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Business Advice

Tax-time warning for SMEs: How always focusing on June 30 can blur your long-term vision

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*The information in this article is general information only. It is not professional tax advice and should not be taken as constituting professional advice from the author. You should seek professional tax advice from your accountant that is specific to your circumstances. 

Every year coming up to June 30, the tax man looms large in the back of all SME owners’s  minds.  

In the lead up many will be looking to minimise how much tax they need to pay, and particularly this year, to take advantage of Government rebates and assistance. In fact, it’s one question we often get asked by the businesses we work with. 

But no business should be acting solely in the interest of minimising tax.  

The reason for this is simple. Tax incentives should not be the starting point for making smart business decisions. It is something to consider, but the business / investment decision should be considered first. 

For most of us our business goals will include growing and increasing profits, which means we’ll likely need to accept that additional tax or legal responsibilities come with this.  

To minimise tax, you’re likely to be minimising the profit that your business is making.  

Don’t be sucked in by incentives 

Right now, the Government is offering highly publicised additional instant asset write-offs as part of its Coronavirus pandemic measures to boost the economy. 

However, if you are not already planning to spend that money, and it does not make sense to do so outside of a tax incentive, this incentive isn’t worth taking up. 

But this is an uncertain time, soon JobKeeper will stop, and the long-term effects on our economy are still unknown. With that in mind, spending incentives are best approached with skeptism and careful planning. 

One common lure is that it can be really appealing for a business owner, knowing that tax incentive is there, to take an additional loan or novated lease for a new car.  

However, unless you need the car (eg you might be a tradesperson in need of a new van or ute) it isn’t beneficial for company purposes. You shouldn’t buy a car for a tax write-off.  

Look beyond June 30 

There is a controversial business adage that any company will need three books: 

  1. For tax (so you pay less) 
  1. For the bank (to get better terms/loans) 
  1. For yourself (reality) 

When you balance your books to make the most of all tax offsets, you often have a focus on a singular point in time: June 30. 

But a business doesn’t operate like this, and continues on July 1 and beyond. People are looking at the tax before looking at what they really want to do. 

Beyond tax, there will be competing interests where it is likely you’ll need to show that your business has strong performance, growth and profits.  

This could be if you’re looking to approach the bank for a loan, or even if you’re presenting your company to a potential investor.  

A great example occurs in Research and Development tax. 

A lot of companies structure the books so they can claim losses for R&D tax rebates. Keep in mind it’ll mean your company looks bad, and you’re stuck with an entity that isn’t going to be appealing if you’re trying to borrow or raise capital in the future. 

Prioritise your business goals 

Instead, business owners should prioritise what they are trying to achieve.  

What’s your plan in the short-long term? Will you need to approach the bank for a loan, do you need to raise capital, do you want to aim for high growth? 

You need a strong business plan and understanding of your fundamentals first. Then manage the tax to support this plan.  

Navigate growth 

When businesses are growing it can be daunting to step up to the next level in terms of legal responsibilities, particularly in payroll tax.  

It’s a common misstep for a business in early growth stages to avoid hiring, because they’ll have to pay over the threshold. But this can cost your business big-time in lost productivity.  

If you are trying to grow your business these are situations you will need to proactively navigate and potentially invest back into your company so it can grow.  

Understanding business fundamentals, growth projections and your responsibilities are part of this, and unfortunately leading a strategy by tax minimisation will likely cost you more in the long-term. 

It’s always important to remember if you’re paying more in tax, it means you’re making more money. 

So as the end of this financial year approaches, approach your tax with your business goals in mind, not just avoiding the tax man.  

This post was first featured on Smart Company.

Cash vs accrual accounting: a guide for Aussie SMEs

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In business timing is everything, especially when it comes down to the basics of how you manage your money.

In accounting terminology, SME owners have the option to manage their business finances either on a cash basis or through accrual accounting.

These are both very important to understanding your business fundamentals.

As we will explain, accruals accounting can help business owners feel more at ease than reporting on a cash basis.

The reason is that the former provides a better picture of what the underlying business is doing rather than just tracking cash in and out, which often doesn’t reflect the performance of the business. Cash accounting means your performance could be overstated or understated depending on when you’re looking at your accounts.

What’s the difference?

The difference between cash and accrual is in the timing.

Cash basis accounting is used when you recognise the money only once it has changed hands, put simply, when it is in or out of your bank account. That means looking at expenses when they are paid, and invoices when the money comes in.

By contrast accrual accounting recognises your performance, by tracking revenue when it is earned and expenses when they are billed – regardless of when they are paid.

So what happens with a lot of small businesses?

Cash is often the default method used by SMEs, especially those on the smaller side, as it is the minimum requirement for quarterly reporting purposes, and it is also much simpler to manage.

But that doesn’t mean it’s the right thing to do. While simplicity is a good thing, it can come unstuck as business owners may lose sight of the underlying business performance.

The benefit of modern accounting systems like Xero or MYOB is that it is now easier to manage both (accruals and cash) so you get the best of both worlds – reporting on a cash basis but still being able to see your performance and position. However, it is still essential to have a good understanding of what each means.

A case study:

Olive, who is a small sporting goods retailer, buys 100 sets of skis over a three month period (x50 in April, x25 in May, x25 in June). She sells them for $200 each (x30 in May, x50 in June, x10 in July and x10 in August)

The difference between cash accounting and accrual accounting is displayed in the table below.

The key difference is the timing of when the cost of goods sold is accounted for. As you can see, in the ‘cash accounting’ method, the cost of goods sold is accounted for as soon as they are purchased and paid for however in the ‘accrual accounting’ method, the cost of goods sold is accounted for only when the goods are sold. As a result, the ‘accrual accounting’ method provides a more accurate reflection on the business’s performance where as the ‘cash accounting’ method focuses purely on how much cash is moving in and out of the business and not necessarily how the business is performing. Another thing to look at is how the profit margin (profit/sales) is reflected in each method. Olive’s business is purchasing skis at $100 and selling them for $200 each. That is a 50% profit margin however, when you look at the scenario from a ‘cash accounting’ perspective, the profit margin appears to fluctuate every month but that is not the actual case.

There are flow on effects to broader business management no matter which you take. Let’s take a more in-depth look at both.

Cash accounting

Cash accounting is a simple method of bookkeeping that keeps track of the cash coming in and out.

How it works:

  • Expenses: when you get an invoice you don’t record the cost till it is paid
  • Revenue: you don’t record revenue until you have the cash

The pros are:

  • Simple to maintain
  • You can see easily when something is paid or charged
  • You can report GST on a cash basis
  • You can see how much cash your business has at any given time

Challenges:

  • You can’t see money you owe to people, or they owe to you
  • There’s no visibilty on performance… *

*If we refer to the above case study, at the start of the season it appears that the business has performed terribly on a cash basis – ordering stock, but once it makes a sale then it is likely to have improved its cash position. However, this position then neglects the fact that it will still have stock on hand, impacting the profitability of trade.

This would suit:

Businesses which have an instant fee for services such as hairdressers or small takeaway restaurants. However, these will still need to account for payroll tax, GST and other legal obligations.

Accrual accounting

Accrual accounting is a more complicated method of accounting, and you may need to get external assistance to help.

It means you record expenses and sales when they take place, rather than just the cash transactions, which means you can keep track of who you owe money to, and who owes money to you.

The pros:

  • Tracks your true financial position as it accounts for outstanding expenses or invoices
  • Helps to better understand financial performance (smooths out things like inventory orders) or delivery of work over time etc.
  • Helpful in accounting for large contracts or upfront expenses

Challenges:

  • It is more complicated and likely to mean you need to rely on a professional such as an accountant or experienced bookkeeper

This would suit:

Ideal for businesses that do not get paid immediately such as tradespeople, retailers, wholesalers, or a consultant who invoices at the end of a project etc.

How to pick a method

To choose the method right for you, ensure you understand how your business works and what you need to accommodate for.

You might want to consider:

  • The size of your business
  • Complexity and timeline of your transactions and processes
  • Whether you have the resources to manage more complicated accounting
  • Whether there are likely to be reporting requirements
  • Future needs including funding from banks or other lenders. Having accruals accounting will help to improve the demonstration of sophistication of accounting practices and improve the business’s likelihood of being granted funding.

As always, a great first step is to speak with your accountant about whether you need to consider a different way of managing your business finances.

Beyond Government subsidy: How to keep your staff employed

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As a business owner, being in charge of your staff’s livelihoods is a responsibility that can lose you sleep, even in boom times.

In the current climate, with many businesses reeling from revenue or business model hits due to the Covid-19 pandemic, keeping people in jobs is a genuine crisis.

The Federal Government has released a wage subsidy of $1500 a fortnight per employee with the aim to keep thousands in work during a time where we are in “social hibernation”.

Through our financial modelling, we help businesses understand what will happen in varying situations.

For many industries, hospitality, fitness and retail, dealing with such a sharp decline in revenue is almost unprecedented.

To keep businesses operational or even viable in “hibernation”  there are a few solid strategies that can help and hopefully keep staff on board through the hard months.

Can your business access the JobKeeper subsidy?

Businesses and sole traders with revenue under $1 billion will be able to access the JobKeeper subsidy of $1500 a fortnight to support employees if their revenue has fallen by more than 30 per cent (of at least a month).

The Government has also introduced discretionary measures to allow for pre-revenue, high-growth and businesses that have not been in operation for a year.

