How to Strengthen your Business Bank Balance

/in , /by

Capital is the magic ingredient in helping to expand of your business.

“Cash flow” involves deferring outgoing expenses long enough to ensure your business has sufficient incoming revenue to pay for overhead costs and leave a small amount for profit. There are times discovering the right balance between “cash in” and “cash out” seems like rushing to find that famed pot of gold at the end of a rainbow – in other words, a challenge.

Profit will strengthen your capital, which you can spend to expand your business. It’s so easy in principle, but in reality a number of businesses have to deliver their services first for a time before they register any income.

So, follow these three tips to help strengthen your cash flow – to provide your business the cash and stability to expand:

1. Receive payment faster.

You have to fix it if you are not sending out invoices promptly. Think about this: each minute that passes by when an invoice is not being sent out to your customer your business is losing money. Get your invoice process in order to build up your business bank balance.

Send out invoices promptly and convert orders/quotes into invoices with a click of a button through online accounting software, or an integrated business management solution. Also, make it easy for you to see customers who owe you and the date it was owed with dashboards that display aged debts.

2. Minimise stock levels.

A business is losing money from stocks that remain in storage. Stocks are a necessary expense for businesses that are into selling products. However, it is hard to find the right spot between too little and too much stock. You need the right inventory system to hit this right spot.

You can improve your purchasing decisions with simple things such as establishing minimum/maximum inventory levels and instant re-ordering, being aware of what sales are incoming, knowing what trends or seasonality changes you need to watch out for or checking the newest exchange rates.

Visibility over stock is a major problem. You can automate your re-ordering and make sure stock is always available by switching to an integrated business solution. This will grant you access to money that you can invest back into the business.

3. Cut down on costs and overheads.

Bringing in more cash and spending less cash is the most straightforward way to strengthen your bank balance. A great way to check the improvement in your profit equation is by cutting down on operating costs and overheads.

Here are tips to reduce your overhead and operating costs:

  • Outsourcing: This is a good way to curb costs either while expanding or when you have to trim down some overheads. IT and administration work are two areas that can be outsourced.
  • Suppliers: Think about choosing one supplier if you are presently ordering stock from several suppliers. Fixed costs and higher volumes will be a great help to suppliers, while your business can gain from reduced costs and ease of managing relationships.
  • Budgeting and forecasting: Be aware of your bills and check your important figures regularly to allow you to identify trends, opportunities or risks. Be practical about expenditures, set aside the right resources to projects, track performance, reinforce decision making, spot problems before they arise, and reach your targets.
  • Systems: Utilising a business management solution frequently delivers calculated cost savings from improved transparency, trimmed down administration time, improved time billing, savings from stock management upgrades, etc.

You can improve your business bank balance in many ways. You can implement some directly, but others need the use of software or a process shift. Your skill in increasing your cash on hand to aid expansion is what single out your business from its competitors.

Do you need advice and guidance to improve your business and take it to the next level? PJS Accountants work to understand your business and its inner workings and how it can compete effectively in the present business environment. From this knowledge, we can come up with a custom plan to implement your business strategies and methodologies, boost profit and increase market shares. Visit one of our specialist advisors or contact PJS Accountants.

4 Tips to Prevent Fraud in Small Businesses

/in /by

Access to capital is one of the major troubles faced by small businesses. Thus, illegal activities such as fraud or theft can harm a small business in an instant.

Here’s a true to life experience involving Ken, an owner of a construction crane rental business. He was passionate about cranes, but was not too confident with numbers. So, the office is being managed just by him and a bookkeeper.

For roughly 15 years, Ken had his bookkeeper handle all of his business’s finances, including bills, bank reconciliations, payroll and corporate credit card. It was only after she left when it was found out that she had been committing fraud, causing the company to lose money amounting well into the $100,000 range.

It was discovered by the accounting company that the bookkeeper hired by Ken was withholding taxes from employees’ wages but was not remitting the payments to the government, and she was using Ken’s credit card for personal use. The accounting firm was able to put Ken’s business back on track financially, but it still ended up losing a considerable amount of money.

Small businesses can learn some important lessons from Ken’s experience to help strengthen their financial security.

1. Don’t let a single person handle all your finances.

Business owners must pay attention to receipts and expenditures that go in and out of your bank account regularly. It may be hard for you to find the time, or you may not find it easy to understand what certain taxes and payments are all about. So, hire a third-party accountant to go over your books on a regular basis. You can find progressive accountants that charge fixed fees at reasonable rates. With Ken’s company, had an accountant came in earlier and went over the bookkeeper’s work, the financial losses could have been minimised. If the expense for hiring an accountant were a worry, he would have ultimately recovered that money many times over.

2. Utilise a good payroll system.

Payroll is daunting and complex. But you can choose from many payroll solutions to make the process easier. Some are less expensive than others. Ken’s business became vulnerable when he let his bookkeeper to manually compute tax filings and wages.

3. Build a great team around you.

Ken believes he could run the business all by himself. He turned out to be wrong, so he paid dearly for that wrong assumption. The most resilient business owners are those who surround themselves with a great team of advisors, mentors and confidants who know how to be accountable for their actions. Your success as a business owner is guaranteed with this improved visibility, combined with your team’s diverse and unbiased viewpoint.

4. Safeguarding the weakness whilst maintaining the strengths.

Though they may differ on several points, professional investors will concur that it is crucial to establish a strategy that safeguards your weakness risks. Small business owners are investors in their business and strive to secure new clients, profits and sales. When that capital is recorded in your business, hold on to it. Have adequate insurance, inventory checks and other safeguarding measures in place so that there is cash on hand in the business becomes a victim of fraud, theft, catastrophic events or natural disasters.

If you are looking for a partner to help you run your business and protect your business from fraud, consider working with PJS Accountants. We offer a full range of services, including tax planning and compliance, accounting and SMSF services, estate planning, succession planning, and bookkeeping. For enquiries, contact PJS Accountants.

A Guide to a Successful Business Planning

/in /by

Are you one of those people who spend more time planning their holiday than they do their business?

Employers often pay more attention on matters such as running a tight ship, instead of focusing on finding and investing on the right resources to expand the business. It’s acceptable, and likely helpful in the short term, but it’s not good in the long term. Business owners become too busy that they neglect to plan.

The result is that business owners don’t have the time anymore to conduct regular or management meetings, and it is often that you will find a small or medium sized company that is dedicated to holding yearly planning meetings for the coming year.

Follow these four simple steps for planning sessions in your business:

1. Establish profit growth potential.

As part of letting a client participate in a planning session and setting and bolstering targets, showcase the profit growth potential in the company by evaluating what-if situations based on adjusting the major drivers of profit, revenue and cash. It is important that your accountant participate in this activity.

2. Deliberate various financial situations.

There are three scenarios you can discuss: Low Growth, Medium Growth and High Growth. The financial consultant and business owner should work together to establish the scenario that the owner is most at ease (the scenario should be both attainable and stretching), and then focus on that scenario.

3. Deliberate major points that is pertinent to the chosen scenario.

Before the planning meeting, the financial consultant should ask the business owner a series of questions that would make the owner think about their performance in various parts of the business. During the planning session, discuss the answers and focus specifically to matters that have to be dealt with to make sure the chosen financial scenario has the greatest probability of being realised.

4. Create an action plan.

A ream of flipchart paper is your most essential tool in the planning session. This item will be continuously utilised the entire day. Every idea that is brought up should be captured on the flipchart paper. By the conclusion of the session, you should all the papers plastered on the wall. Throughout the day, you can turn to past issues and recap what you thought was crucial. An action plan will emerge out of this.

Relevance is the key to an effective action plan. You should be able to see an obvious connection between the things on the action plan and the realisation of the objectives that have been established. Long and waffly are trumped by short and concise always.

As you look at the soundness of a proposed item on your action plan, you should think about the reason why a particular action item has been proposed. What further benefits are there for implementing it? What particular goal does the action plan is designed for?

It is recommended that only a few items be entered on the action plan because it has been proven that implementation is greater and much more focused.

Using the flipchart paper on the walls as your guide, create a clear action plan at the end of your planning session. Here are tips on how to do it:

  • Look at the first flipchart paper. (Don’t forget to number your flipchart papers so that it would be easy to summarise then.) Don’t spend too long recapping the discussion that you had that resulted in the items on the flipchart paper.
  • Check each item. Cross off all duplicates. If a number of items can be grouped together, categorise them as one item on your action plan.
  • Go to the second item and repeat the steps. Go through all the pieces of flipchart paper from 1 to last.
  • Jot down the three major projects that you have promised to put into action in the next 90 days. Put a lot of thought into these projects.

