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Business Financials 101 – Profit is not Cash!

Even if there is a profit in business, many wonder why they may not have cash in the bank. If you have cash sales, profit will usually correlate closely. But if you invoice clients for goods and services, the timing of when customers pay has an effect on the cash the business actually has. For example 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. Once those days have passed, the 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, see HERE we gave an example of Profit and Loss resulting in $15,000 profit.

Profit & Loss Diagram

Profit & Loss Diagram

But what if you were only paid 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,

but CASH Profit would be                   – $35,000

That is – if you still had paid all your bills, you would have to find $35,000 to pay them – see next

Cash Profit diagram

Cash Profit diagram

Got Questions?

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Quickbooks – Customise Invoice Forms


Quickbooks - Customising Invoice Forms

Quickbooks – Customising Invoice Forms

You can customise invoice forms by changing the names and layout of the fields of an invoice to fit the needs of your business.

Which Invoice Templates can I use?

There are a number you can use and customise:

  • Attorney’s Tax Invoice template
  • Delivery Note Invoice template
  • Fixed Fee Tax Invoice template
  • Product Invoice template
  • Service Invoice template
  • Invoice from Proposal template
  • Progress Invoice template
  • Time and Expense invoice

Set the default template that’s used when I create packing slips for my invoices – how?

The only other default form templates that can be defined are the templates for sales order packing slips and pick lists.

Only the QuickBooks Administrator can do this task. To do this task

1. Open the sales and customers preferences.

2. Click the Company Preferences tab.

3. In the Choose template for invoice packing slip drop-down list, click the default template to use.

4. Click OK.

See also

Customising an Invoice Template

1. Decide which invoice template to use.                        

2. Go to the Lists menu and click Templates.

3. Click the Type column heading to find all templates with the same form type. Which template to use?

4. It’s easier to change an existing template than to start from scratch, so choose the template that’s closest to how you want your form to look. You can choose a different template at any time, but you’ll have to reenter the information in the form.

Although you can customise any template, starting with a template that’s close to the way you want your form to look makes it a lot easier to customise your forms.

Quickbooks - Customising an Invoice Template

Quickbooks – Customising an Invoice Template

1. Single-click—not double-click—the template to view and then click the Open Form button at the bottom of the list.

2. Watch how the form looks onscreen and in print preview to decide if this is the template you want to use.

3. Continue selecting and viewing templates until you find the one you want to use.

4. Now you’ve found the template you want to use:

– Customise this template more (and not create a new one), just double-click the template to edit it.

– Create a new customised template that’s based on this template:

a. Single-click—not double-click—the template in the list.

b. Click the Templates button at the bottom of the list and then click Duplicate.

c. In the Select Template Type window, select Tax Invoice. (It can be a different type from the original template if you prefer.)

d. Click OK.

The new template appears in the Templates list. It will have the same name as the original template with “Copy of” in front of it. For example, if you duplicate the Quicken Product Invoice, the new template will be called “Copy of Quicken Product Invoice.”

e. In the Templates list, double-click the new template (the one you just duplicated with “Copy of” in the name).

f. Click the Manage Templates button and enter a new unique name for the template in the Template Name field.

g. Click OK.

5. Now in the Basic and Additional Customisation window, customise the template:

6. Preview the form: The final step in customising your form is seeing how the form looks onscreen and in print preview.

Look at the form onscreen and then do a print preview to see how it looks when it’s printed. Since what prints on the form can (and probably is) different from what you see onscreen when you fill out the form, consider both uses.To do this task

   1. Open the form onscreen to see how the template affects what you see in the form window.

  2. Click on Print drop-down arrow at the top of the window and then click Preview to see how the printed form will look. (What you see onscreen is often different from what you see when the form is printed.)

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Business Financials 101 – The Balance Sheet

The Balance Sheet is a snapshot of the assets and liabilities at any given time, usually produced at end of month. In another way, it is a picture of what the business has and how it is funded.

