With the 2014 year now in full swing we look at some important business and wealth strategies that business owners should implement to improve their overall financial health.
Strategy 1 – Profit and loss & cash flow budgeting
Business owners should prepare monthly profit and loss budgets for at least a 12-month period and more importantly to assess the impact that these projections have on the future cash flow of the business. Budgets should be compared to actual results and variances acted upon on a timely basis.
For more accurate reporting, particularly in respect of manufacturers, wholesalers and retailers, it is preferable that the profit and loss and cash flow budgets are linked and have a number of in-built features including:
- The profit and loss budget should have columns that separate income and expenses that include GST or have no GST. Note the amounts in the profit and loss budget are recorded on a GST-exclusive basis, whereas on the cash flow budget, they appear on a GST-inclusive basis.
- The cash flow budget should automatically calculate GST owed to the ATO depending on whether the business is using either monthly or quarterly GST reporting and whether GST is paid on either a cash or accruals basis.
- It is common for operating expenses on the profit and loss budget to be amortised evenly during the 12-month period and the cash flow budget records these payments on either a monthly or quarterly basis. For example rates and taxes, insurance, light and power, and fringe benefits tax are usually paid quarterly, whilst all other operating expenses are usually paid monthly.
- By entering an interest rate, the profit and loss budget should have the facility to calculate interest paid each month on the overdraft, or interest received where the account is in credit at the end of the month.
- Opening balances (for example, bank overdraft/credit balance, GST liability/refund, debtors and creditors) need to be recorded on the cash flow budget.
- The collection and payment percentage rates for debtors and creditors (for example, current, 30 days, etc.) should be recorded to better reflect the impact of sales and purchases on the cash flow budget.
The cash flow budget should include common items such as PAYG instalments/income tax, loan repayments, plant & equipment purchases, dividends, and loans made to the business.
Strategy 2 – Managing business risk
Monitoring business performance and understanding the areas of risk faced by the business can help to avoid future financial problems. Examples include:
- Regular financial reporting and timely knowledge of business performance allows decisions to be made from an informed position, with monthly comparisons to budget and exception reporting ensuring that problems are identified and acted upon quickly.
- Establish key performance indicators (KPIs) for the business and monitor them regularly. These include gross profit margin, debtors turnover, stock turnover, average mark-up, average monthly breakeven sales & return on investment.
- Developing and reviewing the business plan. Developing a business plan that supports a vision of where the business is heading and helps it get there is a critical tool. All business decisions can then be made within the context of the plan to ensure that resources are not wasted on areas that don’t add to the overall direction of the business. Note that business plans are never static and need to be constantly revised in light of new information and circumstances.
- Planning for growth. When planning for growth businesses should anticipate the resources that growth will require. This goes beyond budgeting for extra sales staff. Matters that should be considered including impact on working capital, premises requirements, management time required and systems capacity.
- Succession & estate planning. Business owners should also have a formal plan that deals with the transfer of the business upon the owner’s retirement, permanent incapacity, or death. This should cover issues such as the proposed method of structuring and financing the planned succession (i.e. having a buy/sell agreement with shareholders/partners which includes appropriate life insurance policies), taxation implications, timing for the transfer of ownership and management roles of family members.
Other areas of risk that need to be constantly addressed include relying too heavily on one or a small number of major customers, relying too heavily on one supplier, and protecting the goodwill and intellectual property by entering into agreements with employees that include job descriptions.
The business also needs to implement processes with adequate segregation of duties to minimise the risk of employee fraud.
Strategy 3 – Reviewing investment portfolios
It’s a good idea to regularly review the performance of assets held both personally and in your superannuation fund.
Due to the global financial crisis, many people continue to invest in the safety of cash and term deposits, but with interest rates now at historic lows, this approach is less likely to suit long term goals. Consider talking to a financial advisor about rebalancing back into other asset classes which have the potential for growth.
Strategy 4 – Planning and monitoring super contributions
Individuals should be planning to maximise the annual “concessional” (tax deductible) and “non-concessional” (undeducted or after-tax) contributions to superannuation for the year ending 30 June 2014.
In addition to planning to maximise super contributions, individuals should also be reviewing and monitoring superannuation contributions made personally or by their employer (e.g. as salary sacrifice) on an on-going basis to ensure that they do not exceed the relevant contributions cap. Excess contributions are a major focal point of current ATO compliance.
For the year ending 30 June 2014 the maximum amounts that can be contributed to superannuation for a person is summarised below:
(i) Concessional contributions (tax deductible)
- Individuals aged 60 and over on 30 June 2014 are subject to a $35,000 contribution limit
- Individuals aged under 60 on 30 June 2014 are subject to a $25,000 contribution limit
Note that employer super guarantee contributions are included in these concessional contributions caps.
(ii) Non-concessional contributions (undeducted)
For the 2013/14 year, the maximum after-tax contributions that can be made by an individual to a superannuation fund is limited to $150,000 per annum.
Where an individual is under the age of 65 on 1 July 2013, there is a 3 year averaging rule whereby the individual will be able to utilise the $150,000 cap for the current year and for the next two income years. This means that the individual can in effect contribute a maximum of $450,000 as an undeducted contribution during the income year and the subsequent two income years. The $450,000 limit is automatically triggered in an income year where the individual makes an after-tax contribution in excess of $150,000
Work test
The work test needs to be satisfied once an individual reaches the age of 65 before concessional or non-concessional contributions can be made. This requires the person to be gainfully employed for at least 40 hours during a consecutive 30 day period each financial year. Unpaid work does not meet the definition of gainfully employed.
Strategy 5 – Consider setting up a self-managed super fund
Running a self- managed superannuation fund (SMSF) is becoming a popular wealth accumulation and asset protection vehicle for business owners, investors and high net worth individuals. However, there are many rules and pitfalls involved in establishing and running a SMSF which need to be considered on an on-going basis.
Strategy 6 – Paying super guarantee contributions to a MySuper account
From January 1 2014, super guarantee contributions for employees who have not nominated a super fund are required to be paid to a fund with an authorised MySuper account. MySuper accounts are simple and cost effective products that ensure members do not pay for any unnecessary features they do not need or use.
Business owners need to ensure that the default fund they are now using for effected employees provides a MySuper product.
Strategy 7 – Reviewing personal & business debt
Consider whether personal debt is “good” or “bad” debt and if bad, take steps to eliminate it. Bad debt is any debt that continually finances lifestyle or consumables and is not repaid promptly, particularly if the interest rate is in double figures such as for credit cards.
Good debt is used to produce income or to accumulate investment assets quicker. Usually such debt has the added benefit of the interest being tax deductible.
A good new year’s strategy is to rid of bad credit card debt, ideally by budgeting to repay it as soon as possible.
Avoid adding short-term debt incurred by spending on consumables to a long-term mortgage. Redraws on home loans should not be used as a solution to over-spending.
Business owners should also be regularly reviewing and comparing their financing to ensure that it is appropriate and that the current financier remains competitive.
Strategy 8 – Reviewing personal & business insurances
Where appropriate, individuals should have the right level of life insurance, income protection insurance, and trauma or disability insurance in order to protect your loved ones if anything happens. It is worthwhile reviewing your insurance arrangements every few years to take account of changed circumstances.
It’s usually more tax effective to have life and disability insurance paid by your superannuation fund.
Business owners need to also ensure that they have adequate insurance to cover events such as loss of profits, fire, theft and breakage, claims against faulty products and claims made against professionals for particular advice or services provided.
Strategy 9 – Estate planning
With Australians having more savings in superannuation and owning other assets, an up-to-date Will is very important. As well, a Will should be updated when there is a change in personal circumstances (e.g. divorce, the birth of a child or entering into a new relationship).
The consequences of dying intestate (i.e. without a Will) is that your assets may not be distributed to the people you want them to go to and also cause unpleasantness for the people left behind.
It’s important to note that superannuation does not automatically form part of an estate and it may be possible to allocate this to specific people by way of a binding death benefit nomination.
Strategy 10 – Seek professional help
It is very important that you consult with your accountant or financial advisor prior to making any important business or investment decisions. The benefits of obtaining such advice will usually far outweigh any cost.