Make sure your projects can hold out against the following questions by double checking each of them:

  • With regards to your chosen financial scenario, which part of the business is this designed for? (For instance, improving margins, expanding the number of customers, improving average transaction price, and more)
  • State the reason why the project is crucial. (Identify the crucial success element that needs attention.)
  • Who will be responsible for implementing the project?
  • What is the date of implementation?
  • What targets will be reached upon implementation of the project?
  • How will the project’s progress and results be measured?

When you follow these steps, it is important to go back to the plan every 90 days to make sure the projects are being put into action and that you are making headway in your chosen financial scenario and that proper accountability has been assigned to guarantee project delivery. Take note that your hands-on accountant can make a vital contribution in this process.

Avoid expending too much attention on what your business does. Being the owner, it is essential for you to take yourself out of the workings of your business at least every quarter and focus on mapping out the future of your business and your personal situation.

Contact PJS Accountants to help you plan growth and development of your business. We provide a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have spent more than 30 years dealing with local businesses in Capalaba, Cleveland and the Redlands. Our team is always available to take your call and assist you in whatever business needs.

The New Employer’s Guide to Superannuation

/in /by

It’s not easy to start a new business. What is even harder is learning all the legal requirements, not to mention an employer’s responsibilities with regards to salaries, benefits, and superannuation, which is one of major payments for employees.

New employers may find it difficult to understand superannuation. However, it is quite simple; all you need to do is understand some core concepts:

Keep comprehensive records

Your records need to include the name of the super funds where your super contributions are being sent, how much you are paying for each fund, the date of payment, and the period covered by the payment.

In case a worker’s employment contract is terminated, the records must detail the manner by which the termination was executed, whether by consent, by notice, etc.

Picking the super fund

Do employees have to right to pick their super fund? Employees are not permitted to pick their own under some awards and agreements.

Employees who want to pick their own fund must be provided by a standard choice form by their employers. The ATO website offers more information about standard choice forms.

SuperStream it!

Beginning 1 July 2015, a new standard called SuperStream will become mandatory for employers. It simplifies the process of reporting superannuation contributions to the government, as well as saves a lot of time for employers.

The Superannuation rate

There have been quite a few changes in the superannuation rate over the last several years. But here are the important numbers:

  • 1 July 2015: 9.5%
  • 1 July 2021: 10%
  • 1 July 2023: 11%
  • 1 July 2024: 11.5%
  • 1 July 2025: 12%

Payment Dates

Contributions are paid to employers every quarter. Each quarterly period has its corresponding due date. Here they are:

  • Quarter 1, 1 July – 30 September: Due 28 October
  • Quarter 2, 1 October – 31 December: Due 28 January
  • Quarter 3, 1 January – 31 March: Due 28 April
  • Quarter 4, 1 April – 30 June: Due 28 July

Make sure your business is always updated with tax changes, including the new SuperStream system, by subscribing or upgrading to MYOB software.

If you are just starting a business and know little about superannuation, meet with one of our experts who can guide you through the process. If you want to know more about super and your obligations as an employer, contact PJS Accountants.

Planning your Retirement

/in /by

It is essential to be ready as much as possible if you are about to embark on a major lifestyle change like retirement. Here are four tips to help you find the plan that you need for your retirement:

1. Plan on how you will remain healthy.

You have to be healthy so that you can enjoy your retirement. Create a plan for how you will remain in the peak of health, at present and in the years ahead. This could include seeking locations that are ideal for walks or jogging, or participating in some type of organised sports club. For your exercise to be effective, you have to find good routines and stick to them. Instead of squeezing your exercise sessions during your free time, it’s good to plan your entire week, allotting a special time to go walking in the park.

2. Settle all your legal issues.

You should be enjoying life and suffering as little stress as possible when you are retired. Find a reputable lawyer to handle all your important legal matters, thus allowing you to fully enjoy your retirement years. Choose a lawyer who is skilled in assisting retirees and who will give you a clear plan for what you have to do to ensure your family is taken care of. You may have a hard time understanding the law, so having the assistance the assistance of a lawyer can greatly ease your mind.

3. Assess your lifestyle.

Take stock of your home with a critical eye so you can see the things that you don’t use anymore. Your emotions can get in the way while you do this, but clearing out your junk will make you feel better. You can earn extra cash from selling unwanted belongings, and you can have a better appreciation of the things you really love without so many junk cluttering your home.

