Bookkeepers and Business Owners! – Training you – Solving Problems – Or We do your books for you!

Bookkeeping – Train, Troubleshoot or we do the books for you! MYOB Reckon Xero & Set Up


Leave a comment

Business Finance 101 – How can a company have profit but no cash!

Business Finance 101 – How can a company have profit but no cash!

How can a company have profit but no cash!

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, see HERE we gave an example of Profit and Loss resulting in $15,000 profit.

Business - Profit & Loss

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)

NotePROFIT 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 –

Business Cash Profit

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much!

Or ask a question – Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

Advertisements


Leave a comment

Business Finance 101 – Research – How your accountant (and good bookkeeper) can help BOOST your business revenue!

Business Finance 101 – Research - How your accountant (and good bookkeeper) can help BOOST your business revenue!

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.

Rose Powell reports in SMEs can make better use of their accountant to boost their bottom line – “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 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.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much!

Or ask a question – Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

Business Finance 101 – How the Cash Flow Statement is Prepared

Business Finance 101 – How the Cash Flow Statement is Prepared

How the Cash Flow Statement is Prepared

 Last month we discussed what the Cash Flow Statement tells us, and here we show and example of how the Cash Flow Statement is prepared.
Three sources are used to gather information for the cash flow statement rather than from the Trail Balance –

  1. Comparative balance sheets provide the amount of the changes in assets, liabilities, and equities from the beginning to the end of the period – that is, year or period before and current period
  2. Current income statement to determine the amount of cash provided by or used by operations during the period – profit and loss prior and current
  3. Selected transaction data from the general ledger provide additional detailed information needed to determine how cash was provided or used during the period – eg asset purchase

Three steps lead to preparing the statement of cash flows from these sources

Step 1. Calculate the change in cash:
This is the difference between the beginning and the ending cash balance from the beginning and end period on the balance sheet.

Step 2. Calculate the net cash flow from operating activities:
This procedure is complex. It involves analysing not only the current year’s income or profit & loss statement but also comparative balance sheets and selected transitions data.

Step 3. Calculate net cash flows from investing and financing activities:
All other changes in the balance sheet accounts must be analysed to determine their effects on cash.

A worked Example – Compiling the Cash Flow Statement

To illustrate a statement of cash flows we will use the first year of operations for Business Pty Ltd.

The company started on July 1, 2014, when it issued 60,000 shares of $1 value common stock for $60,000 cash.

The company rented its office space and furniture and equipment, and it performed services throughout the first half year.

The balance sheets at the beginning and at the end of the 6 months are as follows.

1 Bal Sheet Jul-Dec

The Profit & Loss or Income statement and additional information for Business Pty Ltd are –

Business Pty Ltd
Profit & Loss Statement
For the period ended December 31, 2014

2 Profit and Loss

Step 1. Calculate the change in cash:
The company has no cash on hand at the beginning of the period, but $49,000 at the end of 2014. This is an increase of $49,000

Step 2. Calculate the net cash flow from operating activities:
First the net profit/income must be converted. Under generally accepted accounting principles (GAAP), most companies must use the ACCRUAL basis of accounting, requiring revenues be reported when earned/invoiced and that expenses be recorded when incurred/authorised. Net income can also include credit sales that have not been collected in cash and expenses incurred that have not have been paid in cash. Thus, under the accrual basis of accounting, net income will not indicate the net cash flow from operating activities.

To calculate net cash flow from operating activities, it is necessary to report revenue and expenses on cash basis and can be calculated via either a direct method or an indirect method

1. Direct Method: (also called the income statement method) –

Business Pty Ltd shows sales/revenues of $125,000. However, because the company’s accounts receivable increased during 2003 by $36,000, only $89,000 ($125,000 − $36,000) in ACTUAL cash was collected on these revenues.

The company also shows operating expenses of $85,000, but accounts payable increased during the period by $5,000. Assuming that payables related to operating expenses, the ACTUAL cash operating expenses were $80,000 ($85,000 − $5,000).

Because no taxes payable exist at the end of the year on the Balance Sheet, the $6,000 income tax expense must have been paid in cash during the year. Then the computation of net cash flow from operating activities is as follows:

3 net cash flow(1)

“Net cash provided by operating activities” is equivalent of cash-basis net income or the CASH Profit & Loss.

