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Business Finance 101 – What is Working capital – and how it can be used

Business Finance 101 – What is Working capital – and how it can be used

What is Working capital – and how it can be used

Working capital is defined as the difference between current assets (CA) and current liabilities (CL) at a specific date. The CA and CL amounts are found on your company’s balance sheet. For example, if your company’s balance sheet has current assets of $150,000 and current liabilities of $120,000 then your company’s working capital is $30,000.

Working Capital = Current Assets – Current Liabilities
Normally we want cash and assets that can be turned into cash within 12 months, such as Inventory, debtors who owe the company etc (ie “Current” means within 12 months) to be GREATER than Current (12 months) Liabilities.

But with a significant amount of working capital, a company can still have a period of cash shortage if its current assets are not turning to cash. As an example, a company with most of its current assets locked up in inventory. Or if a company has a large accounts receivables that are not being collected, but even still, this large working capital situation isn’t much immediate help when you can’t meet the payroll run!

There are also other financial ratios use the working capital components such as the current ratio, quick ratio, accounts receivable turnover ratio, and inventory turnover ratio.

Good management means keeping watch on current assets (receivables and inventory) to keep the cash coming into the bank.

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Cashflow Tips – I’m making a profit but no cash – why does this happen?

Cashflow Tips – I’m making a profit but no cash – why does this happen?

Cashflow Tips – I’m making a profit but no cash – why does this happen?

Is your business making a profit but no cash and you wonder why?

This may be because company reports like Profit & Loss may show you are making a profit but have no cash because profit is an accounting record using revenues and expenses, (accrual accounting) which are different from the company’s cash receipts and cash disbursements (cash accounting).

Put another way, there is a difference between revenues (invoiced sales) and receipts (actual cash receipt of payment of invoices (banked)). There is also a difference between expenses (purchase orders still to pay) and expenditures (actual payment of purchases, and overhead expenses).

Examples

  1. As an example a new company that sells $10,000 to its clients in a month and the clients are given 30 days to pay. The company will have $10,000 of revenues in its first month, but the cash will not be received until the second month. If the company’s expenses are $7,000 in the first month, the company will report a profit of $3,000 but will not have received any cash from its clients. It may not have been paid, and it may not have paid its expenses either.
  2. Another company might report a profit of $60,000 in its first year, but during its first year it uses $65,000 of cash to acquire equipment that will be put into service at the beginning of the second year. This company will have a profit, but will not have the cash.
  3. Other times cash is paid out, but the profits are not reduced at the time of the payment, because they don’t pay for expenses but pay loans, payroll PAYG or super or for stock – they go to the Balance Sheet and include prepayments of insurance, payments to increase the inventory of merchandise on hand, and payments to reduce liabilities.

Keep in mind that Profit does not equal cash: It is as simple as that!

Profit is the accounting record of what is left after you have made sales and raised all expenses. Of course, remember there is tax on the profit as well. The remaining amount is then reinvested back into the business or distributed to the owners.

Cash is what the business needs to operate every day and can come from 5 different main sources — profit, selling assets, contributing your own personal funds, bank loans or new investor money.

Cash and Timing

The key to remember is that you don’t spend profit in our business — you spend cash, and it is all in the timing.

There are 2 timing situations to be aware of –

Firstly as the old saying goes, you have to spend money to make money. To make a profit, you first need to purchase goods or services to sell, so you will need cash before the sale is made. By selling your product or service at a higher price than what it cost, you make a profit.  The point is you need the cash before you get the profit, or get credit and pay the supplier later!

Secondly (that catches most businesses) is providing credit to customers. The longer the customer takes to pay, the longer you have to wait for the cash, and in the meantime you have wages, rent, stock and other expenses to pay. This is where the trouble begins and often ends.

Focus on what matters – cashflow

You need to focus on not only profit but also what drives your cashflow. If you have regular loan repayments, rent and other expenses that have to be made on time, then you will need enough cash to cover these while you wait for your customers to pay. Keeping track of your accounts receivable and following up on late payments will definitely help your cashflow. The other thing to remember is if you can get credit from your suppliers, this may mean that you don’t have to pay for stock until you have sold it — again making a big difference to your cash flow.

