What does the board wish for the business this coming financial year? Less uncertainty? More money? More capacity to capitalise on opportunities? In this post Richard Perkins from Moore Stephens SA shares five resolutions that every business should consider making.
They’re not complicated, technical or highly academic – in fact, some you will likely already know.
They will however act as a reminder, that overcoming the biggest problems in business often comes down to the simplest things.
1. “We didn’t get time to…”
Most organisations simply don’t set aside the time to do the forward planning they know is critical to running a business. Here’s a simple test:
- Write down goals for the business.
- Now ask – “are we doing something towards achieving these goals every day or every week?”
If not, it’s not a goal. It’s just a nice thought.
2. Set a realistic budget
Financially mapping the business reduces risk and minimises room for unwanted surprises.
The organisation’s budget needs to be realistic – not just a percentage increase on last year’s.
- Start with an operating budget and assess each line critically.
- Map revenue to see where, how and when the money is coming in, to create a reliable estimate of income for the coming year.
- Once the revenue expectations are in place, look at what is required to generate that income.
For example, what advertising, marketing and resources will be required?
- Once you are comfortable with revenue, work up the expenditure budget. Be tough on costs. Don’t forget to allow for growth and the increases that are likely to flow through.
- Once the budget is complete and likely profit margins are clear, do a couple of alternative estimates for the key revenue drivers, so impact of changes to the assumptions can be understood.
- Once all this is in place, track and measure it throughout the year.
Where possible, the management team should be a part of this process and take responsibility for achieving the budget numbers they give the board. Having a budget in place that all team members report on regularly, improves the focus on what really needs to be done.
3. Map cash
Even some very large businesses have failed because they ran out of cash. Understanding cash flow needs is vital, particularly for high growth business.
Understanding the business’s cash position is about understanding the timing differences:
- How long will it take for customers to pay?
- How much stock will is needed to be held?
- What are the payment terms required by suppliers?
Don’t forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be ‘big ticket’ items and can easily catch businesses out.
The cash forecast should also, identify capital expenditure requirements. Don’t deal with these on a one-off basis as they arise, plan them in advance.
4. Expect the unexpected
‘Growing to death’ is often the result of unplanned growth opportunities. It’s ironic that seizing a major sales contract or big new client can be a business’s ruin, but its more common than you think.
Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in depth knowledge of sales performance and revenue.
Few however, have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not part of the vocabulary. As a result, there can be a sudden and unintended impact on their financial position.
A rush of sales might be a great thing, but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.
For businesses without strong financial management and control, there is simply no way of understanding what impact the opportunity will have until they have experienced it. With no background history to rely on, the warning signs of impending financial crisis don’t appear.
5. Take all the tax advantages available
For small business in particular, there are a range of concessions and funding available. Many businesses simply don’t realise the opportunities available to them.
A simple example is trading stock valuations:
Trading stock is an asset that is recorded on the balance sheet. In most cases it should be tax neutral to the business.
The cost of purchasing stock is expensed in the profit and loss account and offset by the value of the stock asset, until it is sold.
So, while the amount of stock being carried will impact on the cash position because funds are tied up in it, there is no direct impact on profits or taxable income until that stock is sold.
However, if at June 30 some of the stock is worth less than its cost price, the option to value it at the lower figure and take the tax write off now, rather than wait until the stock is sold, is available.
This reduction in stock value will produce a tax saving. For tax purposes, there are a number of ways of valuing stock.
Once stocktake is completed (assuming a need to do one), a business can choose what method to apply depending on the stock and business circumstances. The different ways of valuing stock can produce different results.
Most businesses chose to value trading stock at cost – but there is an option of valuing stock at the lower of cost, market, or replacement value.
For example, if your stock is about to become obsolete, valuing it at cost price for tax purposes is not going to help. In this situation the business would be better off to value the stock at market value, particularly if it is a large quantity.
Take the example of vitamins with a use by date that only has a month or two left on it. Leading up to, and once the vitamins reach their use by date, they are unsaleable.
In this case, estimate how much of the stock is likely to sell prior to the use by date, and at what price.
Using previous sales as a guide, if only 15% of the stock is expected to sell prior to the use by date, the market value of this 15% would be used.
Other than when a business sells stock, the annual business tax return provides a once a year opportunity to adjust stock values and realise any losses.
Another classic way small businesses disadvantage themselves is not taking the Government concessions available to them.
The Research & Development Tax Incentive and Export Market Development Grants are a classic case.
R & D Tax Incentive
Certain companies can claim a tax offset for expenditure incurred on R&D activities. The aim of this offset is to encourage companies to invest in R&D work to create new or improved materials, products, devices, processes or services.
The size and nature of the offset depends on the turnover of the company:
- A company with a turnover of less than $20 million per year can qualify for a 45% refundable tax offset;
- A company with a turnover of $20 million or more can qualify for a 40% non-refundable tax offset.
The proposed 1.5% R&D tax offset rate cut proposed in last years budget was opposed by the Senate and therefore did not pass.
Export Market Development Grant
The EMDG reimburses up to 50% of eligible export promotion expenses above $5,000 provided that the total expenses are at least $15,000.
While it takes time to manage these grants and concessions, the outcome can be very rewarding.
Let’s also not forget that small business was at the very heart of this year’s Federal Budget – If your business has an aggregated turnover of less than $2million the government has provided a number of concessions that you should be taking advantage of. You can read Hayes Knight’s Budget Summary for SMEs here.