4. Discover hobbies to occupy your time.

Instead of spending most of your time parked in front of the television, keep your concentration and memory healthy by discovering a new craft or hobby that you enjoy. This activity could be as difficult as keeping a personal journal, or as easy as water colouring. The essential thing is that you are spending your time honing your creativity and using your mind to acquire a new skill. You may even turn this hobby into a little business, depending on how proficient you become. One way or the other, your time is spent enjoying and keeping active.

It is not too early to start planning your retirement. Consult with financial advisors on how you can best enjoy your retirement years. One of PJS Accountants’ areas of specialty is estate planning. We are experts in customising estate-planning solutions to meet your special family situation. It is our aim to protect your wealth and assets. We also offer other services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, and bookkeeping. Contact PJS Accountants for enquiries.

What Do Accountants Do and When Do you Hire One?

/in , /by

Accountants are not just simply number crunchers; they can also provide critical information to help employers manage and oversee various areas of their business, as well as the financial aspect.

What are the tasks and responsibilities of Compliance Accountants, Financial Accountants, Taxation Accountants, Strategic Accountants and Management Accountants? Do they have similar jobs? Which of these types of accountants do I need?

Nowadays, you will find several specialised areas of accountants and accountants that provide a wide range of services. It is no longer just compliance, customers want more and nothing is wrong with that.

So, what things should I consider when choosing the right accountant for me and my business?

Well, choosing an accountant is like choosing a doctor; you must be comfortable with the person you would be dealing with. And the same as the case with doctors, you sometimes have this desire to seek another opinion, and that’s alright.

Meet with your prospective accountant and ask some important questions. What are the services they offer; are they personalised? Are they offering great value for your money? Do they specialise in a particular area?

Take a look at what your business needs and what you want in terms of accounting solutions. Some clients are content with no-frills packages, others would only go for an accountant that offers all the works.

Contact PJS Accountants to determine what you and your business needs. We offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have over 30 years’ experience with local businesses in Capalaba, Cleveland and the Redlands. Our team will be at your disposal, ready for your call to assist you to stay in charge of all aspects of your business.

Leadership: How to Get the Best out of your People – Part 4

/in /by

The last article tackled the three major leadership behaviours namely: competence, emotional maturity and leading change.

A very big Australian company where I worked for 10 years got new experienced General Manager on board. Sadly, he doesn’t have emotional maturity and is incapable of drawing in the hearts and minds of the staff concerning change. As a result, many employees, including myself, bugged out quite fast. It shows the value of being effective in not just some of the key leadership behaviours but in all 12 of them, as it is essential to maintain to retain key employees.

10. Sharing the Pathway

In the dark is where seeds germinate, but sunlight is vital for crops to grow and yield. It is the same for employees. Keeping them in the dark won’t allow you to get the best out of them. Feeling wanted and connected is innate in people, because they want to know how their everyday tasks and contributions are helping in making the future better. They feel connected this way, and lack of this connection will discourage them to come to work with a genuine desire in helping the business flourish.

The General Manager who was replaced by the new one mentioned above utilised a very basic but very effective approach to involve the 240 people under him. He would conduct several “pathway” presentations across the country every quarter. The “pathway” comprises a three-year diagrammatic path towards a bright future, and other key goals such as revenue, profit, market share, return on net assets, and employee numbers. Down the path you will find diagrammatic representations of major strategies; new factories, new listings for current products, new product launches, new marketing drives, adjustments to the sales channel structure, major employee events, and recommended new vendors. In addition, the company results for the earlier quarter would be shared by the old General Manager.

At the end of one of his meetings, we would step out thinking about novel strategies to beat the competition! That’s how motivating it was. “Be number one but always act like you’re number two” was his call to action at the conclusion of every meeting.

It’s your decision how much information you want to share with your people, but it is important that you share.

11. People Development

“It’s better to train your people and have then eventually leave, than not train them and have them stay,” a wise man once said. Or, these wise words from Richard Branson, “train your people well enough so they can leave, treat them well enough so they don’t want to.”

Have you heard of Abraham Maslow’s 1954 theory of “Hierarchy of Needs?” If you have, you know that self-actualisation is at the topmost level, followed by esteem. Maslow was a psychologist who lived in the 1900s and who spent his life studying positive human characteristics and the lives of great individuals. The need to reach one’s full potential is self-actualisation. The need to feel a sense of accomplishment is esteem.

