Tag Archives: financial

On Cashflow Management – and a hint!

Cashflow management is a critical issue for many business owners.

Typically, your cashflow comes under strain in the following circumstances (not an exhaustive list):

  • your business is growing
  • stock levels increase (eg: lead-up to Christmas for retailers)
  • bringing on new staff
  • increasing production capacity
  • diversifying your business activities

Each of these things can be a “cash thief”.

Let’s consider the issue of inventory(stock) management.  The more stock you have on hand, the more cash you have tied up.  I explain this in more detail here, here and here.  By reducing your stock levels, you free up a lot of cash, however you need to balance out the level of stock you need.  You cannot sell what you don’t have!  Effective stock management makes a huge difference to your cashflow.

Cashflow management can also be impacted by increasing production capacity.  Being able to make a lot more “stuff” requires you to have the raw materials, equipment and people to do this.  All this costs.  Your wages come in each week, your suppliers need to be paid each month and the equipment needs to be purchased/financed.  All this robs cash from the business – and you haven’t yet produced anything you can sell.  By building your capacity, you will be able to (hopefully) generate more sales and/or better margins.  But you have to spend first.  This is where your cashflow management needs to be carefully curated.

The Hint

A number of our customers have pretty regular sales.  They use this to reduce their margins (sometimes!) to generate additional sales and hence cashflow.  You find that there is a very clear cycle for this.

One of my favourite fishing tackle stores is in Melbourne.  They have a great range of products, know what they are on about and provide great service.  Over the past year or so, I have noticed that they are having regular sales in the sixth week after the end of each quarter.  This is because they have the Tax Office commitments to meet.  They need to free up cash to pay our friends in Canberra. Knowing this, you, as a customer, can manage your time for purchasing gear.

The same thing occurs in a lot of businesses (especially retail).  Have a look at the sales cycles and you will see a trend.  The margin is better in your pocket than the retailer’s!


Any time you look at the cashflow in your business, get behind the issue to find out what is driving it.  Sales too low?  Margins being squeezed?  Inventory too high?  Expanding?  Diversifying?  Any and all of these can have a significant impact on your cash reserves.

Cashflow management can be difficult.  But when you look behind the numbers and develop your understanding of what drives your cashflow, you will be in a far better position to make the decisions and changes needed to improve things.

We have access to some really powerful cashflow modelling tools that will enable you to see the real picture – going forward.  If you would like to have a chat with us about how we can help you get a better handle on your cashflow management, give us a call!

On Budgets, Cashflow and Your Business

Budgets, don’t we love them?

The federal government has just delivered its budget for the country – the feedback on which isn’t overly positive.

In your small business, what approach do you use for your budgeting?  Most budgets I see are based on the thinking of “last year plus 5%”.  I have also seen budgets done by some pretty large franchise businesses that are, to put it bluntly, crap.

A budget needs to be approached from the aspect of “is it realistic, is it achievable, is it based on solid assumptions?”  It also needs to take note of the environment within which the business operates.  Over the past couple of decades, we have seen budgeting and planning programs proliferate.  Search “Budget template” on Google and you will get 108 million results.  Like anything, having a tool and knowing how to use it are two completely different things.

Moving Forward 1

When you’re looking at your budgets, the issues you need to consider need to be delved into in some detail.  Here are some examples (and the questions aren’t extensive):

  • Increased sales (everyone works on this assumption) – where are they going to come from?  Who are we selling to?  Do we offer what they need? Can we supply the additional product/service and at what cost?  Is the market being disrupted?  Can we divert focus in to one or two high margin products that will deliver a better result?
  • Profit margins – what do we need to do to improve them?  What options do we have with pricing?  What product mix works to deliver the best margins?  Does our marketing support our pricing to deliver the margins?  Does our sales team understand the impact of margins (hint: most don’t)?  What are our competitors doing and where do we see them going?
  • Operating overheads- what are we doing to ensure we are getting “bang for our buck” on expenses?  What is happening with regard to our overheads and the potential to replace old approaches with new ones (esp software applications)?  What control do our people have over the costs incurred in operating the business?
  • Staffing – What do our team understand about the expectations and accountabilities of their roles?  What additional training and support would enable them to flourish?  What is the ideal team mix for a business such as where ours is moving?
  • Capital expenditure – do we have the right gear, in the right condition, to enable us to deliver what is needed to support our team and customers?  Do we need to invest in additional equipment to save costs over the medium/long term?  What is the best utilisation of our capital to deliver strong, sustainable results over the medium/long term?