2. Indirect Method: (or reconciliation method) –

starts with Net Profit/income and converts it to net cash.

Increase in Accounts Receivable―Indirect Method:
If accounts receivable increase during the year, revenues on an accrual basis are higher than on a cash basis because goods sold on account are reported as revenues. In other words, operations for the period led to increased revenues, but not all of these revenues resulted in actual cash, but appear as an increase in accounts receivable. Therefore the increase of $36,000 in accounts payable must be deducted from net income.

Increase in Accounts Payable―Indirect Method:
If accounts payable increase during the period, expenses on an accrual basis are higher than they are on a cash basis because expenses are incurred for which payment has not taken place yet. Therefore the increase of $5,000 in accounts payable must be added back to net income.

As a result of the accounts receivable and accounts payable adjustments, net cash provided by operating activities is determined to be $3,000 for the year 2003. This calculation is shown as follows.

4 ar and ap cash flow(1)

Observe that net cash provided by operating activities is the same whether the direct or indirect method is used.

Step 3: Calculate Net Cash Flows from Investing and Financing Activities:
Finally, we need to determine whether any other changes in balance sheet accounts caused an increase or decrease in cash.

For example, an examination of the remaining balance sheet accounts shows that both common shares and retained earnings have increased. The common shares increase of $60,000 resulted from the issuing of common shares for cash. This is a receipt of cash from a financing activity and is reported as that in the statement of cash flows. The retained earnings increase of $20,000 is caused by two items:

  1. Net income of $34,000 increased retained earnings, less
  2. Dividend declared of $14,000 decreased retained earnings.

Net income has been converted into net cash flows from operating activities, as explained earlier. The additional data indicates that the dividend was paid. Thus, the dividend payment on common stock is reported as cash outflow, and classified as financing activity.

We are now ready to prepare the statement of cash flows. We start with the operating activities section. Either the direct or indirect method may be used to report net cash flow from operating activates.

The statement of cash flows under indirect method for Tax Consultation Inc. is as follows.

Business Pty Ltd
cash flow statement-Indirect Method
For the period end 31 Dec 2014

5 Net Cashflow Stmt(1)

As shown, the $60,000 increase in common shares results in a cash inflow from a financing activity. The payment of $14,000 in cash dividends is classified as a use of cash from a financing activity. By coincidence in this example, the $49,000 increase in cash reported in the statement of cash flows agrees with the increase of $49,000 shown as the change in the cash account in the balance sheet.

What are your thoughts?

Call for FREE 30min advice / strategy session today! 0407 361 596 Aust

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

 

 


Leave a comment

Business Finance 101 – How does the Cashflow Statement Work – Overview for Business Owners

Business Finance 101 – How does the Cashflow Statement Work - Overview for Business Owners

How does the Cashflow Statement Work – Overview for Business Owners

There are 2 popular financial statements that are commonly given for a business – a profit & loss or income statement, a balance sheet or statement of position, but rarely used is the cashflow statement (or statement of cash flows). The purpose of the cashflow statement is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash for the business.

Business owners usually know by “feel” what their cash flow is like, and they should monitor cash for a very good reason – without a sufficient cash balance at the right time, a company can miss golden opportunities or may even fall into bankruptcy. 

The cash flow statement answers questions that cannot be answered by the income statement and a balance sheet. For example a statement of cash flows can be used to answer questions like where did the company get the cash to pay dividend of nearly $14,000 in a year in which, according to profit & loss / income statement, it lost more than $10,000?

The cashflow statement is a valuable analytical tool for business managers as well as for investors and creditors, although managers tend to be more concerned with forecasted statements of cash flows that are prepared as a part of the budgeting process. The statement of cash flows can be used to answer crucial questions such as the following:

  1. Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?
  2. Will the company be able to repay its debts?
  3. Will the company be able to pay its usual dividends?
  4. Why is there a difference between net profit/income and net cash flow for the year?
  5. To what extent will the company have to borrow money in order to make needed investments?

For the statement of cash flows to be useful, it is important to use a common definition of cash. It is also important that a statement be constructed using consistent guidelines for identifying activities that are sources of cash and uses of cash. The proper definition of cash is broadly defined to include both cash and cash equivalents.

