CASH FLOW MANAGEMENT A MAJOR CHALLENGE FOR SMALL BUSINESS OWNERS

One of the biggest challenges for those running a small business and who do not have a strong background in bookkeeping or accounting that they don’t understand the difference between cash flow and profit. Many promising sole trader businesses have run into trouble because the owners started using the business bank account as their personal ATM, falsely believing that the money left at the end of the month was profit they could use for their own pleasure.

Cash flow is just that – the flow of money coming into the business from revenue and going out to cover expenses. If this is not carefully managed, there may not be enough money available to pay business accounts as they become due. Regardless of how much profit the business is making, if there are no funds to pay the bills, suppliers may refuse to continue supplying essential stock to satisfy customers, and banks or lenders may withhold funds.

Careful management of the business finances is the best way to ensure this does not happen. To do this, owners must understand the variables that impact on cash flow. Customer and supplier terms, the timing of loan payments, future business decisions and many other factors affect cash flow, but by planning and monitoring it, owners can predict shortfalls and surpluses, and make financial decisions accordingly.

One way to do this is to prepare an annual cash flow forecast or statement wherein the owner estimates and records several important parameters. These include the total monthly cash inflow, the total monthly cash outflow, the net cash flow and the opening and closing balances. The cash inflow should include income such as sales, capital injections from borrowings or owner funds, interest revenue or any other sources. Cash outflow would include purchases, loan payments, supplies and expenses such as telephone, electricity, wages and the like.

Bearing in mind that this is only an estimate, the next step is to monitor the inflows and outflows monthly and compare them with the actual figures which, by now, should be available. If the business is not tracking as planned, then the figures need to be reviewed and adjusted throughout the year.

Management may need to look at their stock control to save money on storing and insuring stock they do not need. Careful management of debtors, following up on outstanding accounts and establishing a sound credit policy are all a necessary part of good business management that will support the cash flow forecast. A review of product pricing, improved customer service and a renewed marketing push are all ways to increase income. Reviewing overheads and looking for ways to reduce costs such as power and water bills will also improve cash flow.

The skills of an experienced accountant are often the best investment a business owner can make, especially if handling the financial side is a new experience. Many owners are juggling the demands of running a business as well as the management of their SMSF (self-managed superannuation fund). By using the services of a company such as SMSF Assure to assist with the administration of their SMSF, they will have more time to spend with their accountant on improving aspects of their business such as the cash flow.

Computer Technology Freeing Up the Talents of Accountants

There is no part of our economy or any sector of our society that has not been impacted by the extraordinary advances that have taken place in all areas of technology over the past 30 or so years. While some industries have all but disappeared along with thousands of jobs, new ones have emerged, creating employment opportunities and requiring a new generation of highly skilled workers.

An excellent example is that of a typical modern business office. The equipment, business management systems and even the layout bear no resemblance to the old-fashioned model of rows of desks with clerical staff bent over stacks of paper and typists pounding away on manual machines. Computer software can now process a weekly payroll for over 200 people with only one or two clerical staff checking the input, and then transferring their wages directly into nominated bank accounts.

The same advances in computer technology and business management systems have also changed not only the way accountants do their job, but also expanded their skills base. Before the office environment became computerised, much of the accounting work was performed manually. Eventually, hand-written journal entries were replaced by ledger machines, and then basic computers with limited processing power were introduced, followed in large companies by mainframe computers that took up an entire room.

The introduction of the personal desktop computer accompanied by word processing and accounting software liberated not only accountants but also administration staff from boring and laborious tasks. Instead of spending countless hours manually analysing computer printouts to produce monthly Income Statements and Balance Sheets, modern accountants can now generate reports weekly and even daily if required.

With the data entry performed daily by a suitably trained bookkeeper, accountants now can run reports on “what if” scenarios applicable to their business. This enables them to suggest possible new business opportunities to management, or conversely, to advise against a business direction under consideration that has a significant element of risk attached.

Some accountants have also become proficient at the administration of self-managed superannuation funds (SMSFs). Many business owners are setting up their own funds to accumulate wealth for their retirement and are finding that the reporting and compliance requirements so onerous that they are unable to concentrate fully on their business. Companies such as SMSF Assure are now offering their clients the services of a dedicated superannuation team, which includes qualified accountants.

Technology has also allowed accountants to spend more time on developing important decision-making tools such as cash flow projections, financial forecasting, monitoring and measurement processes and establishing clear and achievable financial targets. This is not only good for the business, but also for the ongoing personal development of the accounting staff.

Accountants are still completing tax returns, but these days, there are no multiple page forms. Rather, the information is lodged directly with the ATO via an electronic portal. No longer shackled to endless manual tasks, accountants are using today’s technology to widen their influence, offer high quality advice to their management team and expand their skill set by undertaking new and exciting areas of specialisation.

A Good Accountant Is More Than Just Having A Qualification

As any successful business owner will tell you, their accountant is just as much a part of their success as product quality, marketing plans, reliable supply chains, customer service standards, experienced staff and every other aspect of their business model.

Many people successfully complete accounting qualifications every year and start working in their profession. Most of them will perform the technical parts of their job quite professionally, but only some of them will have that extra something that makes them invaluable to their clients.

Apart from the relevant qualifications, what are those extra qualities that make an accountant an invaluable asset to their clients, and a source of wise and relevant counsel? Depending on whom you ask, there will be a range of attributes put forward, but many experts agree that empathy, perspective and dedication will be in the top five.

Some would disagree and ask what use empathy would be in a profession renowned for mathematical and financial precision. After all, the goal is to ensure that the accounting records of client businesses are accurate and reflect the true financial position of an entity at any point in time and to correctly report on taxation obligations.