We don’t know these two needs are on the list of some of the people we come across on the streets. But we do know that they sit high for the kind of team member we wish to work for us. What it means is that investing in the growth of your model employees is important because these people want to learn and expand their skills and knowledge. They want to feel a sense of achievement and accomplishment. If you fail to provide them opportunities for growth, these people are likely to leave your team at some point.

You are responsible, as their leader, to promote the growth of your people. It is easy to ignore this, but don’t forget that they represent your competitive edge. There’s no reason for you not to invest in sustainability.

There are many ways to develop your people. Some of these include efficiency training, product training, performance feedback and coaching, leadership training and mentoring, and competency or skill training. Identify the development they need by identifying gaps in your business.

For employees in a managerial position, provide them with leadership training. Model employees depart due to a lack of relationship with their team leader or manager.

Succession planning for vital roles is the other critical element of people development. You can see this happening in a business where things are getting along smoothly, then someone in an important job suddenly leaves and everything goes chaotic because no one is ready to assume the vacated position. Leaders must think ahead; assign individuals for critical role succession and support their growth. If you can’t do this due to your business size or structure, put in effect a really effective hiring process.

This is probably not new to you: “Your people are your greatest assets.” It is true.

12. Moral Courage

For some people, “moral courage” may be a way of being or personality trait, instead of a behaviour. But it has been include as a key leadership behaviours because it is vital for leaders to display this in all things they do. This has been put last because it is the behaviour that strengthen all the other behaviours.

Leaders have to be strong and on occasion, assertive, and courage is needed for this. Leaders have to make difficult and on occasion, very unpopular decisions, and courage is needed for this. Leaders have to convey unambiguous expectations and make people responsible, and courage is needed for this. Leaders have to build the right culture and possess great emotional maturity, and courage is needed for this. Leaders have to establish a direction and push for change and action, and courage is needed for this. Do you get the picture now?

You fail as a leader when you don’t possess moral courage. Being morally courageous means you will do what you think is right while keeping your values, without thinking of the consequences for yourself. When you possess moral courage, you will look towards the future with a strong determination to succeed. When you have moral courage, you will be calm in the face of pressure, allowing you to look through the smoke, thus allowing you to keep your attention on your core business.

Trust in your ability and be strong.

To conclude this four part leadership article, don’t forget that effective leadership mainly involves having confidence and trusting yourself to be and act as a good leader. Just like many things in our life, it takes practice and dedication to be good at whatever you do. Don’t expect to succeed overnight. You will become a better leader by striving to possess the 12 leadership behaviours and having a way to regularly self-evaluate your leadership.

In today’s economic climate, running a business can be difficult. Competition has become fiercer and finding the right staff and managers is not as easy as it seems. Businesses also have to deal with compliance of various government and regulatory requirements. PJS Accountants can assist you in dealing with accounting compliance and strategic planning challenges. We have has over 30 years’ experience with local businesses in Capalaba, Cleveland and the Redlands. Our team will be at your disposal, ready for your call to assist you to stay in charge of all aspects of your business. Contact PJS Accountants for enquiries on how we can help you improve your business.

The Tax Issues Experienced by a Unit Trust as a Property Investment Medium

/in /by

This article was originally written by Eddie Chung in a blog post titled:  The Tax Issues Experienced by a Unit Trust as a Property Investment Medium

 

Unit trusts have been popular property investment channels for a long time, particularly if several owners are participating. Much like shareholders owning stocks in a business, unit holders can indirectly own their proportionate shares in an underlying property managed by a unit trust, which is a fairly easy concept to understand, though companies and unit trusts are basically different according to the law.

Tax breaks of unit trusts as property investment channels

In terms of investment property ownership, unit trusts are generally favoured over companies as they can pass on whatever net cash profit from the property that embodies non-cash depreciation and capital works deductions to the unit owners. These cash distributions, or “non-assessable amounts,” generated by a unit trust will normally lower the units’ cost base and do not bring about instant tax implications.

But in the case where the cumulative non-assessable sums surpass the units’ overall cost base, any surplus will generate a taxable capital gain. As long as the underlying units have been owned by the unit holder for a minimum of 12 months and the unit holder is either a trust or an individual, the capital gain will be split under the 50% capital gains tax (CGT) discount (unit holders who are a complying superannuation fund are entitled to a 33.33% CGT discount).