Cash equivalents (applicable more for large companies) include short term, highly liquid investments such as treasury bills, commercial paper and money market funds that are made solely for the purpose of generating a return on temporary idle funds. Instead of simply holding cash, most large companies invest their excess cash reserves in these types of interest bearing assets that can be easily converted into cash. These short term liquid investments are usually included in marketable securities on the balance sheet. Since such assets are equivalent to cash, they are included with cash in preparing a statement of cash flows

The 3 sections of cash flow statement (each has an inflow and outflow section):

Business Finance 101 – How does the Cashflow Statement Work – Overview for Business Owners

How does the Cashflow Statement Work – Overview for Business Owners

Operating Activities: (mostly income statement / profit & loss)

Operating activities shows the cash effects of transactions such as –

  • cash receipts from sales of goods and services and
  • cash payments to suppliers and employees for acquisition of inventory, taxes, interest on loans

Investing Activities: (mostly long term assets)

Investing activities generally show long term assets (and sometimes debt/equity securities) which include –

  • sale/disposing of plant, equipment
  • sale of debt or equity securities
  • acquiring plant and equipment
  • acquiring debt or equity securities

Financing Activities: (mostly long term liabilities and equity)

Financing activities involve liability and stock holder’s equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them with a return on, and a return of, their investment.

  • Increase in debt / loans taken on
  • Payment/redemption of debt facilities / loans
  • Dividends paid

Next month we will work through an example

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much!

Or ask a question – Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

Business Finance 101 – 6 MORE tips! Plus 4 individual tax tips – End of Financial Year tax tips 2018

Business Finance 101 – 6 MORE! Plus 4 individual tax tips - End of Financial Year tax tips 2018

6 MORE! Plus 4 individual tax tips – End of Financial Year tax tips 2018

BUSINESS

1. Get more from your director’s bonus

If you are expecting a pre-30 June bonus, you may be able to sacrifice your pre-tax salary or bonus into super rather than receive it as cash. As with the deductible contributions, this could reduce tax on your salary or bonus by up to 34%, and will allow you to take advantage of the contribution caps that apply in this financial year. Once your money is invested in super, the tax going in is only 15% and also, tax on earnings is capped at 15%, which may compare favourably to investments held in your own name.

2. Pay quarterly/monthly super

Super Guarantee contributions must be paid before 30 June to qualify for a tax deduction in the 2017/18 financial year. You might consider bringing forward the June quarter contribution payments. We recommend allowing plenty of time for it to reach the super funds (5-14 days some funds require).

3. Bad debt review

Review all your bad debtors. Write-off all those you think are unlikely to pay to enable a tax deduction this year. We recommend recording this in the minutes of the business after ensuring that all reasonable steps have been taken to recover the debt.

4. Prepay expenses

Prepaying certain expenses such as rent, repairs and office supplies before year end can reduce your current year tax liability. If payments are due early next financial year, a pre-payment may entitle you to the tax benefit much earlier.  The rules differ depending on the type of entity so please call your tax agent, if you would like more clarification.

5. Stocktake

Trading stock should be reviewed before 30 June, either by a physical count or from a perpetual stock record system. Small Business Entities can be exempt from conducting a yearly stock take if the value of stock has moved by less than $5,000 during the year. Tax is paid on the value of stock at the end of the financial year so consider selling or disposing of slow moving stock so that it is not included in the count.

6. Franking credits

If you are planning on paying dividends out to shareholders before the end of the year, it is worth reviewing the company’s franking account to ensure that the company has paid sufficient tax to enable the dividends to be fully franked. This may mean paying ahead of scheduled payments in an arrangement with the ATO. For assistance with calculating your franking account balance, please talk to your tax agent.

INDIVIDUALS

A. Get a super top up from the Government

If you earn $35,454 – $51,021 pa, of which at least 10% is from employment or a business, and make a personal after-tax super contribution, you could qualify for a Government co-contribution of up to $500. 

B. Boost your partner’s super and reduce your tax

If you have a spouse who earns less than $10,800 pa, consider making an after-tax super contribution on their behalf, and you could receive a tax offset of up to $540.

