The Profit & Loss Equation

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We all know that for any business to make an income it has to make Sales.

Many business owners closely monitor the sales, compare them to previous months, previous years and, if they can get hold of the information, other businesses.

But this isn’t the only thing to monitor. You have to make sure that out of those sales proceeds you can pay all of the costs of the business and have some left over for the business to make a profit.

And as the above picture shows the amount left over can end up being only a small percentage of the sale value.

Firstly you deduct Direct costs, the costs that if you didn’t sell that product or service you wouldn’t have to pay. This leaves your Gross profit. This is a much better value to monitor closely.

And you need to do so product by product, or service by service.

You may have an overall Gross Profit but it’s hiding the fact that you sell product A at a good margin, but product B at a loss. Reducing your overall gross profit. And it may even be that Product B is a higher dollar amount so you concentrate on pushing these sales, but there is very little point in selling something for less than it cost you to get to the point of sale.

The only time a business can justify this if it’s doing it intentionally as a loss leader. A marketing ploy to get customers to come in and buy other things as well.

Then, the total Gross Profit must be enough to cover all your overheads. The costs that would continue even if you didn’t sell those particular products or services e.g. your occupation costs.

Anything left after that is your profit.

You can also turn this around the other way, from the profit you want to make, or even break-even point, you can add your overheads and margins and calculate how much sales you need to make to achieve this.

 



How to get the best from your Xero

Last month I talked about using your management accounts to tell the story of what’s happening in your business. And how important it is that those management accounts are timely and accurate.

And it’s that accuracy that’s also vital to help us in preparing your year-end Financial Statements. The more we have to change in your accounts the more time it takes us and the bigger the cost to you.

More and more of our clients process their own accounts. And systems like Xero do make this seem super easy. They make out it’s quick, simple and what’s more – fun. But at our end, we’re finding it’s a mixed bag as to the accuracy of the accounts we are given. And banks are often saying the same thing. Read More »



Interpreting your accounts – Part 2

In my last blog I talked about the benefit of understanding your accounts and having them prepared regularly.

Now I am going to explain this in more detail.

Following are two of the most common misunderstandings of business. Reviewing your management accounts regularly can help your business by understanding these two areas.

1. Profit is not Cash

It’s not uncommon for us to be going over annual accounts with a client, telling them the profit and they say “I don’t believe we made that profit – if we did, where is it? It’s certainly not in the bank.” Read More »



Understanding the story your accounts are telling you

Your Accounts tell the story of what’s happening in your business. They are the financial results of events that occurred and decisions you made. By knowing what that story is saying you can react to events more quickly and make better decisions.

The Profit and Loss Statement or Statement of Financial Performance is a summary of trading for a period of time, usually a year. It shows the sales that you made, and deducts off them the cost of those sales and your overheads to work out if you made a surplus from those sales.

The sales in your accounts are recognised at the time the sale is made; when you invoice it – not when you’ve got the cash in the bank for them. The costs offset against those sales are also recognised when they are incurred, not when you pay for them. This is the essence of accrual accounting.

The Balance Sheet or Statement of Financial Position is like taking a financial photograph on a certain day. It lists what you own – your assets and what you owe – your liabilities. The difference is the equity in the business.

We have an e-book on our website that explains in more detail what each part of the accounts mean.

The benefit of regular accurate management accounts

But really, how useful are the end of year accounts we prepare for you? Obviously they have to be done to correctly calculate the amount of tax you owe, and comply with the Companies Act, but in terms of helping you make useful business decisions they are often just too late. They are a summary of financial events up to the last balance date. If another six months have passed you can’t exactly react quickly to address any problems.

This is why having regular accurate management accounts prepared is vital for any business.

Very often a business owner gets the books done, just because they need to be done for the GST return to be filed. But they should be so much more than that. By reviewing those accounts and watching a few Key Performance Indicators you can understand what’s going on now and make decisions about what to do about it now.

And better yet – knowing how the business is going on a regular basis helps you plan for the future.