In comparison, if a company made this type of distribution to a share owner, it will be typically considered as an assessable dividend straight away, which may result in an immediate tax liability.

Unit trusts are also preferred over companies when a capital gain is generated as a result of selling the investment property. As long as the property has been owned for no less than 12 months, whatever capital gain made by the unit trust will be covered by a 50% CGT discount. For example if the unit holder that gets the capital gain is paying tax at a marginal tax rate of 49% including the temporary Budget Repair levy and the Medicare levy. The discount capital gain’s effective tax rate will be 49% x 50% = 24.5%.

On the other hand, if a company made the capital gain, there is no CGT discount and a 30% tax will be levied on the capital gain. In the case of a divided ascribed to the capital gain being issued to an individual shareholder who is paying tax of 49% (the highest tax rate) as a franked dividend, the capital gain would have an effective tax rate of 49% after the individual shareholder has used the franking credits.

With these dissimilarities in tax application, it’s easy to appreciate the reason for unit trusts being generally favoured as property investment channels over companies. With that said, taxation is not the only factor that you should take into accounting when you make any structuring decision. For example, you have to consider that the treatment of stamp duty relating to the allocation of shares and units may be considerably dissimilar, depending on the area where the dutiable transaction took place.

Tax issues encountered by unit trusts as property investment channels

There are some less well known technical tax issues with regards to utilising unit trusts as property investment channels that property investors are unaware of. There may be far reaching tax implications with some of these problems.

Possible double taxation

Double taxation may inadvertently occur because the existing tax regulations include a cost base reduction system called “CGT event E4” and a “capital works deduction drawback.”

Imagine an innocent scenario where a single unit owner of a unit trust makes a contribution of $1M to purchase units in the trust. Subsequently, the unit uses the money to buy an investment property.

Ignoring other rental expenditures and income, let’s say the unit trust claims $5k in capital works deduction during the first year and issues the cash attributable to the deduction to the unit owner as a non-assessable sum (since the deduction isn’t a cash expenditure and the trust’s income covered by the deduction is not exempt from the trust’s assessable income but is issued to the unit owner) – the non-assessable sum will activate the “CGT event E4,” which will entail the tax cost base of the units maintained by the unit holder to be trimmed down to $1M – $5k = $995k. As stated above, the cost base reduction alone does not activate a tax liability directly.

If the property is sold by the trust at year’s end for $1.2 M, for example, the assessable capital gain earned by the trust, disregarding the impact of the 50% CGT discount to make things simple, is computed as:

Capital proceeds $1.2M
Original cost of property $1M
Less: Cumulative non-assessable amounts clawbacks ($5K) ($905K)
Taxable capital gain $205K

The unit holder will receive the $205 as a taxable capital gain, although the cash attributable to the capital gain issued to the unit holder is just $200k since the capital works deduction clawback amounting to $5k is just a tax correction.

When the time comes that the units held by the unit holder are either cancelled or claimed, the capital proceeds on the sale of the units will remain at $1M, although the units have a cost base of $995K because of the past activation of CGT event E4. Thus, a taxable capital gain of $1M – $995K = $5K will be made to the unit holder as a result of the sale of the property.

Combining all the elements above together, the following is the economic benefit that is due to the unit holder:

Non-assessable amount sheltered from tax $5K
Actual capital gain in cash1 ­­­$200K
Total overall economic benefit $205K

But the taxable amount all in all for the unit holder is:

Taxable capital gain distributed by trust $205K
Taxable capital gain on disposal of units $5K
Total capital gain that is taxable $210K

This means the capital works deduction of $5K underwent double taxation!
The double taxation problem was discovered a long time ago, but it still happens today, and investors either don’t know about it or just consider it a trade-off for doing business.

Probability of not recouping tax losses

A more major concern in using unit trusts as property investment channels is the technical problem that relates to the possibility of transforming any unit trust into a “fixed trust” in Australia. There are many taxation policies that may be impacted by the matter of “fixed trust.” One of these is trust loss policies, which cover the capability of a unit trust to recover carried forward tax losses.

