How can a company have a profit but no cash to pay its bills? And what does it mean when accountant’s say “Profit is not Cash”?
If you have cash sales (cash accounting) profit will usually correlate closely to the actual cash you have.
But if you invoice (accrual accounting) clients for goods and services, the timing of when customers pay has an effect on the cash the business actually has.
Not everyone pays on time, but if they did you would have regular cash flow, and only be delayed by the initial terms at the beginning, eg 7 days, 30 days. Regular payments will mean regular flow of money to cover your expenses.
What if clients are late paying? Then the debtors on your balance sheet will grow (that is where the invoice “waits” for payment) until the client pays.
As an example, in our previous post explaining Profit and Loss, seeHEREwe gave an example of Profit and Loss resulting in $15,000 profit.
But what if you were onlypaid half of the sales at the end of the period (which is more close to reality – eg most pay the next month or two…)
Sales (invoices) $100,000
But only paid (actual cash) $50,000
Which goes to bank (in assets)
Net Left $50,000
Which sits in debtors/receivables (in assets)
Note – PROFIT would be same in accounting terms,
Note – but CASH Profit would be -$35,000 (negative!)
That is, if you still had paid all your bills, you would still have to find $35,000 to pay them – see here –
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Cashflow Tips – 5 ways to improve cashflow business success
Here are 5 ways to help improve cashflow business for success and get it under control – remember it is an on-going monitoring that keeps you on top – measure and tweak, measure and tweak…!
One of the things many business find a burden is that cashflow can easily get out of hand and several studies suggest that financial miss-management is one major contributor to business failure.
Take action on these –
1. Look at who owes you – WEEKLY.
Check your debtors/accounts receivable report every week – get onto those tardy payers – send Statements a minimum every Fortnight! A month is too big a gap and easy to slip the mind…
2. Plan for highs and lows. Be aware of possible lean cashflow patches coming up and plan for them!. Avoid major purchases from your business’ working capital unless you are sure you have cash to cover it. A cashflow budget will help you see this – eg when revenue is down on forecast you expected (eg the average monthly required, or based on same time last year, or certain % growth if that is the current trend).
3. Have finance products working to your benefit. Overdrafts, premium funding, lease facilities and cashflow funding products can all be excellent tools to help boost a business’ cash. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in, which is the best way to handle credit cards!
4. Avoid penalties. Keep on top of credit cards, taxes and compliance to save the cost of fines… and the stress!
5. Keep your hands out of the till. Make cash drawings for personal purposes as minimal and follow conservative cashflow forecasts. Take a weekly wage for yourself so it’s easier for the bookkeeper/accountant, and gives stability to regular expenses and drawings so you can PLANbetter!
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Bookkeeping –Top 7 ways to organise your accounting
When it comes to running your own business, keeping your accounting in-order must be an achievable goal. That said, there are times where a little lack of discipline can cause some headaches down the track. Rather than getting yourself in a bind later, let’s have a look at some simple steps you can take to help keep your accounting organised.
1. Bank Accounts – Separate and Secure
Mixing up business and private transactions in your bank accounts is a recipe for disaster. Always use separate business bank accounts for your business transactions; your private bank accounts should be kept wholly for private transactions. The cost of business bank accounts these days is very low, and there is no excuse for not having a business bank account or accounts. Get in the habit of making regular transfers of drawings from your business to your private bank account.
2. Cash payments – Avoid cash, where possible
It’s best not to use cash for your business transactions, as losing the receipts is common (and extra work) but if you use it in an emergency, then reimburse yourself using a suitable expense claim (to document the transaction, which analyses the expenses between expense categories) so that again, all business transactions are recorded and the GST is safely captured.
3. Credit Card accounts – Stay on top monthly
If you use a credit card for your business that is absolutely fine, but you should always pay your business credit card bills from your business bank account — that way no business transactions are omitted and all GST is captured. Similarly, if you use the wrong Eftpos card by mistake (such as the one for your private bank account) reimburse yourself documenting using a suitable expense claim document or simply transferring the correct amount to your personal bank. Then there is a clear record in your accounts.
4. Bartercard – Managing transactions
If you must use Bartercard, then it’s so much easier if you use live bank feeds to record all the transactions on the Bartercard statements because there are a lot of them (especially the fees and charges). Otherwise, it’s a total pain from the bookkeeping point of view. (Where not available with your software version,here is how to enter the transactions).
5. Accounts Receivable – Implement process to report and remind methodically
Always ensure you have a system for recording (good accounting software) whether your customers, clients or patients have paid your accounts receivable. Of equal importance, it’s important to track how old the debts are if unpaid so you can chase them up promptly. Your system should also record any special arrangements to pay over time or the excuses given for non-payment. It doesn’t have to be sophisticated, and if you are not using your accounting software to issue invoices, just write on the face of the invoice whether or not they have been paid, filing separately those paid from those awaiting payment. It’s surprising how many business people do not know who owes them money, which is just plain crazy considering how hard it is to earn the money in the first place!