C. Use super to manage Capital Gains Tax

If you make a capital gain on the sale of an asset this financial year and earn less than 10% of your income from eligible employment, you may be able to claim a tax deduction for a contribution to superannuation, which could reduce or offset your capital gain. You will need to be eligible to contribute to superannuation (which means you are under the age of 65, or under 75 and meeting the work test), and be comfortable having your contribution preserved in super until you meet a condition of release (eg retirement).

D. Make tax deductible super contributions

If you earn less than 10% of your income from eligible employment (eg you are self-employed or not employed), you are generally able to claim a tax deduction for personal contributions to superannuation. As with super, you will need to be eligible to contribute to superannuation (which means you are under the age of 65, or under 75 and meeting the work test), and be comfortable having your contribution preserved in super until you meet a condition of release (eg retirement). If you claim a deduction for it, the contribution you make will be taxed at 15% in your super fund, so your tax saving will be the difference between your marginal rate and 15% – which could be up to 34%.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much!

DOWNLOAD a FREE “Bookkeeping Quarter Checklist” to get organised! CLICK HERE

Or ask a question – Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

Business Finance 101– 5 End of Financial Year tax tips 2018

Business Finance 101– 5 End of Financial Year tax tips 2018

5 End of Financial Year tax tips 2018

Time to plan for a good finish for EOFY and here are 5 tips to get started and prepare for 30 June.

1. Consider the ideal timing for asset sales

If you are thinking of selling a profitable asset this financial year, but are likely to earn a lower income in the next year, it may be worth postponing the sale until after 30 June, as the sale is income, less the original cost. However, if you expect an income windfall from 1 July, it may be worth bringing the sale forward. As always, your decisions depend on your expectations for future asset prices, so don’t postpone a sale for tax purposes if you are expecting your investment to fall in value!

2. Pre-pay investment loan interest 

If you have (or are considering establishing) a geared investment portfolio, you can pre-pay 12 months’ interest on your investment loan and claim the cost as a tax deduction in the current financial year.  This can assist to manage cashflow more efficiently, and potentially reduce your income tax liability this financial year.

3. Pre-pay income protection premiums 

If you are employed or self-employed, income protection insurance provides peace of mind about the security of your income in the event you are unable to work due to illness or injury. Premiums for this insurance are generally tax deductible; prepaying your annual premium prior to 30 June will allow you to claim a full year of cover in advance as a tax deduction.

4. Review your debtors and creditors

Review your accounts receivable / trade debtors – who is taking the longest to pay – is debt-collection failing – consider if it is simplest to write off (reverse) the sale and move on with more Profitable clients and prospects. Likewise – who do you owe? Can you pay them by end of year to tidy up your accounts – or if you are struggling – can you negotiate longer terms to keep things open with suppliers and keep the relationship going?

5. Offset capital gains with capital losses 

Generally, if you have incurred capital losses on your investments, you are able to offset these capital losses against any capital gains you have made. You can also use losses you have carried forward from previous years. Remember, income losses can only be offset against income; capital losses can only be offset against capital gains.

DOWNLOAD a FREE “Bookkeeping Quarter Checklist” to get organised! CLICK HERE

Or ask a question – Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

Business Finance 101 – What is the Balance Sheet – Example and Definition

Business Finance 101 – What is the Balance Sheet – Example and Definition

What is the Balance Sheet – Example and Definition

An important part of helping our clients at Account Keeping Plus, is to educate and help businesses and bookkeepers to understand what is the Balance Sheet (also known as the Financial Position) and here we give an example and definition.

Definition

The Balance sheet presents a look at a point in time (eg end of month or year) of the assets and liabilities of the business. In other words, it is a picture or summary of what the business has and how it is funded.

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

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 show Plant & Equipment and Motor Vehicles.

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 show business loans and overdrafts, car loans/finance.

Equity is the difference of assets less liabilities. Sometimes known as net worth  or Shareholder Equity.

Example

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

Bal Sht like house

In a similar way, a business reports these as the Balance Sheet Assets, less its Liabilities, leaves Equity (Shareholder’s Equity)

Bal Sht summary

Look for future Posts where we will look at important ratios that can be calculated from parts of the Balance Sheet.

What are your thoughts? Call for FREE 30min advice / strategy session today!

0407 361 596 Aust

DOWNLOAD a FREE “Bookkeeping Quarter Checklist” to get organised! CLICK HERE

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