There are three areas in the Balance Sheet – Assets Liabilities and Equity.

The assets include bank accounts, petty cash, inventory, debtors or accounts payable, which are also grouped as Current Assets because they turn over in less than 12 months. Long Term Assets include Plant & Equipment and Motor Vehicles.

The liabilities include credit cards and short term loans, creditors or accounts payable, GST, payroll withholding tax, PAYG and super accounts, which are grouped as Current Liabilities as they also turn over in less than 12 months. Long Term Liabilities include business loans and overdrafts, car loans/finance.

The Balance Sheet can be likened to a house with a loan. The house has a value, say $450,000 and if there is a loan, say of $250,000 there would be a net of $200,000 which is also called Equity.

Buying a Home - IllustrationIn a similar way, a business has it’s assets, less it’s liabilities, leaves an Equity (Shareholder’s Equity).


Business - Balance Sheet Diagram

In Future Posts we will look at important ratios that can be calculated from parts of the Balance Sheet.

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Quickbooks & MYOB – Retentions and How to Enter

Quickbooks & MYOB – Retentions and How to Enter

Quickbooks & MYOB
Retentions and How to Enter

Client emailed asking how to enter retentions and whether GST is on the 10% retained.

Retentions are common in the building industry, and are a safe-guard for the purchaser who holds back say 10% of payment on a job, often up to 12 months, like an insurance in case there is a problem with the work performed by the contractor.

Keep the GST code on all lines and invoices – it applies at any stage and on retentions when due.

To enter in your books you can do it several ways:

  1. Invoice for the full amount of the job or final installment. On the next line of the invoice, raise -10% (or as applicable) and allocate that to an Asset account called something like Retentions. If you are using items, create the item ‘Retentions” and link it to the Retention Asset account. This account will be a record of what you are owed, like a debtors account. The invoice will then have a balance of 90% due.
  2. Or you could invoice the full 100% and send to the payor. When they pay 90% (short the 10% for retention) the invoice will be left open in accounts receivable reports. Sometimes this is preferred.
  3. As in 2 above, with 90% left after payment, you could adjust the invoice to the 90% amount and it will be closed, then raise another invoice for the 10% retention amount either now or in 12 months time when it is due.


Business Financials 101 – Business Health Ratios – The Profit and Loss Statement and Profit Margins

All businesses report how the business is going on the Profit & Loss Statement or Income Statement, and from it we can calculate Business Health Ratios that give us insight to the financial health of the business. The statement shows all the sales for a period less cost of goods (if you sell product) leaving gross profit, then from that all the expenses (operating or overheads like rent, wages etc) leaves  the operating profit (not always reported), then from that less any non-regular income and expenses, gives us the final net profit.

Business Financials 101 – Business Health Ratios – The Profit and Loss Statement and Profit Margins

Business Health Ratios
The Profit and Loss Statement and Profit Margins

In summary, there are three main levels of profit or profit margins

Gross profit (after cost of sales deducted from sales/revenue),

Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items) and

Net profit (Final, after tax and other non-regular expenses and income).

Note that “profit”, “earnings” and even “income” are all used interchangeably, and mean the same thing.

When the term “margin” is stated, it can apply to the absolute dollar number for a given profit level and/or the number as a percentage of sales/revenues.

The absolute amount, the dollar amount, is on the Profit & Loss Statement. The net profit margin commonly uses the percentage calculation to provide a measure of a company’s profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the sales generated.

So the calculation for –

Gross Profit Margin is Gross Profit / Sales (ie GP divided by sales).

Operating Margin is Operating Profit / Sales (ie OP divided by sales), and so on.

The observation of profits over years can detect consistency or positive/negative trends in a company’s earnings. Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company’s earnings that drive its stock price, as well as earnings per share and Return on Equity.

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MYOB & Quickbooks – Terminated Employee Notified to ATO?


Terminated Employee notified to ATO?

Terminated Employee
notified to ATO?

