cash flow management

Cash Is King

by Advice

In these times of seemingly ever-increasing costs, improving cash flow is crucial for the financial health of a business. Here are some strategies to help you do that:

  1. Invoice Promptly: Send out invoices as soon as goods or services are delivered. Consider offering early payment incentives to encourage faster payments.
  2. Follow up on Payments: Establish a system for following up on overdue payments. This might involve sending reminders, making phone calls, or even offering payment plans.
  3. Manage Expenses: Analyse your expenses and cut any unnecessary costs. Look for opportunities to negotiate better terms with suppliers.
  4. Inventory Management: Avoid overstocking inventory, as it ties up cash. Use just-in-time inventory practices when possible.
  5. Tighten Credit Policies: Be cautious with extending credit to customers. Screen new customers for creditworthiness and set clear credit terms.
  6. Reduce Operating Costs: Evaluate your fixed and variable costs. Look for ways to reduce expenses without sacrificing quality or service.
  7. Increase Sales: Focus on marketing and sales efforts to boost revenue. Consider diversifying your product or service offerings to attract more customers.
  8. Improve Cash Reserves: Build up cash reserves during periods of strong cash flow to cushion against lean times.
  9. Negotiate with Suppliers: Negotiate favourable payment terms with suppliers. Extended payment terms can provide some breathing room.
  10. Consider Financing: Explore financing options such as business loans or lines of credit to cover short-term cash flow gaps.
  11. Monitor Cash Flow: Keep a close eye on your cash flow through regular financial reporting. This will help you spot issues early and take corrective action.
  12. Forecast Cash Flow: Create cash flow forecasts to anticipate future needs and plan accordingly.
  13. Streamline Operations: Look for ways to make your business processes more efficient, which can reduce costs and improve cash flow.
  14. Offer Discounts for Early Payment: Consider offering discounts to customers who pay their invoices early to incentivise prompt payments.
  15. Debt Management: Manage your existing debt wisely, ensuring that interest payments and principal repayments fit comfortably within your cash flow.

A list like this can be a bit overwhelming so just pick one or two to start off with.  Focus on those for the next month or so and see how you go.  Then pick another strategy and build from there.

Remember that improving cash flow often requires a combination of strategies tailored to your specific business needs and circumstances. It’s essential to regularly review your financial statements and adjust your approach as needed to maintain healthy cash flow.

A crucial part of the equation is having accurate and up-to-date financials.  None of these will work if you are flying in the dark.  That’s where we come in.  Activ8 can do the number crunching so you can focus on your business.  No more losing sleep over the books.  Give us a call on (07) 3367 3366.

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2023 Budget – What It Means For You and Small Businesses

by Advice

The 2023 Federal Budget was very underwhelming tax-wise with the primary focus being measures aimed at lowering the cost of living or improving welfare.

This budget is a first-term government setting the tone to win a second and third term.  It’s not a big spending budget and the government is banking a lot of the tax windfall it will receive over the next 4 years.  The numbers are a bit rubbery, but it is a good start to repair the budget.

There is little to no structural change to the tax system, and they have left the stage 3 tax cuts alone.  The government is doing everything it can to not break promises and to send a message about economic competence.  Short of a drastic change in economic circumstances, I think the stage 3 tax cuts are here to stay.

The Treasurer, Dr Chalmers, has indicated that more “difficult decisions” will need to be made to sustainably fix the budget, but I think they are looking to the next term of government.  Labor wants to bank some trust and goodwill with the electorate before it brings any major tax reform to the table. 

BUDGET OVERVIEW

The key measures of the Budget affecting small business and what it means for you.

1. Temporary Full Expensing is Ending

Currently, most businesses that purchase business assets can claim 100% of its price in full, in the year that it’s purchased and ready for use. This will finish on 30 June 2023.

Recommendation: If you need to purchase a business asset and have the cashflow to do so, we recommend you purchase it BEFORE 30 June 2023 to be able to claim 100% of its cost in the 2023 year.