The business needs to be profitable to stay in business. Be careful of sacrificing profits to generate cash. Offering discounts to pay early will definitely help your cash position but will reduce your profit.

The best management is to make sure you have enough cash buffer to cover ongoing expenses. Having a finance facility (overdraft, credit card) can help that will tide you over during a cash flow shortage, but this will cost in the form of fees and interest, which again, will reduce your profit.

Remember profit does not equal cash!

See more help at Cashflow Tips

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Bookkeeping – Holiday/Annual Leave Payout deducts from the Accrual, but Holiday Cash Out doesn’t – Why?

Bookkeeping – Holiday/annual leave payout deducts from the accrual, but holiday cash out doesn’t – Why?

Bookkeeping – Holiday/annual leave payout deducts from the accrual, but holiday cash out doesn’t – Why?

Client Skype’d Hi Paul, I’ve had a look and our special Pay Category, Holiday Cash Out doesn’t seem to be deducting from the balance of Holiday Leave Accrual. It’s not listed under entitlements under the Payroll Category List window.

Answer – Yes it is NOT linked to the accrual because only one can be linked at a time to a pay category – the Holiday/Annual Leave pay category that is regularly used, is linked to the Holiday Accrual and deducts from the accrual – if you go to Entitlements, and then open the Holiday Leave Accrual, you will see down at the bottom it says it is linked to Holiday Leave.

Your Holiday Cash Out is not an entitlement – it will be under the Wages Payroll Category to be used when paid :), but it has no effect on the accrual.

Client Skype’d – Thanks. So how do we reduce the accrued holiday leave by the hours that have been paid as a holiday cash out which is allowed in the award, up to 2 weeks per year? Can we put it as an entitlement that gets deducted or can we manually deduct from accrued holiday pay?

Answer – It needs be manually deducted – the more automatic way is to set up the Hol Cash Out as a separate entitlement, and choose to link it to the Holiday Cash Out wage category.

BUT – If the 2 weeks are optional it will be difficult to balance with the regular Holiday accrual if not taken every year – it becomes messy – if not used regularly but occasional years.

I would adjust the Accrual in this way – do a paycheque with ZERO hours, and in the lower lines at Holiday Accrual, adjust the holiday accrual with NEGATIVE the hours cashed out, and write a note in the memo for the reason and date the cash out occurred, there should be no super generated, ensure any other allowances etc are ALL ZERO also – then record, and this pay updates the accrual and there is a clear record with note and date for the reason for the adjustment.

Client Skype’dOK I will try that. There’s only a few done so far. So will need to do that for those ones. May make an adjustment today so these are all done now and up to date. Thanks.

Answer – Yes, do as a pay, then it updates and provides a note and proper record on the staff pays record.

Client Skype’d –  Thanks. Is the other option to use the “Unused Holiday Pay” for Cashed Out pay as well?

Answer – NO Unused is for a different reason – when they leave and still have Unused Leave owing due to them on leaving. The Unused Holiday will ALSO NOT decrease the Holiday Accrual, but it is used to be clear what the pay is for – and when you enter the Termination Date in the card it closes OFF the entitlements.

Client Skype’d –  OK thanks. Thought I’d check. Will org. Cheers.

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Business Tax Tips – Taxable Payments Annual Report – Building Industry

Business Tax Tips – Taxable Payments Annual Report – Building Industry

Taxable Payments Annual Report – Building Industry

Are you a business in the building and construction industry? You will probably need to report the total payments you make to each contractor for building and construction services each year.

If you’re a business that is primarily in the building and construction industry, you need to report payments you make to contractors if both of the following apply:

  • you make payments to contractors for building and construction services
  • you have an Australian Business Number (ABN).

Contractors can be sole traders (individuals), companies, partnerships or trusts.

You need to report these payments to us on the Taxable Payments Annual Report by 28 August each year.

Activities and services that are considered to be building and construction are broad. Some examples include architectural work (including drafting and design), certification, decorating (including painting), engineering, landscaping and construction, project management and surveying.

Payments you need to report

Report only payments you make to contractors for building and constructions services.

Contractors can be sole traders (individuals), companies, partnerships or trusts.

If invoices you receive include both labour and materials, whether itemised or combined, you report the whole amount of the payment, unless the labour component is only incidental.

