test may apply. Talk to us if you’re in doubt.
‘Change of use’ and the main home exemption
Under the current rules, if the property has been used as the person’s main home for over half of the relevant bright-line period, there is a complete exemption from tax under the bright-line test. Under the proposed changes, properties acquired on or after 27 March 2021 will be subject to a ‘change of use’ rule. If a property switches from being the owner’s main home for more than 12 months, then a proportion of the sale profits of a property sold during the bright line period will be taxed, based on the ratio of time that the property was and wasn’t used as the main home. The existing main home exemption rules continue to apply for residential property acquired on or after 29 March 2018 and before 27 March 2021.
The rules are graduated depending on when the property is acquired:
- for residential property acquired on or after 27 March 2021, taxpayers won’t be able to claim deductions for interest from 1 October 2021
- for properties acquired before 27 March 2021, interest on loans can still be claimed as an expense. From 1 October 2021 – 31 March 2023, the amount claimable will be reduced to 75%, reducing by 25% each following income year, until it is phased out completely from 1 April 2025.
The Government is also consulting on whether an exemption for new builds acquired as residential investment property should apply. Property developers and builders who build properties to sell will still be able to claim their interest expenses.
Residential properties used to provide short-stay accommodation, where the owner does not live in the property, will be subject to the bright-line test and cannot be excluded as business premises.
Some of the proposals are subject to consultation. If you have the opportunity to comment, please make it clear how the changes affect you. If you own a residential rental or one used for short-stay accommodation, or if you are considering buying a second property, please contact us, to discuss the tax implications.
Leveraging Your Technology
The decisions you make in your business are only as good as the data you use to make them. The more accurate and up to date your data is, the better your decisions will be. Leveraging your technology will provide you with accurate real-time data to make more informed decisions in your business.
Processes and systems drive your business, so it’s important to ask yourself if all of yours are clearly documented and up to date? Some processes may be followed simply because they always have been. Although other processes may have evolved over time, your documentation might not necessarily reflect this.
Using technology to streamline your processes and systems increases efficiency in your business, saving time, money, and reducing stress. You’ll also prepare your business for the future, making it more sustainable, scalable, and saleable.
Leveraging your technology can help you to:
- Make your data accessible from the cloud, allowing you to view real-time data and make decisions on the go.
- Reduce human error and increase productivity by automating repetitive tasks and workflows.
- Track your expenses and load them directly to your accounting software simply by taking a photo.
- Minimise double handling and increase efficiency by integrating your apps.
- Collaborate with your team regardless of where they are.
- Save the time and money needed to travel by using online meetings.
- Induct new team members seamlessly with clearly documented processes.
- Monitor your inventory in real-time, reducing inventory days and freeing up cash.
- Store customer preferences to personalise customer experience, increasing customer satisfaction and retention.
- Make your business becomes scalable, with systems in place to allow the business to grow without the wheels falling off.
Using technology to its maximum advantage will help to improve your business. However, implementing these changes can often be overwhelming. Let us know if we can help you leverage your technology!
Things were certainly thrown up in the air when COVID-19’s lockdown happened in March. For many businesses, the first, most visible effects of the pandemic quickly created a challenge to their operating and business models. A lot of things came into question, from how and where employees worked, to how they engaged with customers and how their business accounts and compliance were managed.
COVID-19 kicked GoFi8ure’s agility and response plan into place, allowing us to become more agile in how our GoFi8urine’s worked together and how we worked with our clients. Thanks to the amazing cloud online tools and software available, our team of superheroes were able to continue consistent service delivery without any impact on our clients.
Our success in working remotely during this time, whilst meeting client deadlines and requirements, was thanks to our tested systems and processes which allowed us to work with agility and resilience without disruption. It is because this experience, that we made the decision to not renew our Upper Hutt Headquarters lease.
Making the decision to not renew our Upper Hutt premise was hard to make because we love our Hutt Valley community and poured our heart and soul into branding and creating the Hutt office, however, it gave us an opportunity to offer more flexibility, versatility and remote working to our GoFi8urines. We would like to assure all our clients that the upcoming changes will not cause any disruption to our workflow or delivery of services. In fact, it will allow us to work closer as a team and continue to provide superlative accounting services for our clients nationwide.
Like the sound of being more agile in your business? GoFi8ure offers a range of services that can help ensure your business is agile and responsive, so you can remain competitive. Get a quote today or contact us to find out more.
If you ever need anything, our GoFi8urine’s are just a call or email away!
Your dedicated GoFi8urines