As stated, the list above is only a “taster” for the questions that need to be asked prior to even thinking about what the budget looks like.  More often than not, where these types of questions are asked, they are asked after the budget has been done.  This is like putting the cart before the horse.

Once you have done your overall budget, I strongly recommend that you do a cashflow budget that ties in to it.  The assumptions you make in this should also be assessed to ensure you are making the right qualitative decisions for your business.  For example, we have been dealing with one of our customers relating to one of their major debtors.  Sure, the debtor (owes money to our guys) is a big customer.  But the margins they make on the work they do for them are really small.  Then, the debtor takes nearly four months to pay their account.   Is he really a customer that they want?  By the time they do the work, spend three months chasing payment (including heavy involvement from the Directors who could be better utilised building the business), the profit from doing the work has disappeared.  Is that really what you’re wanting in your business?  Maybe you already have it!

Doing the cashflow budget may cause you to go back and revisit your operating budget.  The assumptions made might be called into question.  This is a really powerful process to go through as you are considering all aspects of the performance of the business.

Remember that a budget is a forecast of what your results are going to look like.  Doing your budget with the approach that your inputs will drive your results will give you a far more robust, realistic and achievable plan than doing it “the old way”.

By approaching the process in a way that allows you to develop solid, detailed and explainable budgets, you will actually be in a position where you are in far greater control of your business and you will be able to use those budgets to make better decisions along the way through the year.  This moves you from working “in” the business to “on” the business.

Establishing budgets can be a time-consuming process.  Yet it is be very valuable.  The emphasis should be on qualitative questions to drive the quantitative outputs.  By just focusing on the quantitative aspects of budgeting, you are missing out on a great opportunity to maximise your return.  And isn’t this what you, as a business owner, should be looking to do?

If you want to (metaphorically) fall in love with your budgets once again, take the time to approach the process in a way which will enable you to get the reward and return you’re seeking.  Last year plus 5% doesn’t work.

If you want to discuss how we can assist you in developing a really solid budget (and cashflow budget) for your business in the lead up to the end of financial year, please get in touch.  Our first meeting is at no cost to you and is designed to provide you with significant value.  It just might lead to you achieving the results you’ve always wanted.

On Superannuation in the 2016 Budget

Superannuation and government – a recipe for disaster!

Treasurer Scott Morrison delivered the Federal Budget on Tuesday night.  After many months of speculation, the detail (such as it is) finally came to light.  And how short-sighted the document turned out to be – especially for those with superannuation.

Having worked in and around superannuation since 1991, I have witnessed so many changes and it is little wonder that the average punter tends to tune out when the word “superannuation” is used.  It is therefore not surprising they really don’t seem to care and become easy prey for financial planners and industry superannuation funds.

train overboard

The changes being proposed by the Turnbull government in the budget can be summarised as follows (note that I’m not covering all of them here – just the major ones that will impact our clients).

I preface all this by stating that the policy platform relating to superannuation is somewhat confusing – the government wants people to provide for their retirement so that there will be less strain put on the welfare system when they retire.  Fantastic!

Why then do they limit the amounts that people can put into superannuation?  This flies against any and all forms of logic.  If you want to create a welfare replacement vehicle, encourage people to use it – don’t restrict them.

Over the past 20 plus years, we have seen limits – some very generous, others less so.  Passing strange it is that superannuation limits tend to reflect the underlying state of the budget!  When things are going pretty well, the limits are up, when things tighten up, so do the amounts people can contribute.