The best resource to keep up with changing information for these and other measures is direct through Government websites. We also recommend contacting your accountant for more information specific to your business.

Cut costs

Depending on how the current economy has affected your business there are probably areas that ordinarily would be considered essential that must be cut at least temporarily.

Redeploy: If you are a larger business, you might be able to move staff into different roles where more help is needed.

Leave: Other businesses are reacting by asking staff to take periods of leave, both paid and unpaid, through the pandemic period to balance their cash.

Re-negotiate terms

It is essential during these months of uncertainty to assess whether your business has a cash flow, revenue or other problem.

If it is cash flow related, speak to suppliers and other stakeholders about different terms to cope through the pandemic.

One area under focus is commercial rent with landlords moving to defer rental payments. Some co-working spaces, including the one we are based in Stone&Chalk, have offered three months rent reprieve to assist businesses through the crisis.

Flip your business

If we told you a month ago, that Attica, one of the world’s 100 best restaurants, would pivot into a bakery to survive, you’d have laughed at us.

But it has, and many other strong brands in the restaurant business have likewise flipped their models to survive through an uncertain period.

Many of us can look to these savvy business owners for inspiration on how we can change and adapt to the rapidly evolving situation.

But keep your eye on the future, a crisis can push a business to change in positive ways and ensuring you think long-term will help ensure you make the right choices now.

Charles Darwin said it best: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

Keep communicating with your team

In this period of social distancing, keeping connected to your team is important. You don’t want to lose good staff through lack of support as they’ll be essential to your recovery when things begin to pick-up again.

Although a time of uncertainty, giving your team updates to keep business progressing, and the team informed about their potential job security will help not only producitvity, but their personal wellbeing.

There is no doubt that no matter what your business is, it will be a time of evolution and change. Before making major decisions it will pay off in the long-term to return to your key business drivers and fundamentals.

We also have responsibility, and now incentives, to keep our teams together and staff employed where we can through the Covid19 crisis.

Understanding where your cash flow and growth has come from in the past, and where it is likely to pick up when the economy begins to recover will help guide your choices so they are beneficial to your business now, and when the good times come again.

Financial health check: Why you can’t manage your business by your bank account

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It’s the start of the year, and in these early days, it’s natural to take a look at how your business is going financially. The unfortunate thing is that this step is often where SMEs make their biggest mistake. They look straight at their bank account and that’s it. I’m guilty of this too, and in Ravit Insights’s dealings with a wide range of companies, the same holds true for other owners.

We too frequently take the shortcut of looking at how much cash is in the bank to guide key decisions. When running a business it can be very easy to get caught up in the day-to-day operations and looking for shortcuts like this one can land you in trouble.

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’tis the season – so is your business prepared?

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For most Australians December is either a time where your foot is flat to the floor, or you’re winding down and focusing on the next end of year lunch.

Knowing which camp you fit into is vital for all Australian small and medium businesses.

For the gelato store near St Kilda beach in Melbourne a warm summer with more tourists and beach days can make their business profitable for the entire year, even through the dark days of winter. The same goes for the retail stores, which despite declining economic environment, often rely on a very busy Christmas to buoy their annual turnover.

However, for others, like consulting firms or those in financial services, December signals a time to wind down. Often businesses will really slow down over late December and early January, with some taking a much needed break.

Whichever camp, or another, you’re in, it is important to understand how seasonality will affect you.

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Why growth is bad for your bank balance

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Growth is good. But it comes with big challenges.

With the hype in the startup world, growth, in the form of a mythical hockey stick, has become one of the much vaunted and sought after business metrics.

As we frequently see reported globally, the highest growth and highest valued technology startups are rarely profit or cash flow positive – think Uber and WeWork.

What that means for the majority of business owners, is that balancing growth with cash flow or capital needs is one of the key operational challenges.

It’s probably what you’ll lose sleep over (if this is you, take a breath and fill out our growth early warning signs check list).

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Don’t listen to billionaires — they don’t understand your business

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When we started Ravit Insights, we followed advice from billionaires and industry experts by putting ourselves in front of potential clients and this is what it got us: radio silence. The truth is, billionaires and experts don’t have a full understanding of our company, and they don’t have a full view of yours either — despite what they would have you believe on LinkedIn and Instagram.

They got to their high level of success over a long period of time, and they’ve probably forgotten half of what they’ve done to get there.

The mistake we made was taking their words at face value rather than thinking for ourselves. Following their advice, we priced our solution too high, and we didn’t go anywhere. Instead, we needed to educate ourselves and find people who truly understood what we were trying to achieve and at what scale and pace.

We could have had a lot more clients if we had ignored the experts and trusted our gut straight away. This is the advice we wished we had been given two years ago.

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Contact us today at info@ravitinsights.com.au