The definition of building and construction services is broad – it includes any of the activities listed below if they are performed on, or in relation to, any part of a building, structure, works, surface or sub-surface:

  • alteration
  • assembly
  • construction
  • demolition
  • design
  • destruction
  • dismantling
  • erection
  • excavation
  • finishing
  • improvement
  • installation
  • maintenance (excluding the maintenance, service or repairs of equipment and tools)
  • management of building and construction services
  • modification
  • organisation of building and construction services
  • removal
  • repair (excluding the service or repairs of equipment and tools)
  • site preparation.

Get more details from the ATO website HERE             

Need help? Not sure? Call for FREE 30min advice / strategy session today!

Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

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Need help? Not sure? Call for FREE 30min advice / strategy session today!

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Business Tax Tips –GST Error Correction – How to put it right

Business Tax Tips –GST Error Correction – How to put it right

Business Tax Tips –GST Error Correction – How to put it right

On the Australian Tax Office (ATO) website has information on what to do when you find you have a GST error correction to make – and how to put it right in a way that is easier than revising a prior statement, as well as you can save penalties (see!… the ATO is really NOT your business enemy!)

Correcting GST Errors –

If you make a mistake (that fits the definition of a GST error) when reporting GST on an activity statement, you can correct that error on a later activity statement if you meet certain conditions.

The benefit of correcting a GST error on a later activity statement is that you will not be liable for any penalties or general interest charge (GIC) for that error.

Generally, it is easier to correct a GST error on a later activity statement than to revise an earlier activity statement. Revising an earlier activity statement that contains an error can incur penalties or GIC.

Here are a series of links about correcting GST errors –

o    options for correcting an error

o    definition of a GST error

o    types of GST errors

o    correcting credit errors

o    correcting debit errors

o    how to make corrections on a later activity statement

o    when a credit or debit error cannot be corrected on a later activity statement

o    what is not a GST error

o    example of correcting GST errors on a later activity statement

o    record keeping

o    more information.

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Business Finance 101 – Current Ratio – What is it and what does it show?

Current Ratio – What is it and what does it show?

Business Finance 101 – Current Ratio – What is it and what does it show?

There are several financial ratios including the current ratio which shows the proportion of current assets to current liabilities. The current ratio is known an indicator of a company’s liquidity. Put in another way, it shows when there is a large amount of current assets in relationship to a small amount of current liabilities there is some assurance that the obligations coming due will be paid.
As an example if a company’s current assets are $500,000 and its current liabilities are $250,000 the current ratio is 2:1. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2 : 1. Clearly a larger current ratio is better than a smaller ratio in comparison to current liability. Generally, a current ratio that is less than 1:1 indicates insolvency, and the preference is at least 2:1, or over 2.
When benchmarking a company, or comparing your own, it is wise to compare a company’s current ratio to those in the same industry. It is also worth keeping a close look at the trend of the current ratio for a given company over time. Is the current ratio improving over time, or is it deteriorating?
The composition of the current assets is also an important factor. If the current assets are predominantly in cash, marketable securities, and accounts receivable, that is more valuable than having the majority of the current assets in slow-moving inventory.

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Bookkeeping – End of Financial year final pay falls in new financial year

Bookkeeping – End of Financial year final pay falls in new financial year

Bookkeeping – End of Financial year final pay falls in new financial year

Client questionJust a quick question. 

We have an employee being paid fortnightly.

Next payment to be made 07/07/2017.  This includes the week 26/6 to 30/6/2017. Does any of this have to be put through in EOFY for 2016/2017?  Or will it be first payment for New year on new tax table?

Solution Payroll is taken as  a cash payment in the accounts – ie WHEN it is paid.

Regardless of what period it covers – it is WHEN it is paid.

So not included in previous tax year.

You can finish your payroll YE17 year, prepare the Payment Summaries – check you include in Gross Payments, any NEW payroll types/categories if you created any during the year.

Then roll forward to new payroll year, and you can process the 7/7/17 payroll that covers end of June days and some of July days.

Need help? Not sure? Call for FREE 30min advice / strategy session today!

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Email info@accountkeepingplus.com.au or call 0407 361 596 Australia