So here goes:

$500,000 Lifetime Limit on “private contributions” (in the legislation, these are called “Non-concessional contributions”)

The idea has always been that there were opportunities for people to add to their superannuation accounts during the year using tax-paid/after-tax money that they might have saved up.  This can also include amounts withdrawn and re-contributed to the fund when it is in pension phase.  Prior to Tuesday this week, people could deposit $180,000 per year into their fund or, elect to “bring forward” a couple of years contributions and put $540,000 into their fund.  This works really well for people who haven’t been able to build big balances in the superannuation system as they were running businesses, bringing up families and generally contributing to the wealth of the nation.  Now, the government, in their wisdom, is placing a “cap” on the amount they can contribute in this way.

The net effect of this is to restrict the ability of people to put money into their superannuation accounts for their retirement.

Remember when it was possible (some years ago) to put $1,000,000 into superannuation?  Lots of people took that opportunity up.

Now, if you’re one of the lucky ones who have made contributions of this type since 2007 and are currently over the new $500,000 limit, good for you.  It just means that you won’t be able to make any more.  If you’re not at the new $500,000 limit yet, well, you can make additional contributions to get you there – but PLEASE don’t go over the limit or you will get stung with Penalty Tax.

One interesting note – the budget papers make reference to the fact that the date of 1 July 2007 was chosen as this is the date from which the Tax Office has “reliable contributions records”.

I am not sure whether backdating a limit commencement start time is valid Constitutionally.  Watch this space!

Limiting the Size of your Pension Fund

The government refers to this as a “Transfer Balance Cap” – what they really should call it is “You can’t have a pension bigger than this”.

What it means is that, from 1 July 2017, you will be able to transfer a maximum of $1.6 million into your retirement account.  Subsequent earnings on the amount transferred will not be subject to tax.

I don’t know about you, but I have found that where you segregate assets, it becomes difficult to “un-segregate” them.  Let’s say you have a fund with $2m in it. You transfer $1.6m of shares into the new “Maximum Pension Fund” box.  The share market tanks – all of a sudden, you have well less than $1.6m in that account.  Can you top it up?

Conversely, you transfer $1.6m into your “Maximum Pension Fund” box and the shares appreciate markedly so that the balance in that “box” is now well over $1.6m.  Do you have to transfer funds out?

Or, riddle me this one – your single asset in your superannuation fund is a building worth $2m.  Do we have to transfer 80% of that building into the “Maximum Pension Fund” box?

Apparently the government is going to “consult” on how this will all be implemented.  Good luck with that.  This has all the hallmarks of an absolute mess and will result in uncertainty for the superannuation industry for years.

I find it somewhat galling that the government will be effectively trying to legislate how much you can save in your pension fund to access the tax-free earnings.  Many people have saved and worked hard over decades to give them a retirement that they can enjoy.  To come in and take this away from them is unfair – especially for those who are already in pension phase and who have planned their lives and activities around what they thought was some level of certainty.

Contribution Limits

As mentioned above, the government keeps telling everyone to put more money into superannuation.  Then they place a limit on how much you can contribute before you run into penal tax rates.

If you have a look at the levels of allowable (read “deductible”) superannuation contributions over the past years, you will see it is a dog’s breakfast.  Starting (for the under 50 year olds) at $50,000 in 2008/9, it has reduced to $25,000 from 2009/10 then increased to $30,000 from 2014/15 and it reverts to $25,000 from 2017/18.  It’s a bigger mess for those aged over 60!

If the government wants people to contribute to superannuation to fund their retirement, set a limit and stick to it.  For younger people with a plan to put money aside, it becomes impossible for them to budget to achieve this.

I will point out there are some positive proposals in the budget with regard to superannuation, however, the issues highlighted above are so short-sighted and ill-thought-through that the government is making the superannuation system even more unwieldy than it was previously.

On Data Ownership

Just who “owns” your business’ data?

Source: nctba.org
Source: nctba.org

This is a question that not very many (if any) business owners consider in the selection and implementation of the “back-end” of their business.  More often than, not, the choice is effectively left to the accountant and/or bookkeeper.  This then creates a legacy system that the business has to deal with for many years to come.