6. Accounts Payable – Don’t forget about!
Similarly, always have a system for your accounts payable. I’ve had two clients pay me twice this month for the same invoices, which is not only a hassle for me because I have to repay the money, but it is risky for them as not all suppliers are as honest as I am! It’s best to be totally organised with your accounts payable and pay them on the 20th of the month so that your suppliers know when they’re going to be paid and you know when you’re going to pay them. Research shows that the most successful businesses pay their bills on time!
7. Paperwork – Organise and digitise where possible
Keep all your business paperwork in an orderly fashion. Nowadays you can scan on the paperwork and keep this electronically, either on your accounting software or in a simple electronic filing system using the US date system (eg 2 May 2018 written as 180502) so that everything is filed in chronological order. Keep a separate e-folder for each month and year. If you’re old-fashioned you can keep the paperwork in physical form, but now so much arrives electronically it’s pretty daft printing it out and wasting all that ink and paper!
Conclusion –
Keeping your accounting organised will save you time and money, and also help you make your business more successful. Perhaps even more important, it should result in a whole lot less stress!
GST on Hire Purchase – How it works and how GST applies
Instead of paying the full price upfront for a high purchase asset such as equipment or vehicle, a business can acquire assets by entering into hire purchase to pay for and use goods over a period of time – then they need to account correctly for the GST on hire purchase. Next they need to know how GST applies. Here is some information from the ATO website to assist, including links for further information –
do not own the goods until you have paid the final instalment.
Where the supply of goods to you under a hire purchase agreement is a taxable supply, the price you pay for the goods includes GST. If you use the goods in your business, you can generally claim a GST credit.
You treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – that is, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement. A hire purchase agreement is not treated as a sale or purchase made on a progressive or periodic basis.
Paying GST on hire purchases
If you enter into a hire purchase agreement on or after 1 July 2012, all components of the supply made under the agreement are taxable, whether or not the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, are also subject to GST.
If you enter a hire purchase agreement before 1 July 2012, and the supplier:
separately identifies and discloses the interest charge to you, you don’t have to pay GST on the interest as it is a financial supply;
doesn’t separately identify and disclose the interest charge to you, you must pay GST on the total amount payable under the contract.
The interest charge is ‘disclosed’ to you if the supplier tells you any of the following in the hire purchase agreement:
the dollar amount of the credit charge;
the interest rate;
the formula or formulas used to work out the credit charge amount;
any other information sufficient to work out the credit charge amount.
A hire purchase agreement entered into before 1 July 2012 continues to be treated in this way even if there’s a subsequent change to the agreement, provided the change doesn’t result in a new agreement. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.
Claiming GST credits on hire purchases
If you account for GST on a cash basis.
As all components of a hire purchase agreement entered into on or after 1 July 2012 are subject to GST, you can claim one-eleventh of all components, including the credit component and any associated fees and charges that have been subject to GST under the agreement.
For hire purchase agreements entered into on or after 1 July 2012, you can claim input tax credits up front instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non-cash basis.
For hire purchase agreements entered into before 1 July 2012 you can claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you don’t know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.
If you account for GST on a non-cash (accruals) basis.
You can claim the full GST credit on your hire purchase agreement in the tax period when either:
you make your first payment;
a tax invoice is issued to you, provided you haven’t already made your first payment.
For agreements entered into before 1 July 2012, you claim a GST credit only for the principal component of the agreement, not the credit component.
Example: Hire purchase agreement entered into on or after 1 July 2012
Albert’s Abattoir (Albert) is registered for GST and reports GST quarterly.
Continuing the example above, Albert decides to buy a second freezer on hire purchase from Friendly, …on 20 July 2012.
Albert buys a freezer from the Friendly Freezer Store (Friendly) for $33,000 through a hire purchase agreement. Under the terms of the agreement, which separately discloses the interest charge, Albert will repay $670 per month for five years. The total payment will be $40,200 ($33,000 plus $7,200 interest).
Because the agreement is entered into after 1 July 2012, both the principal and interest component of the supply are subject to GST.
The freezer is delivered on 7 August 2012 and Friendly notifies Albert that the principal component of the first instalment is $550. This means the credit component of the first instalment is $120 (670-550).
Albert can claim a GST credit for the GST included in both the price of the freezer and the interest charged. As the agreement was after 1 July 2012, the interest is not a financial supply (even though it is separately disclosed).
Whether Albert accounts for GST on a cash or non-cash basis, he can claim a GST credit of $3,654.54 (one-eleventh of $40,200) for the tax period ending 30 September 2012, as this is the period in which he pays the first instalment.
(To see a pre-1 July 2012 Example: hire purchase agreement entered into before 1 July 2012, see the webpage)
Business – Research – How your accountant (and good bookkeeper) can help BOOST your business revenue!
Did you know research shows that for the third of business owners who worked with an accountant as an advisor, one in five (21%) saw a rise in their revenue over the last year.
The vast majority of the 1005 business owners surveyed, 89% used an accountant last year.
Only 32% of owners reported having an advisory or consultative relationship with their accountant, compared with the 57% whose relationships were for compliance only, such as tax return completion or GST reporting. Just 11% did not have an accountant…. Adam Ferguson, general manager of the accountants division at MYOB, told StartupSmart that using an accountant as an advisor was especially valuable for start-up companies.