To put it simply, the trust loss policies, in general, allow fixed trusts to recover tax losses provided most of the unit holders of the applicable trust remain the owners of the units of the trust from the time the tax losses were acquired. Thus, a unit trust can in allowed to recover its tax losses if it is a “fixed trust”. If it is not, it must pass a series of more difficult trust loss recovery tests before it can recoup its tax losses.

It was believed, for quite a while, that a significant number of unit trusts are really fixed trusts. This changed when several fairly new legal precedents implied that it is very hard, from a technical standpoint, for an Australian unit trust to be eligible as a fixed trust. As a result of these instances, the risk is now greater that unit trusts with carried forward tax losses will not to be able to recoup tax losses.

It seems that the Commissioner of Taxation has been active in tackling this problem, but it is not far fetched for him to exploit the technical issue and dare taxpayers who have utilised unit trust for different reasons, including property development and investment.

Considering all of these issues, circumstantial evidence appears to imply that individuals and their advisers who still utilise unit trusts and may likely face this technical problem are either ignorant of its existence or are aware of the problem but paying no attention to it. There are also people who think that the court decisions were erroneous and continue to hope that regulations will be changed sometime in the future to right the wrong.

Whatever your views and approach are, and in spite of the fact that a resolution will be found eventually, doing nothing is a bad idea as there may be practical actions that you can do to lessen your exposure to risk.

For tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Have a chat with one of our expert advisers now and significantly minimise your exposure to financial risks.

How to Generate More Gross Profit from your Business

/in , /by

A business will not be able to generate the amount of operating profit it needs if it fails to generate sufficient gross profit. Fixed expenses can be reduced, but this move has its limit. After that, the business’ ability to earn revenue will be impaired, thus weakening its ability to generate the needed amount of gross profit.

So, it appears that gross profit is highly important, at least in the P & L. And, it is also the determining factor in how much operating profit a business can earn.

We now live in a world where can gain access to an infinite amount of information, and for businesses, this means competition is fiercer than ever. Businesses are feeling the pressure to keep gross profit margin (%) at a certain level or increase it. There are several factors that impact gross profit and/or GP margin: labour issues and material issues.

1. Materials

Failure to pass on materials cost increases

This can be due to adverse changes in the freight or FX rate for imported materials or increases from local or global suppliers. Make sure you are passing on these increases to your customers. It’s not easy to do, but look for and apply price increase for those goods or services where you can. Or you can look for other suppliers with trading contracts that fit your business, including lower prices for materials of the same quality.

Product Mix

All businesses need to check their financial statements at least every month. Doing will allow you to detect the rise and fall of GP margin from one month to another. The fluctuations could be the result of the assortment of services or goods the business has sold for a particular month. A motor body builder, for instance, may have more job orders in the month that have a huge amount of third party parts like toolboxes and cranes. These jobs will tend to be of higher value but have lower GP margin. In addition, frequently the price of a higher value job will have to be set steeper to boost the probability of winning it.

Fix your lowest possible GP margin for the job that you believe will play a part in generating the total gross profit dollars needed for that particular month, and make sure not go lower than that set margin.

Pilfering of Materials

It may not be pleasant to find out that one of your employees is stealing stock, but the reality is it happens. Put into effect measures to counteract it such as setting up and implementing good systems, recruitment procedures, CCTV and culture development programs.

Insufficient materials inward system

Some businesses have experienced paying large sums of money to merchants for materials that suppliers fail to deliver. This is one of the fastest ways a business loses money, but the easiest to resolve. Assign an individual with a keen eye for detail to oversee the materials in, and implement an effective system for physically verifying materials that come in against the merchant’s delivery docket and invoice for each delivery.

Failing to allocate materials that are utilised

It occurs often in manufacturing companies where work orders are quoted that comprise a fixed amount of materials, and then additional materials are utilised for the job but not put in the job card. The most common reason for this is employee errors that need additional materials to fix the mistake, and they don’t notify somebody. Another reason is materials being overlooked in the initial cost estimate. It will benefit you to put in place effective systems for correct quoting, excellent hiring procedures to ensure only quality workers are hired, and great employee training and mentoring programs.

Significant wastage of materials

There are several reasons why this can occur, including materials that are obsolete, damaged or outdated and thus cannot be used or sold. Moreover, it can happen when material wastage is not taken into account adequately when costs are estimated. Make sure to implement effective purchasing and warehouse procedures to lessen the probability of having unsaleable or unusable materials, and evaluate your cutting and quoting systems.

