Tips to Getting Paid Faster while Maintaining your Business Relationships

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How do your invoices in order without ruffling the feathers of your customers and suppliers? Here are some tips:

Know your customers

You can easily get information from credit reporting agencies to analyse payment problems in keeping with historic trends. This way you can adapt your approach as necessary. For example, when the information tells you that your customer is recently failing in meeting payment deadlines, you can implement stricter terms of payment. Similarly, if your customer has been good in making payments, you don’t need to worry immediately if they get delayed for a few days.

Put expectations in writing

Give your customers official documents at the beginning of each project, so you don’t wait until payment day to talk to them with payment problems. It is not over the top to have Official Terms and Conditions in writing. It is a simple way to let your customers know the method of payment you prefer, the number of days your customer are allotted to pay, and the actions you will take when they are late in paying the bills.

Make it easy for customers to pay you

Sometimes the blame for late payment lies on you, specifically in the manner you prepare your invoices. Your paperwork must be accurate and easy to follow, so your customers don’t need to ask too many questions. Itemise each cost and include all your bank information and contact numbers, even if you think you’ve already given them to your customers or suppliers.

Money discussions

You may not want to damage the good working relationship that you’ve worked so hard to establish with your customers with uncomfortable talks about money. If you don’t have an accounting staff to do this task for you, talk to theirs. This will make sure you maintain your day-to-day relations while still collecting money on time.

Talk to a good accountant to help you send out invoices and collect payments on time. PJS Accountants offer the help needed to handle accounting, compliance, and strategic planning challenges. We provide a range of services that assist in reducing the challenges businesses face – so you can have more time to do what you do best, and that’s running your business effectively. Contact PJS Accountants for enquiries.

Things to Remember when Valuing a Business

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It is important to know the value of a business if you are looking at buying or selling a business.

The problem is that the figure you have in mind and the figure from that of the other party are not the same. If you are the seller, you would probably be disheartened if buyers are not seeing the potential in your business.

The value of a business depends on how profitable it is, and also taking into account the risks involved. However, previous cash flow, lucrativeness and asset values are just the foundation. What provide the most value are the hard-to-quantify aspects such as major business relationships and goodwill.

Influencing factors

The value of a business is affected by the following basic factors:

The reason for selling

Business value can be affected by the circumstances surrounding the sale. A forced sale could slash the value. For instance, a business operator who becomes ill may be forced to accept the first offer he gets, while an owner who is just trying to see what offer he can get can afford to drive up prices, thanks to long negotiations.

Tangible versus intangible assets

It is easier to value a business that has property, equipment, stock available and other tangible assets that have some re-sale value. A number of businesses have nearly zero tangible assets aside from office equipment. But they may have intangible assets that might offer considerable value, such as intellectual property, good customer relationship or well-respected brand. It may not be easy to quantify these intangibles, so seek guidance from your accountant regarding this matter.

Years in business

Businesses that have been operating for years will have a better track record, liquidity and loyal customers who can be relied on for repeat business. Don’t easily trust businesses for sale that have only been trading for one or two years, because they may be “hot” now but the tide may be about to turn, like cafes and bars.

Valuation methods

The real worth of a business is the amount that someone is willing to pay. To determine the amount, various valuation techniques are used by buyers. These methods are normally merely to assure buyers that they’re not paying too high an amount. Here are the primary methods:

Asset valuation

Involves adding up the assets and subtracting the liabilities. For example, a business owns $500,000 worth of machinery and equipment and has $50,000 in unpaid invoices, the business’s asset value is $450,000. A buyer has the option of only purchasing the business assets. By not taking over the business as a going concern, the duty of paying any outstanding debts or tax payments will remain with the former owner. Asset valuation is ideal if you are considering buying a stable, asset-rich business.

The assets listed in the accounts are the basis or foundation for an asset valuation. This is called the net book value (NBV) of the business. To reflect economic reality, you have to refine the NBV amount for the important items, such as fixed assets that may have changed in value, old inventory that may have to be sold at reduced prices, or businesses that aren’t going to be paid.