What story are your accounts telling you about your business? Do you review your accounts to find out? Do you even have regular accurate accounts prepared? We can help you with all of this. It’s what we love doing.



Health and Safety Reform – Are you prepared for the changes?

Following on from the blog I wrote in the middle of last year, the Health and Safety Reform bill has just passed through Parliament and will come into effect on 4 April 2016.

You will have all heard the outcry from opposition politicians about high risk industries such as worm farms and mini golf while sheep and dairy farming are considered low risk. This has distracted attention a bit from the real purpose and impact of the new laws and how they will affect you.

Basically the implementation of the new regime will see more onus placed on people at every level of responsibility (in particular senior managers and company directors) who are required to understand and proactively manage health and safety in their workplace. There are now stronger penalties and wider enforcement tools for non-compliance.

I have gone through the Act and various articles including this summary from NZ Law Society on the implications and have tried to simplify them into a summary of the areas that everyone in business will need to be aware of.

This is not the complete Act so for further information about the legislation please go to Worksafe.


Who does the law apply to?

The new act widens the definitions of workplace and now applies to everyone who meets the new definition of a ‘Person Conducting a Business or Undertaking’ or a “PCBU”

Read More »



Property Investment

In my last blog I talked about the pros and cons of residential rental property as an investment. If you have the desire to invest in property but don’t want the hassles of tenants there are other types of property investment.

Commercial property is similar but aimed at the business market. Generally it’s a bigger investment as they’re more expensive buildings but the basic concept is the same. One of the advantages is that you can lock tenants in for a longer lease, and it’s usual to have a time to review the rent set in the lease. The tenants want the surety of both the time frame and the cost. However, it can take longer to find a tenant, especially if there’s plenty of property in the market or a down turn in the economy.

Commercial property is valued on the rental return, more so than residential property. Hence where a rent may be agreed, but an incentive offered to get a tenant in, rather than reducing the rent.

You also have to be clear who owns what, has the landlord provided the fit out, or has the tenant. Are you just charging rent, or do you get to pass on rates and insurance costs. Read More »



Running a great business

I spent a few days last month getting together with a group of colleagues who meet twice a year to work “on” our business’s. We’ve been getting together for 5 years now so we know each other very well. As one of them said “Its a bit like getting undressed together!”

Many Chartered Accountants call themselves “Accountants and business advisors”. To be honest, many of them have never really run a business themselves, or they have run a pretty sloppy one so I’m not really sure quite how they can advise their clients on how to.

I’ve been an owner of BW for over 20 years, and have many clients running small and medium businesses so I’ve gathered a bit of knowledge over the years.

Here are a few simple tips to running your business from me:
Read More »



Business Technology

There is no question about it, computer systems are replacing the need to employ people, and making things happen so much faster in a business.

Just one example is the creditors and the payment cycle.

In the old days, after purchasing something you received the invoices in the mail, sorted them and reconciled them to a statement. The invoice may have been processed into a creditors system, maybe by about the 10th of the month you had an idea of what your creditors balance was at the end of the month previously.

When it came time to pay it, you wrote a cheque, put the cheque with a remittance advice into an envelope, wrote the name and address of your creditor on the envelop then took them all to the post office. Your creditor had to open the envelope, record the receipt in their debtors system, write up a bank deposit slip and take it and the cheque to the bank to deposit.

Things have changes. Now, using an online system like Xero, invoices arriving by email and using a system called Receipt Bank the way we do, the processing of your invoices can take much less time.

Receipt Bank can read an invoice/receipt and save you the need to process it by inputting all the details for you, even making an educated guess at what to code it to. You then go in, make any necessary changes and approve it. Receipt Bank then send it to Xero and enters it as one of your creditors. Read More »



Could your business survive a month without you?

Could you take a month off from your business, as I did recently, and expect everything to be up to date when you get back? So many business owners tell me that they can’t take time off from the business without it, in the worst case, falling apart, and in the best case them coming back to a massive pile of things to catch up on.