2. Instant Asset Write Off – $20K

Replacing temporary full expensing is the Small Business Instant Asset Write-off.  Businesses with a turnover of less than $10 million, will be able to immediately deduct the full cost of eligible assets costing less than $20,000 (incl GST).  Assets need to purchased and installed before 30 June 2024.

Assets that cost more than $20,000 will be added into a small business simplified depreciation pool and depreciated at 15% in the first year and 30% each year thereafter. Remember, this is a tax deduction, and it is not $20,000 cash back to you.

3. Low and Middle Income Tax Offset (LMITO) has ended

The temporary LMITO was introduced in the 2019 Budget and then extended during the COVID-19 pandemic.  It resulted in extra tax refunds of between $675 and $1,500 (depending on your level of income) for individuals. The Government didn’t extend the LMITO, so it has ended as at 30 June 2022.

Lower tax refund: Individuals who received an extra tax refund of up to $1,500 in 2022 will not receive it again this year in 2023.

4. Small business failure to lodge penalty amnesty

An amnesty has been announced for small businesses with a turnover of less than $10m, and have fallen behind on their tax returns.

A small business will not be charged failure-to-lodge penalties for outstanding tax lodgements that are lodged between 1 June 2023 and 31 December 2023 that were originally due between 1 December 2019 to 29 February 2022.

You’ve got 7 months to sort this one out and avoid some fines if you need to catch up.  Remember to reach out if you need a hand!

5. Super Stuff

The budget confirmed changes that were previously announced.  From July 2026 employers will have to pay super at the same time as wages, rather than quarterly.  This measure is designed to increase compliance with the legislation.

It won’t begin for 3 years but you will need to factor this into your future cashflow planning.

At the other end of the scale, very high superannuation balances will attract a higher rate of tax from 1 July 2025. Earnings on balances exceeding $3 million will pay tax on earnings at a rate of 30 per cent, 15% higher than the current rate of 15%. Earnings on balances below $3 million will continue to be taxed at the concessional rate of 15 per cent. Defined benefit interests will be appropriately valued and will have earnings taxed under this measure in a similar way to other interests to ensure commensurate treatment.

If you have a balance of more than $3 million in your Superfund you should do a complete review of your arrangements to determine the best tax strategies going forward.

6. Family Support

From 1 July this year, Parental Leave Pay and Dad and Partner Pay will combine into a single 20-week payment. A new family income test of $350,000 per annum will see nearly 3,000 additional parents become eligible for the entitlement each year. The Government has also committed to increase Paid Parental Leave to 26 weeks by 2026.

7. Tax incentive for energy efficiency

The Small Business Energy Incentive provides an additional deduction of 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy.

Up to $100,000 of total expenditure will be eligible, with a maximum bonus deduction of $20,000.

While the full detail of what qualifies for the incentive is not yet available, it is expected to apply to a range of depreciating assets and upgrades to existing assets such as electrifying heating and cooling systems, upgrading to more efficient fridges and induction cooktops, and installing batteries and heat pumps.

Some exclusions will apply including electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels.

8. Plan for higher PAYG instalments in 2024

Normally, PAYG instalments toward next year’s tax are adjusted using a GDP adjustment or uplift.

In 2022-23, the Government reduced this uplift factor to 2% instead of the 10% rate that would have applied. And now for 2023-24, the Government has set the uplift factor to 6% instead of the 12% rate that would have applied.

If you continue to make good business profits with tax to pay, you will need to budget for slightly higher PAYG instalments. 

OTHER STUFF FOR SMALL BUSINESS 

A few other “watch this space” announcements for supporting small businesses:

  • $23.4 million Investment in Cyber Security
  • $392.4 million Investment in an Industry Growth Program
  • $18.1 million Investment in Buy Australia Plan

These types of investments tend to filter down through state government grants so keep an eye out.

These are the main measures affecting small businesses from this budget.  Remember, these are subject to the measures passing through Parliament.  If you require further information on any of these announced measures, please do not hesitate to contact our office on (07) 3367 3366.

improve your business

5 Tips For Using Your Financials To Improve Your Business

by Advice

With preparation of year-end financials getting underway, it’s timely to explore where the opportunities for improving business results can be found in your financials.