“The start-up phase of a business is very different to when it’s up and running. In that phase, your accountant can help with things like creating a business plan, applying for business loans, building out your business case,” says Ferguson.
For start-ups who are already in operational phase, the increasing use of cloud accounting systems enables accountants to provide feedback and ask the right questions about compliance and cash flow.
Ferguson says cloud accounting means compliance is no longer a year-end process, and increasingly a monthly one. This makes them well placed to advise on cashflow questions.
“An accountant can play a key role in helping a start-up, reporting on cash flow on a more regular basis, and understanding the dynamics that drive cashflow,” says Ferguson.
The report found companies that worked with an accountant as an advisor were less concerned about attracting and retaining customers, and were more likely to increase their overall investment in their business strategies.
“Once you’ve got your cash flow healthy, it becomes a question of how to use that and where to invest that to grow my business,” says Ferguson.
Over half, 53%, said they found their accountant advisor provided useful advice on how best to manage the money that flows through their businesses.
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Cash Flow and Budgeting – What are they and how are they different?
They may sound too hard or scary, but cash flow and a budgeting can show related information – so what are they and how are they different? There is a difference and each have different uses, but mainly they help the business owner in the financial management of the business or organisation.
Cash flow forecast – is an estimate of the amount of money (actual cash) you expect to flow in and out of your business and includes all your future income and expenses. A forecast usually covers the next 12 months, or it can also cover a short-term period such as a week or month.
It predicts when the actual income and expenditure occurs in the actual bank account(s).
Does not consider accruals and adjustments such as depreciation, only ACTUAL cash in and out.
Large capital purchases such as assets (usually not recorded in a profit and loss and budget) are included in a cash flow forecast, as to HOWthey will be paid – eg show loan money in and payments out – fully paid or the instalments on loans/finance.
The full year cash flow forecast is usually shown on a month by month basis. But in it can be broken down into fortnightly or even weekly depending on the requirements.
Budget – details overall what you plan to do with your finances based on expected sales and expected costs, and is similar to Profit and Loss (and a Balance Sheet). It is used to measure how you go against the budget – are you on track for what you want to achieve?
This is usually over 12 months, and focuses on profit. In addition:
Accruals and other non-cash adjustments such as depreciation are included;
Large capital purchases will be included;
A budget also provides a benchmark to then monitor performance – after each month accounts are finished we compare what actually occurred against what was budgeted or planned to occur;
Usually the full year budget is prepared in months like the Profit & Loss;
A budget is NOT used to monitor the amount of cash in the bank accounts. That is where the cash flow forecast comes in;
Both Cash Flow and Budget detail the planned financial goals the organisation is trying to achieve and are linked to the strategic and business plans of the organisation. The main difference is based on:
1. The type of the transaction and;
2. The timing when receipts and payments will occur.
As a simple example: A budget will record the income when you have sent out the invoicewhereas your cash flow will record it when you actually receive the amount in your bank account. Always remember not to assume that debtors will pay the following month. Often it may be later which is why it is important to know your Average Debtor Days which may show that payment occurs typically 64 days after sending out the invoice. This would be reflected in the cash flow, but not the budget.
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Rise in revenue and business health – Businesses used their accountant as a business advisor
Rose Powell reports inSMEs can make better use of their accountant to boost their bottom line– “For the third of business owners who worked with an accountant as an advisor, one in five (21%) saw a rise in their revenue over the last year.” Rose also wrote – “Small business operators who used their accountant as a business advisor last year were 31% more likely to see an earning uplift, according to new research from the 2013 MYOB Business Monitor.
The vast majority of the 1005 business owners surveyed, 89% used an accountant last year.
Only 32% of owners reported having an advisory or consultative relationship with their accountant, compared with the 57% whose relationships were for compliance only, such as tax return completion or GST reporting. Just 11% did not have an accountant…”
Adam Ferguson, general manager of the accountants division at MYOB, told StartupSmart that using an accountant as an advisor was especially valuable for start-up companies.”
“The start-up phase of a business is very different to when it’s up and running. In that phase, your accountant can help with things like creating a business plan, applying for business loans, building out your business case,” says Ferguson.
For start-ups who are already in operational phase, the increasing use of cloud accounting systems enables accountants to provide feedback and ask the right questions about compliance and cash flow.
Ferguson says cloud accounting means compliance is no longer a year-end process, and increasingly a monthly one. This makes them well placed to advise on cashflow questions.
“An accountant can play a key role in helping a start-up, reporting on cash flow on a more regular basis, and understanding the dynamics that drive cashflow,” says Ferguson.
The report found companies that worked with an accountant as an advisor were less concerned about attracting and retaining customers, and were more likely to increase their overall investment in their business strategies.
“Once you’ve got your cash flow healthy, it becomes a question of how to use that and where to invest that to grow my business,” says Ferguson.
Over half, 53%, said they found their accountant advisor provided useful advice on how best to manage the money that flows through their businesses.
So talk and work with your accountant – if you need a recommendation, call us for FREE help!
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