This question was raised recently by one of the participants in my Tax Discussion Group who detailed an example where a customer of theirs was wanting to bring their bookkeeping from an external provider to an in-house resource.  Their system is on the Xero platform and the soon-to-be-no-longer-required bookkeeper wasn’t keen to assist them in transitioning the data for the new resource to use.  Suffice to say, the Xero Terms & Conditions seem to support the “losing” bookkeeper and effectively leave the customer (whose data it actually is) up that famous creek.

When you are considering a software package through which you wish to operate your business, you need to carefully consider who actually has the ownership of the data and what happens where you choose to change service providers.  Will they given you a guarantee that your data will move with you or will they “hold you to ransom”?

We guarantee that your data stays in your ownership.  If any of our customers want to move away from us or from the package that we manage for them, we will not stand in their way – it’s your data after all.

Does your current advisor give this guarantee?

Might just be worth asking the question – and get their response in writing!


On New Credit Laws

Credit trapAre you in the habit of paying your bills a bit late?

You know – the power bill, gas bill, phone bill etc?  Those bills that rack up during the month and you sit down one night to clear them all up in one go?

Under new credit laws which start to apply in Australia from 1 April 2014, there is a new regime for credit providers to report your credit history.  In effect, the changes will result in your payment history being reported – not just your non-payment history.

Up until now, credit reporting was only done where you were over 60 days late in paying a bill.  With the new changes, you will be “reported” if you’re one day late.

Not much of an issue you ask?  Well, consider this – all the financial institutions will now have access to your full payment history.  They have made noises about the late payment of bills not being a large influence on their credit assessment processes, but they have indicated that they will take this into consideration when looking at any credit applications.

Even if you have a perfect history of paying all your loans and credit cards on time, have never had a default notice issued to you and have generally run a clean financial life, the fact that you regularly pay your phone bill late can have an impact on the financial institutions’ view as to your credit worthiness.  The reporting will also be done when you are in dispute with (say) your telephone company – you’re late and they don’t care about the reason for you being late (even if it is not your fault).

It will come as no surprise that the legislation was largely driven by the banks and financial institutions.  They will be able to use the information obtained to offer a more detailed “risk rating” on everyone and this will in turn mean changes to the margins they charge on loans.  End result?  More revenue for them.  At a time when we need to get our economy going and encourage spending, this type of legislation will end up having the reverse effect.  Talk about the law of unintended consequences!

So, when you get your bills from now on, make sure you pay them on the due date – even if you are in dispute.  If you don’t you might just have a nasty shock coming next time you apply for credit!

Image credit: The Australian

On Why Accountants are Going to End Up Like Lawyers (…shudder)

For years I have had to put up with lawyers telling me how good we accountants have it compared to them.  “You get your clients coming back every year for their tax return – we don’t” is their chant and mantra.  They bemoan the fact that they are only needed when there is an “issue”.

Given what I see as coming up, they will lose their chant. 

It is becoming increasingly apparent that the world of tax returns and financial statements (or “compliance” as we know it) is going to change markedly in the years to come.  The timeframe over which it occurs could well be under three years.

What we are seeing is the development of software and IT “solutions” that effectively feed information straight from your customers’ records into the Tax Office.  This means that they will gather data on you more quickly and before any accountant (unless you have one doing all the entries) gets a look at it.  From where I sit, this poses a range of challenges to anyone and will create a highly targetted and focussed audit approach from the regulators.  When we consider the speed with which information can now be obtained on a business (daily bank feeds with automatically coded transactions), it isn’t that great a leap to have nearly everything automated.

So what does this mean for the classically-positioned compliance firm working around Australia?  It means that their service offering is going to be removed from them and they are going to have to find some new ways to service their customers.  It won’t be based around the “compliance factory” that has been a staple for years.  It will not be around the preparation and lodgement of financial statements as this will be largely automated and make the accountant/bookkeeper redundant.

The really sad thing is that, like most change, not many accountants that I have spoken to are aware of what’s coming.  They believe that things will just continue on their merry way.  They are also generally the ones who haven’t grasped the whole technology thing in any way and don’t “get” the Firm of the Future thinking with regard to their businesses.  This is sad.