Usually, intangible things such as software development expenses are not included.

Price earnings (P/E) ratio

The value of a business divided by its profits after tax. For instance, a business with a share value of $40/share and earnings per share after tax of $8 would have a P/E ratio of 5($40/8=5).

You can use this equation: Value = Earnings after tax * P/E ratio. When you have arrived at a right P/E ratio to use, multiply the business’s most recent profits after tax by this amount. For instance, given a P/E ratio of 6 for a company with tax profits after tax of $100,000 would have a business value of $600,000.

It is not easy to decide on the right P/E ratio to use. You will need to rationalise your P/E ratio figure to a prospective buyer or seller. “Standard” P/E ratios are used in some industries, so find out from your accountant the industry averages you can use.

Entry cost valuation

Instead of buying a business, why not set up a similar venture from scratch? An entry cost valuation would give you an idea of what the process would cost you. Here’s how to come up with an entry cost valuation:

Compute the cost to the business of:

  • Buying or funding its assets
  • Developing products or services
  • Hiring and training staff
  • Growing a client base

You can use the amount to draw up a comparative assessment. For example, from the calculation you can see you would need:

  • $500,000 to purchase the set-up equipment
  • $50,000 per month for operating costs
  • 12 months of operation to establish a client base.

Therefore, a company that owns of all these has a value of at least $1.1 million. You can now take into account the cost savings you can make, if any, such as moving to a cheaper location or using better technology.

The major factor in determining how much a business is worth may be something that can’t be easily quantified. It is not easy determining the value of intangible assets because the amount can vary depending on the type of assets or industry. Seek professional advice or guidance from your business advisers, industry association or Chamber of Commerce.

PJS Accountants offers accounting and other booking services to individuals and companies, big and small. Allow our team to evaluate your financial situation and advise you on the right measures to avoid cash flow problems. Contact PJS Accountants for enquiries.

Important Things to Consider When Selling a Business

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To get your business ready for sale, there a few important things you need to consider. Because of this, it is no wonder that almost 80 per cent of Australian businesses are not attractive to buyers in their present conditions and 96 per cent of business owners have not drafted a plan for generation transfer.

Good planning and preparation in terms of legal, taxation and operational matters are the ingredients to a successful sale. To ensure the success of the sale of your business, here are a number of important items to consider:

Know your buyer

To help you know the right sales strategy, whether through succession or selling on the open market, know who your likely buyer will be.

If you’re planning to sell to relatives, avoid potential familial conflict by drafting a formal family succession agreement. These kinds of agreements are typically contained in the business owner’s will.

If you intend to sell on the open market, make sure that this plan is not in conflict with the expectations of a relative who may be expecting to take over the business in the future.

State specifically the asset you’re selling

Next, make a decision on what you want to sell – your business or the underlying structure that owns the business. The latter is typically a share sale in which a company continues to operate the business. You can get major tax breaks through careful planning in the lead up to the sale.

If you are selling a small business, carefully consider the possible application of the small business concessions from the point of view of a capital gains tax. These concessions are intended to help owners of small businesses and should be utilised if applicable. To activate the small business concessions, the turnover of the business must be below $2 million or the net assets must be under $6 million.

Get rid of unwanted assets

After you have determined your sale strategy, you have to focus on the items that would affect the final price. There are times it would be to your benefit if you segregate non-core holdings, such as the land where the business is standing, from those that are crucial for the operation of the business, in order to set a price that’s within the reach of the buyer.

It is also better to pay out retained earnings to reduce the value of the company’s balance sheet. Obviously, the payments of dividends could have top-up tax consequences for the persons involved, therefore it should be handled well prior to the sale.

Conduct due diligence

Lastly, making sure the business is sale ready will entail doing due diligence or a stocktake relating to things like intellectual property and personal use assets on the balance sheet, and deciding on what terms of the sale will be satisfactory to the seller. You should also consider whether you are willing to work in the business for a period of time following settlement to assist the purchasers with a complete turn over.

Contact PJS Accountants to help you plan your strategy for a successful sale of your business. We offer a complete range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs.