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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Call and you also get FREE“Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!
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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How to do the Accounting for Barter transactions and Trade Exchanges
In ourprevious postwe explained all about how the Australian Tax Office views Barter and Trade Exchanges – in summary you have to record and report as if they were REAL money transactions.
Here is a summary of how to record in your accounts in MYOB, Xero, Reckon, Quickbooks – from theXero support community –
“Set yourself up a new bank account called Bartercard – there won’t be bank feeds but you can then pay invoices from this account and also receive payments intoit by completing the payment section at the bottom of an invoice. You could use a spend money to take accounts of the fees.” Business Buddy. And further comment –
“Yes simply treat Bartercard exactly the same as any other method of financing, such as a bank account or credit card account. The Bank Feed does work but at month end only and is the easiest way. As a Chartered Accountant using Bartercard ourselves, and with lots of clients using Bartercard, it is really simple – treat Bartercard income and expenses exactly the same as cash income and expenses, pay/claim GST exactly the same, record income / profits / expenses exactly the same as if it were cash. So, although your transaction is similar to acquiring say a stock item for $10k and selling it for $45k, that’s a profit of $35k that would hit the P&L. However when the $T (Bartercard Trade Dollars) are spent on (say) accounting fees, stationery, cleaning etc in the business, these expenses are tax-deductible, and if all the $T is spent in the business, this ends up as tax neutral. Other than the cash saving by making these payments in $T instead of cash, that is a real cash profit the organisation has made and like any other profit, will hit the P&L positively.” Ian Malcolm.
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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 –
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
Current income statement to determine the amount of cash provided by or used by operations during the period – profit and loss prior and current
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.
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
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:
“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.
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:
Net income of $34,000 increased retained earnings, less
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
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.
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Cashflow Tips – Handle your business growth plan carefully to avoid disaster!
For many, your business growth plan will solve most business problems.
But growth can also be a disaster for a business if not handled well – and here are some common miss-beliefs.
Build it and it will sell itself – Many new ideas come to entrepreneurs all the time – but not everything succeeds for outside and internal reasons – no real demand, lack or poorly-prepared marketing plan (often a weak spot for small business owners), lack of financial budget plan.
I can/will do it all – Common error to fall into the “if it’s to be done no-one does as it well as I do it” trap. Yes in the early days you have to do most yourself – but document the method that you find works best, then teach someone else to do it so you can move on to other things. A good explanation is found in “The E Myth” by Michael Gerber. Paint a clear picture of what the future business will look like/become, write out the Organisation chart of the key roles of the organisation and job descriptions, find/create the systems required to make the business efficient, and get employment/HR help as it is a whole new mine-field of managing people and financial responsibility!
Bigger is better – When owners work on business growth, they often focus on sales, but a look at industry benchmarks often reveals that businesses in higher sales brackets aren’t always the most profitable. Often, businesses with modest turnover can achieve better profits, where-as too often, as a business grows, overheads can get out of hand and the extra sales get eaten up then profit falls. So sales and marketing plans are very important – and testing and measuring as you go is paramount – set budgets and create reports at least monthly to track how you are going.
Growth solves Cashflow problems – Nothing just happens without careful measuring and managing carefully!!! Ensure the budget is created as already mentioned, know your margins (Gross Profit, Net Profitas minimum). See if there are supplier discounts with larger purchasing volumes, and importantly, if you sell on account instead of retail, keep monitoring debtor days and don’t get slack on customers taking their time to pay!
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Bookkeeping – Accounting for Barter Transactions and Trade Exchanges
If you are a member of a barter organisation eg Bartercard in Australia, you are still required to ensure you are accounting for barter transactions for the sales and purchasesas if made by regular cash methods, and GST and tax still applies.
Here is how the ATO website explains it as at today –
How barter works
In its simplest form, bartering involves the direct exchange of goods or services for other goods or services without reference to money or money value.
There are sophisticated forms of bartering in the market place, both locally and internationally. These arrangements are typically controlled by member-only organisations, with credit units the medium of exchange.
The terms ‘exchange’, ‘barter exchange’, ‘trade exchange’ and ‘countertrade exchange’ are used to describe the organisation that manages the bartering operation. Various terms are used to refer to the medium of exchange, such as units, credits, trade dollars or barter dollars. The most commonly used term is trade dollar.
Trade exchange operations vary in size and sophistication, from community-based to business-based operations.
A trade exchange provides its members with a trading account for the purpose of recording member transactions. The trade exchange credits or debits the account each time a member makes a sale or purchase respectively. The account is also debited for fees the trade exchange charges its members. The trade exchange may buy and sell in its own right, acting as a member with its own trading account.
Tax treatment of barter transactions
Barter transactions are assessable and deductible for income tax purposes to the same extent as other cash or credit transactions.
When an entity that is a member of a trade exchange makes a taxable sale to another member, there is a liability for tax, including GST.
Payment may be in money or in kind, or in some instances a combination of these. The payment for sales between members of a trade exchange is the debiting of the recipient’s account and the payment received is the crediting of the supplier’s account.
Value of supplies made through a trade exchange need to be taken into account when determining whether an entity meets the GST registration threshold and is required to register for GST. For example, if an entity has $60,000 of cash transactions and barter transactions valued at $20,000, it meets the GST registrations threshold.
As a general rule, when valuing the payment arising from barter or countertrade transactions, we will accept a fair market value as adequately reflecting the money value or arm’s length value, as applicable. In most cases, we will accept as a fair market value the cash price that the taxpayer would normally have charged a stranger for the services or for the sale of the goods or property.
The rules of most business-oriented countertrade organisations specify a rate for converting credit units into an Australian dollar equivalent. Customarily the rules specify that each credit unit has a value equivalent to one Australian dollar. Where the monetary value worked out using the rate specified in the rules represents a fair market value of the goods or services provided, that rate is to be applied when valuing the payment. In all other cases, a conversion rate that values the goods or services provided at their fair market value is to be applied when valuing the payment.
Transactions where the values are set at artificially high levels for the purpose of establishing an inflated income tax deduction may indicate fraudulent activity. Parties to transactions that involve inflated credit unit values may have consequences other than an adjustment to the amount of income returned or the amount of income tax deductions claimed.
Personal purchases are not deductible for income tax purposes and a GST credit cannot be claimed, whether the purchase is made using trade dollars or Australian currency.
Example: GST payable on a taxable supply between members of a trade exchange
Harvey and Tracey are registered for GST and are both members of the Better Bartering Exchange. Harvey is a bookkeeper and provides bookkeeping services to Tracey who operates a courier service. Harvey’s trading account is credited with 440 Better Bartering credits (BBs) for the supply of services to Tracey.
Under the rules of the exchange, one BB equals $1 and the commercial value of the services is $440. The price of the supply is 440 BBs. Before calculating the value of the supply, the 440 BBs are converted to their Australian dollar equivalent ($440). The value of the taxable supply that Harvey makes is $440 × (10÷11), which is $400. The GST on the supply is, therefore, $40 (that is, 10% of $400).
Harvey will declare $400 as assessable income on his income tax return, and Tracey will claim $400 as a deduction on her tax return.
Payments to ATO
Payments to us of GST, income tax and the super guarantee levy must be made in Australian currency.
Generally, only other members of the trade exchange and the trade exchange itself may accept payment in trade dollars.
Tax invoices and ABNs
A tax invoice is required for a barter transaction as it is for any other business transaction. However, where a member of a trade exchange makes a taxable sale and the payment is expressed in credits, the tax invoice must comply with all of the usual requirements for a tax invoice, and include either:
The GST inclusive price expressed in Australian currency
The GST payable in Australian currency.
Australian business number (ABN) obligations apply to bartering transactions to the same extent as for any other business transaction.
Example:Tax invoice
Harvey and Carol are registered for GST. Harvey uses his Better Bartering credits (BBs) to purchase a new computer from Carol for his bookkeeping business. The rules of the exchange specify that one BB equals $1, and the market value of the computer is actually calculated in BB credits on this basis.
Carol issues Harvey with a tax invoice, showing the price of the computer in BBs and the GST payable in Australian currency converted at the rate of one BB equalling one Australian dollar.
If Carol did not quote an ABN, Harvey would be required to withhold 46.5% of the payment and remit that amount to us.
Record keeping
Members of trade exchanges must keep records that record and explain all business transactions and other acts they engage in that are relevant to a particular sale, importation, purchase, dealing or entitlement. The records must be kept for five years after the completion of the relevant transactions or acts.
In addition to ordinary accounting documents, this may include:
Invoices and receipts
Purchase orders, delivery dockets, contracts and barter scheme statements
Other relevant documents, such as the application for membership of the bartering scheme, the rules of the scheme, and any other documents governing the relationships between members, and between members and the trade exchange.
See also:
GSTR 2003/14Goods and services tax: the GST implications of transactions between members of a barter scheme conducted by a trade exchange (As at 29 May 2013)
Leave amount incorrect on PAYSLIPS but correct in REPORTS and Employee record – for Desktop and previous Quickbooks Plus, Pro, Premier, Enterprise, Hosted 2014 onwards
Lady called – Why do our payslips from the latest version of Reckon Accounts show an incorrect amount of Accrued Leave, but the reports and Employee record show the correct amount?
SOLUTION – From the Reckon Support Notes (ID: 5623) –
This issue is effecting random Reckon/Quickbooks Accounts Business (Plus, Premier and Enterprise/Hosted) users using 2014 and later releases.
Analysis:
Reckonhave identified the issue where the payslips of some employees do not display the correct accrued leave hours. This issue is totally random.
Reckon understand although the payslips do not show the correct hours, the leave liability report and the leave hours in employee actual record shows the correct hours.
Solution/workaround:
Please note: While we have known this KB to fix most of the issues we have tested, we cannot warrant that it will fix the issue in every case.
(The workaround to the issue is to reset the hours for leave for the employee and entering it manually after rebuilding the files 3 times.)
Please follow the below steps to fix the issue which is categorised into two parts:
Part 1: Preparations
Backup the file. Make a fresh new backup of your Reckonfile and keep it separate in a safe location so you can easily access it if required.
Print the Current ‘Leave liability’ report and ensure you know the current leave accruals for each employee prior to making any changes.
Part 2: Execution
Go to the employee menu and select the employee which has an issue with leave.
Edit the employee.
Go to ‘Payroll & Compensation’ Info Tab
Click on the Leave Details Tab
Note down the existing Year Begins on “xxxxx”, Day “xx” and Begin accruing time on “xx/xx/xx” field for the employee – (or take a screen shot of the existing details. As you will need to enter them back once the fix is done.)
Do this for both Personal and Holiday
Tick the ‘Reset hours each new year‘ option for the employee
Enter the Year begins on,Day and Begin accruing time on field as a date after the last pay entered but prior to the next pay date (i.e. if the last pay was on 08/11 and the next pay is on 15/11 enter any date between 09/11 & 14/11 as the reset date)
Do this for both Personal and Holiday
Rebuild the data file 3 times (File > Utilities > Rebuild)
Process the next pay (eg 15/11), the leave will reset
Go into the Employee record and enter the correct Amount of Personal and Holiday Leave (and untick the Reset option)
Enter the correct ‘Year begins on’, ‘Day’ and ‘Begin accruing on’ field as well as noted in step 5 above.
Next week when you process the next pay (i.e. 22/11), the leave accruals will be correct in Payslip & Employee Record and the Transaction.
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