Question came – Just checking, we have had 2 employees cease employment with us, I understand how to notify and terminate them from their super fund but do I need to notify the ATO?? I notice on the bottom of the tax declaration there is a box that you tick if you no longer pay for this employee….do I tick that and send the copy to the ATO??? This is the copy I have on their employee file. Cheers.

AnswerNo you don’t need to notify the ATO. No need to enter on the TFN Declaration, unless started and stopped within a short few days.

Complete final normal pay, find their entitlement to Annual Leave (and good practice to print it for a record in case they ask for verification) and pay that to Unused Payroll (tick this wage category on via their card while in the pay run (*without super and zero out the Ann Leave/Hol Pay and Sick pay that may accrue again) ie just Unused Hol Pay and PAYG tax is all the final pay is.

Just do the Payment Summaries at year end (unless the employee requests one now, you must provide).

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Business Tax Tip – Hobbies – How much can you sell before you need to declare the income like a proper business?


Hobby or Business?

Hobbies – How much can you sell before you need to declare the income like a proper business?

The ATO (Australian Tax Office) has guidance about how much can you sell before you need to declare the income like a proper business, that is whether an activity is a hobby or not. It is not simply based on turnover, but on the intention to make profit and indicators of formal set-up such as having a business plan etc.

From the ATO website – at “Am I in Business?” a series of questions are posed to help work out if the activity a business.

Quoted from the ATO site –

  1. Does your activity have a significant commercial purpose or character?
  2. Do you have more than just an intention to engage in business?
  3. Do you have a purpose of profit as well as a prospect of profit?
  4. Is there repetition and regularity to your activity?
  5. Is your activity carried on in a similar manner to other businesses in your industry?
  6. Is your activity planned, organised and carried on in a business-like manner?
  7. Does your activity have characteristics of size, scale and permanency?
  8. Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?

Each time you answered yes to the questions above, it increases the probability that you are in business though no one indicator is decisive, they must be considered in combination and as a whole.

Why does it matter whether your activity is a business?

It matters because it may affect if:

  • Any money you receive from the activity is assessable income;
  • You are entitled to an Australian Business Number (ABN);
  • You can or must register for goods and services tax (GST).

How does the question of whether your activity is a business affect your tax?

There are numerous areas in which people carry out activities, often in a small way, which may constitute a business. These include, for example, gardeners, tradesmen, and couriers.

If you are carrying on a business:

  • Any money you earn from this activity is generally assessable for income tax;
  • You are generally entitled to claim tax deductions for any allowable expenses you incur in earning this income;
  • If your activity results in a loss, you may be entitled to offset this loss against other income or carry it forward to offset against future income, and therefore reduce the income tax you might have to pay in the future.

Common areas where people carry out activities which may be a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.

If your activity constitutes a hobby or recreation:

  • Any money you earn from this activity is generally not assessable income;
  • You are not entitled to claim tax deductions for any expenses you incur in carrying out this activity;
  • If your activity results in a loss, you are not entitled to offset this loss against other income or carry the loss forward.

Do you need to apportion your expenses?

It may be necessary to consider whether your expenses were incurred solely for business purposes, or for a `dual purpose’ (for example, partly for business purposes and partly for private purposes).

Generally, if your expenses were not incurred purely for business purposes, it is necessary to apportion your expenses between the different purposes.

What evidence might you have to show that your activity is a business?

These are examples of questions that we may consider in determining if your activity constitutes a business:

  • Do you have a business plan?
  • Do you use specialised knowledge or skills?
  • Have you had prior experience in this area?
  • How much capital have you invested in the activity?
  • Have you done market research?
  • How much time do you spend on the activity?
  • Is the activity a part-time side-line or your main income earning activity?
  • Do you give quotes and supply invoices?
  • Do you advertise?

As well as guidance about how much can you sell before you need to declare the income like a proper business spend time and read other information about being in business – refer to Tax basics for small business and Starting a business essentials