The value of having an empathetic accountant lies in their ability to understand the challenges and responsibilities of running a business, in addition to their financial skills. An accountant who can mentally stand in the client’s shoes and see problems affecting the business with the same emotional attachment as the client, will likely offer different solutions from someone to whom the business is just another set of figures.

Perspective is another quality that elevates the role from just lodging tax and BAS returns to one of a trusted sounding board. As someone with a thorough knowledge of the inner workings of the business, the accountant with perspective will be called upon many times by the client to validate their business decisions or alternatively, to offer a different point of view.

Every vocation needs employees who undertake their work with dedication and the accounting vocation is no exception. All business owners expect that their accountant would practice the profession with diligence and dedication. The best way to demonstrate this to clients is through ongoing professional development. New technologies and constantly changing laws and taxation rulings are part of the finance industry. An accountant who keeps up to date adds additional value to a client’s business through this dedication.

These qualities are not just necessary for accountants with business clients. They also enhance the services provided by companies administering self-managed superannuation funds such as SMSF Assure. The superannuation industry is also undergoing rapid change, so these qualities will be important to clients relying on external assistance to manage their administration responsibilities.

The Tax Deductions Many Business Owners Miss

At this time of the year, every small business owner and sole trader should already be planning how to optimise their tax deductions to legally reduce their tax obligations. There is still three months to go before the end of the financial year, so now is the time to talk to their tax accountants and finalise any transactions that could save them money at tax time.

Businesses large enough to have an administration team to track and record expenses have a distinct advantage over the micro business or the sole trader in this regard. Sole traders are especially disadvantaged because they generally spend their day sourcing and performing work, then have the burden of using their nights and weekends to keep their tax records in order.

In this busy and pressurised environment, it is common for legitimate tax deductions to be missed and records mislaid, so when it comes time to complete their tax returns, often they are overpaying tax. Identifying and tracking these deductions is critical to saving them money, but some of them are often overlooked. Here are five of the most common examples.

Mixed-use Expenses

Most small business owners are familiar with tracking business expenses, but often, business and private expenses are part of the same transaction. These should also be tracked as the business component of the expense can be claimed as a tax deduction. Personal phones and the home internet, for example, can have both business and personal usage. Keep a diary that records times and how a call or internet search relates to the business so that it can be considered at tax time.

Deferring Income and Prepayments

These are two strategies that may suit some small business owners. If it is practical, delay issuing invoices until 1 July so that the income falls into the next financial year and not the current one. Conversely, pay some expenses early so they count in the current financial year, reducing this year’s taxable income. Other annual expenses, such as insurance, can be prepaid for the same result.

Claim All Advertising Expenses

Most business owners claim advertising expenses such as newspaper classifieds, adverts in community newspapers, production of flyers for letterbox distribution, etc. What they often forget about are the adverts they place on Facebook or Google to get traffic to their website. They may be small at the time, but over twelve months they add up and can be used to reduce taxable income.

Update a Vehicle

The Instant Asset Write-off is a great reason to update an ageing commercial vehicle, or to buy new tools, replace computer equipment or any other asset under $30 000, regardless of whether it is new or used.

Make a Superannuation Contribution

Business owners who have employees are required to make all superannuation payments on behalf of these employees to the relevant superannuation funds by 30 June, in order to qualify for a tax deduction in this financial year.

Many business owners also have their own SMSFs (self-managed superannuation funds) with their own responsibilities as trustees, including reporting annually to the ATO (Australian Taxation Office). This is an additional burden to running the daily operations of their businesses, so they often engage the services of a company such as SMSF Assure to handle the administration of their SMSF, allowing them to concentrate on their business.

Does Your SMSF Investment Strategy Include Insurance?

As we go through life in our modern world, many of us choose insurance to protect us from a range of common loss scenarios. Vehicle insurance protects us against claims for damage in the event of an accident, home and contents insurance assists us to replace stolen or damaged items, and income protection insurance assists if we are unable to work for extended periods of time.

These insurances provide us with the security that, if we have an unfortunate accident or occurrence, our insurer will hopefully recompense us for some or all of our losses. We also need to consider what will happen to us if we are sick or injured and incur both hospital and medical expenses.

In Australia we have access to both universal health insurance and private health insurance. Most of us have one or the other, and many of us have both. Since 1984, Medicare has been the foundation of our health care system and is available to Australian and New Zealand citizens, permanent residents, and people from countries with reciprocal agreements.

The three major parts to Medicare are medical services, hospitals and medicines. It covers the cost of public hospital services should you need them, and some or all the costs of other services such as visits to GPs and other medical specialists. It also covers prescription medicines, which are available to Medicare recipients at much reduced prices under the Pharmaceutical Benefits Scheme.

Medicare is partly funded by a 2% levy on taxpayers (with exceptions for low-income earners) and further funding by the federal government from general revenue. People can also choose to take out additional private health insurance, which gives them access to private hospital services and a range of ancillary services not covered by Medicare.

As a result, Australians enjoy some of the best medical services in the world. The introduction of this scheme gave many Australians access to services they previously could not afford, and as a result, we now recognise the importance of health insurance as part of a modern and fair society.

Insurance is also an important consideration for trustees of SMSFs (self-managed superannuation funds. Once the SMSF has been established with the ATO (Australian Taxation Office), the trustees must by law finalise an investment strategy with a financial advisor. This includes consideration of the insurance needs of the members. Finalising an investment strategy is not the same process as engaging a company such as SMSF Assure to undertake all the administration and reporting requirements of the SMSF.

The ATO advises that an SMSF can provide insurance for members for an event that is consistent with several conditions of release of the member’s superannuation. These are death, a terminal medical condition, permanent incapacity and temporary incapacity. SMSFs generally cannot provide trauma insurance for their members. These events are not the same as universal or private health insurance but may be equally as important to the SMSF fund members.