Changing the outcomes of business results rarely happens by continuing to do what has been done in the past, but understanding what you have done, what that has achieved and how that can be changed will arm you well to make decisions for the future.

Here are 5 tips to apply when reviewing your financials which can lead to actions to improve your business.

1. Sales and Gross Profit

Your top-line sales figure for this year compared to last year gives you limited information, so drill down to explore the reasons for the change.  Have there been particular product or service lines that have performed stronger this year, what was the driver for that and did it really improve profitability? For example, your sales may have increased because you cut your prices, but if that didn’t generate sufficient volume increases you may be no better off.  Say your gross profit margin is 35 percent and you reduce your prices by 10 percent; your turnover has to increase by 40 percent just to maintain profit levels.

A simple yet effective profitability benchmark is your average dollar sale, to calculate that divide your total sales by the number of transactions. Compare this year’s average dollar sale with the results from a year ago to see some trends. To improve business year on year, set yourself a target, supported by a few initiatives, to increase this by 10 percent in a year’s time — it’ll do wonders for your profitability.

2. Breakeven point

The availability of your financials is an opportunity to update your breakeven point, which is a fundamental piece of information you need to know about your business.

If you know what cash you need to collect from your customers to cover your outgoings each month, it’s a truly motivating factor and a very early indicator of impending success or challenges on the horizon. We refer to outgoings rather than overheads or expenses because you need to factor in your drawings or tax as well as overheads when calculating your breakeven point.  This number can then be used to drive activities from salespeople and accounts staff to ensure the work is processed, invoiced and funds received month on month.

3. Solvency

Review your balance sheet with particular attention to your current assets and current liabilities, items in there include cash at bank, accounts receivable and short-term debt.  When classified as ‘current’ they are expected to be received or paid within 12 months and reviewing this comparison is a very good indicator of business solvency.

Can you pay your bills as they fall due, or are you dependent upon some extended trading terms of suppliers to continue to trade?  As directors of trading businesses, you have a legal duty not to take on liabilities you cannot repay and doing so puts yourself at risk of disqualification from directorship and severe financial consequences.  Identifying a solvency concern, determining the options available and taking action early is the best approach to ward off future issues.

 

 

4. Cash flow statement

It’s not unusual for business owners to look at a profit number only to ask “where has that profit gone?”. If your financials include a cash flow statement, use this to identify where all your profit has gone if it’s not sitting as cash at bank.  Alternatively, request a source and application of funds summary to be provided with your financials.

A cash flow statement or summary will show the sources of funds and how they have been applied over the period, which is essential because many of the outgoings of a business will not appear in the profit and loss account (for example, drawings, tax or loan repayments).  Use this Source and Application of Funds summary to understand where the profit from the last 12 months has gone and decide on future actions in light of this information.  Some common places you might find your profit sitting include the debtors, reduction of loan principal and tax payments.

5. Advance to and from directors/shareholders

How much money does the business owe you, or do you owe money back to the business? If the business owes you a substantial sum, it is good practice to consider each year if it is time to begin planning to draw this money down.

This could trigger a restructure of your finances if the business profitability is suitable and replace your advance account with a business loan. This will enable you to withdraw the money you are owed to build wealth outside the business or reduce personal debt.

If you owe money back to the business, keep this in check, reviewing it annually with a view to repaying it with priority.  Approach management of the advance account with full support from your Mazars adviser to plan for any tax consequences of these actions.

Good business operators take a keen interest in using annual financials as a means to understanding the financial well-being of their business.  There are no silly questions when it comes to clarifying elements within the financial statements and using the historical performance to set goals for the future.

At Activ8, we are focussed on supporting the development of efficient profitable businesses and can assist in identifying opportunities for improvement from your financials.  The preparation of monthly or even quarterly financial statements will provide more timely information, which will further allow for the identification of areas of improvement in your business.