Thinking about what will happen flowing from this is that a lot of the accounting firms will then start lowering their prices to try and attract more customers as their prices to their existing customers will drop markedly (especially where they bill by time).  This will place more pressure onto staff, more stress on their already overloaded systems and drive many to the brink.

Then have a think about those industries that have been established to “offshore” the processing – they will disappear too.  If there is no need for the work, it doesn’t matter where it gets done!  The flow-on from this for a number of these businesses will be significant.

However, there exists a terrific opportunity for those that do understand what is coming and make the changes necessary in their business to adapt to the new environment.  The old business models will disappear and the focus of the customers will be on engaging accountans who can add value and do not bill by the hour.  They will seek advisors rather than reporters.  They will seek a professional relationship with a trained and experienced expert with knowledge and training in the areas that matter.  I am afraid that someone who is really good at processing “I” Returns will be at a significant disadvantage in this new world.

So when my lawyer mates continue to gripe at me about how we have an “annuity stream” from tax work, I will gently remind them that this is coming to an end.  My concern is that it will take a lot of our accounting friends along for the journey.

On Money & the Euro

Received the following from Remo Greco at Canbrea & Co this morning.  Worth a read:

The Origins of Money, and Saving the Euro

It is really hard to see where the euro is going. Spanish yields are at record high levels, meaning Madrid’s debt looks less and less sustainable. Yet there is still no clear plan for the euro, new ideas seem to have run out, and there is a lack of progress on old ideas. What is going to happen?

One way to think about the euro’s future is to look at its past, and to go back to the origins of money. There are two leading schools of thought about this. The first was set out 120 years ago in a paper by Austrian economist Karl Menger. In Menger’s theory buyers and sellers agree on a common commodity to use as the medium of exchange. Something small, valuable and divisible is best. It helps if it doesn’t rot. Gold and spices are all good examples. This money is highly “saleable” so everyone accepts it, and this means that traders don’t face the costs associated with barter. There is no role for government here.

The second theory places great emphasis on the role of government, as Charles Goodhart explains in a 1998 paper. This group—the Cartalists, who Mr Goodhart refers to as the “C team”—argue that currencies become money due to the active involvement of the state. Examples include setting up a mint to produce coins, demanding taxes are paid in state money, and stamping notes with the head of state’s image. This C-theory has much stronger evidence based in anthropology and history.

Why is this relevant for the euro? Here is Mr Goodhart writing in 1998, on the eve of the euro project.

The key relationship in the C team model is the centrality of the link between political sovereignty and fiscal authority on the one hand and money creation, the mint and the central bank on the other. A key fact in the proposed Euro system is that the link is to be weakened to a degree rarely, if ever, known before. … There is to be an unprecedented divorce between the main monetary and fiscal authorities … the C team analysts worry whether the divorce may not have some unforeseen side effects.

 The logical conclusion from this is not a new idea: the euro area needs greater fiscal integration. But the reason is different. It is not because Greece and Spain spoiled a perfect plan with their profligacy. It is because the euro enshrines the divorce of fiscal and monetary power. If you are a member of Mr Goodhart’s C team this never made sense in the first place.

[Source: R.D., The Economist, July 25 2012]

Financial Education

One of the things that amazes me is that many people in business don’t really understand the “ins and outs” of a profit and loss or balance sheet.  And that is before we get to issues surrounding cashflow.

I’ve had some interesting meetings with people over the past week where it has become apparent that there is a significant lack of understanding of basic financial concepts.  Please be aware that I am not necessarily saying this is a bad thing – it’s more of an opportunity.

Where business people don’t appreciate the information that we provide to them, it is incumbent on us as accountants and advisors to help them to learn and provide them with a financial education.  I know of one accounting firm in the UK which provides an education process for their customers (and others) where they teach the basics of reading financial reports.  I believe there is a terrific opportunity for us accountants to provide this sort of service to business people – it will really assist them in making better business decisions.