Stocktake or valuation process is inaccurate

During the preparation of management reports or financial statements, the closing inventory balance is affected by the cost of sales (and gross profit). If you overstate the closing inventory balance, you’d end up with an overstated gross profit as well. And if you understate inventory, then you’d have an understated gross profit. A business with no process to oversee stock control and valuation on a regular basis cannot rely on the correctness of the management reports.

Incorrect work in progress or progress claims accounting

When preparing its management accounts at each month’s end, a project or manufacturing business has to take into account the effect of progress claims, work in progress (WIP) and customer deposits. The fundamental idea is to balance income and expenditures associated with each other in identical periods. Depending on the requirements, compute the WIP and eliminate it from the P&L pending the completion of the job or keep the WIP on the P&L and accrue the income associated with the job. Doing this task also involves factoring in the effect of deposits and progress claims to make sure income is inputted in the right period.

2. Labour

Computing labour costs in WIP

Computing WIP is complex. It is easy to compute the outlay of materials for WIP, but labour outlay is not as simple. The labour cost for WIP should comprise: payroll tax, work cover, superannuation, allowances, overtime and base salary.

Significant rework or warranty work

Labour outlay related to rework and warranty work can become an opportunity cost for business when it entangles labour that could be better utilised in other gross profit and revenue generating assignments. To minimise rework and some warranty jobs, effective systems, hiring, training and mentoring are needed. In addition, commence evaluating your warranty policies and have a more extensive inspection of what’s happening in quality, if you are seeing a significant degree of warranty work.

Mistakes in Bookkeeping

There are a few ways this could happen. First, a simple data entry typo into MYOB that bloat the cost of sales amounts, or more uncommon is paying a supplier invoice for materials twice. Make sure you hire a competent bookkeeper, and that your accounting documents are checked by your accountant each month.

Fraud

Like the discussion on theft, employers also hope that their staff are honest and follow the core values of the company. However, fraud can happen. A common type of fraud that directly hits gross profit is a “billing scheme.” This is comprised of three parts: setting up a fake entity to take payments, making a fake invoice or falsifying a genuine invoice to be presented for payment, and manipulating the payments process to allow the false invoice to be approved and paid. Ask the help of your accountant in putting in place effective systems to prevent fraud as it can really damage the business when it does happen.

Low pricing

This is commonly the biggest cause of low GP margin and happens due to several factors: incorrect cost estimate or low charge out due to the inaccuracy of the labour rate and materials costs. There is also discounting pricing to garner a significant amount of jobs, frequently by sales representatives in companies that has insignificant policy and tracking of pricing. Competition among businesses is becoming fiercer every day. If you are engaged in a battle for competitive pricing, you must realise it is only for a short term. If you are envisioning long term, you have to evaluate your business model, and fast.

Worker productivity

Productivity means the volume of output compared to the volume of input. Worker productivity can decline due to factory lay-out, low worker skill level and experience, and overall distractions like excessive socialising during work hours. This will raise the variable cost compared to revenue, thus lowering the GP. This can also be caused by the failure of keeping the work (sales) up to them because frequently a business can’t trim down its skilled variable labour element to equal work demand. It can also happen if excessive overtime is permitted. Strive to cut waste throughout the organisation by carrying out lean principles, creating training programs and instituting a culture of high productivity. One way that employers can monitor worker productivity monthly is revenue divided by the number of variable labour hours.

Minimal labour rate charge out

When computing for a quote, make sure that the hourly labour rate charge actually reflects the existing variable labour cost condition. Costs must be reviewed regularly to make sure salaries, work cover, superannuation, payroll tax, average overtime, all award allowances, all kinds of leave, non-productive time, and an allowance for write off, like over-runs and warranty, are accurate.

Summary

A lot of well established, historically and financially stable organisations are being caught unaware by how fast change is happening in the new global business environment. The media plays this out every day. If you don’t see it within your company, you have to establish a culture of change and innovation.

An important question to ask yourself as you move into the planning stage for 2016 is: What instant changes should I do to make sure my business is still sustainable and prospering in five years?

PJS Accountants offers expertise in helping improve your business and take it to the next level. We work to understand your business and its inner workings and how it can compete effectively in the present business environment. From this knowledge, we can come up with a custom plan to implement your business strategies and methodologies, boost profit and increase market shares. Visit one of our specialist advisors or contact PJS Accountants.