A year or so ago I presented to a business group in Ballarat on the topic of business margins and mark-ups.  Many of the attendees did not understand the difference in the two and certainly did not appreciate the impact of discounts.  The feedback I received after this presentation was terrific.

As a consequence of this, and following from our strategic planning work, we’ve now appointed a firm to assist us in putting together some video presentations which we’ll post on youtube.  These will discuss the topics that business people need to know in simple and understandable ways which will help anyone wanting to develop their understanding of basic financial reporting.  In some ways it will be a community service – if we assist a number of business owners to make better business decisions then that will be a terrific outcome.

I’ll let you know when the posts are available on youtube – hopefully you will get something from them and I would appreciate any feedback you wish to give on the topics as presented.

What do you REALLY Want?

Well?  What DO you REALLYwant?  A lot of people out here in the real world have some vague concept as to what they want, but they never get any real clarity about it.  They pay lip service to goals and aspirations, but make no concrete plans to move themselves towards those goals.

In our meetings and discussions with businesses all around Australia, we find that a lot of businesses (and especially business owners) really have no idea as to what they’re wanting to do or achieve.  They get caught up in the day-to-day processes of running their business, family and life.  Their activities are all operational and none of them strategic and none of them actually propelling them to where they want to be.

This is a real tragedy as, with a few changes, they will be able to make a significant change to their lives by, firstly, getting clarity as to what they want.  This is often seen as a difficult and confronting process – but having been through it, I can attest to the fact that it’s absolutely liberating!

To really succeed, you need to be able to describe what success looks like.  Many people we talk to can’t even answer the simplest question “How much money do you want to earn?”  If they can’t answer this, they’re not going to be able to design their activities, let alone their business, to deliver what they’re wanting.

The clarifying of goals and aspirations is vital as, once they are clear in your mind, you will be able to design your approaches to create what you’re wanting.  In many respects it come down to whether you are at cause or at effect in your life.

Once you know what you really want, you’ll be at cause and you will start to behave and perform in ways that will deliver the results that you’re after.

The other side of this is that if you don’t do the planning etc, you will more than likely end up with what you DON’T want!

Generation Y, Timesheets and Climbing Trees

Much has been written and pontificated about regarding the entry of Gen Y into the workforce.  For those of us in the “professions”, this poses a real challenge.  These guys have grown up “connected” like no generation before them.  They are far more flexible and open to things than our generation and don’t necessrily do some of the “traditional” things well.  This is one of the reasons businesses such as Google do so well – they allow their people to have time to be creative and explore things.

One interesting thing about the Gen Y’s is that many of them have grown up playing computer games.  Whilst this might not have done much with regard to their ability to climb trees, it has taught them, from an early age, things like strategy and considered approaches.  Their modus operandi seems to be that they’ll source out the process to get to Level “x” on the internet and then start challenging themselves.  There is some thought that this may be an issue in that they haven’t learned the process themselves – I’m not sure whether this is the case – they have learned how to “short circuit” the approach.

Anyway, the issue then becomes one where they hit the workforce and some rusty old guy with grey hair tells them they have to account for every 6 minutes of the day and this will be the basis on which their performance will be assessed.  Given their more relaxed approach to things, this doesn’t sit well – they’ll be needing some flexibility to attend to their mobile phone, their facebook, their twitter and the various other social networking sites they inhabit.  An employer who tries to stifle this will face challenges.

I had an interesting experience with one of my young guys the other week – we visited a “traditional” accounting firm to do some due diligence work on a business one of our customers is looking at acquiring.  They had the timesheets and they had the workpaper files (about 6 inches thick).  He’d never seen this stuff (came to us from Uni) and could not get over the fact that people worked like this in todays’ environment.  Our discussions afterwards were quite enlightening!

I have found that Gen Y people are (usually) creative and flexible.  A timesheet will make sure that this creativity and flexibility gets killed stone dead in the name of “productivity”.  Removing the obligation for them to record their life in increments will create the opportunity for them to do what their computer games have trained their minds to do – learn, strategise and work out the best approach.  Isn’t this more useful and effective in a “professional” office enviroment than being able to climb a tree?