How healthy is that, for the owner or the business?

There’s also the business risk. What happens if you get hit by the proverbial bus? How many peoples’ livelihoods are in jeopardy because the business couldn’t carry on without you?

Nobody in a business should be able to hold the whole place to ransom like this.

Some of the steps required to make the business sustainable include:

  • Good processes and systems
  • Having a great team that all know what their roles are and how to do them, including the owner
  • Team members trained to cover each others tasks
  • A good data base system or customer relation system, so all the team have access to information about your customers and can help them out
  • Others having access to your emails, to keep on top of them

Then when you go away, even though you will be missed, the place won’t fall apart without you.

I came back from a month away to a clear desk and an inbox of about 12 emails. My team did a great job keeping everything up to date



Have you got a Shareholders Agreement?

Following on from our previous blogs about buying or selling businesses, the importance of having a good shareholders agreement is evident.

Like wills these can be very easy to put in the too hard basket, but take a moment to think what would happen if your business partner(s) were to suddenly die or decide to sell their shares?

It isn’t all about value of shares (although having a method for valuating future sales/purchases is important) it is more about considering potential events. Even just having the discussion is great as it gives everyone a chance to establish priorities, find out if you are on the same wavelength and address any areas that may cause concern in the future. Do you have the funds/insurances in place to cover unforeseen circumstances? Do you want rules about selling shares, who to, notice period?

Even if you are already in business it isn’t too late to do a shareholders agreement.  If cost is contributing to your procrastination, the more groundwork you put in to get an understanding of your needs the easier the agreement will be for your lawyer/accountant and the lower the cost.

Parts of the conversation required can be pretty difficult but the importance cannot be stressed enough. Most people find that when they go through the process they not only learn about their partners priorities but also their own and it helps to clarify why they got into the business and what they want to achieve from it.

Give Peta or I a call and we will be happy to point you in the right direction, help start the conversation or act as an independent facilitator at a meeting of the partners.

We look forward to hearing from you



The forbidden topic of Politics!

At dinner parties they say never bring up politics or religion, the same should probably apply to this blog. But with an election looming it is pretty hard to avoid its effect on businesses in Wellington.

No matter what your politics are, the effects of an election year seem to be felt widely through the Wellington economy.

From the consultants who are uncertain about their contracts, or businesses unwilling to commit to contracts due to uncertainty about changes with the incoming government, to the legislations that didn’t make it through before parliament shut up shop on July 31. Many things go on hold, at least until parliament resits in November, possibly until the start of the new parliamentary term next year.

Examples of this are the changes to the Consumer Guarantees Act I mentioned in an earlier blog and our Chartered Accountants Institutes merger with its Australian counterpart which has the go ahead in Australia but is on hold here.

And this isn’t even taking into account any jitters around proposed changes to tax, minimum wage rates, government funding etc…

For most, these delays will be only minor irritants and business goes on as usual but for others these can have serious effects. So from a business perspective I can see real merit in 4 year terms. So bring on the election, let’s hope coalition talks go smoothly and we can all get back to business as usual as soon as possible.

Make sure you get out and vote (Especially since by not voting it means that you don’t have a moral right to criticise the outcome).

If you have any feedback on any of my blogs I would love to hear it, send me an e-mail on clayton@bwaccountants.co.nz



Buying & Selling of Businesses

I’ve been working with a few clients this year on the sale or purchase of a business. Sometimes it’s an outright sale or purchase to or from a third party, sometimes it’s bringing a new owner into an existing business, sometimes it’s someone wanting to get out of the ownership of a business; a business divorce. Sometimes it’s the shares in a company that are being sold, sometimes it’s the operating business being sold out of a company and sometimes the purchaser doesn’t want to buy all the parts of the business.

Each reason needs a different approach but the procedure to come to a successful agreement is pretty straight forward.

There’s the price to be agreed. (We don’t do formal valuations, but we do a business appraisal, analysing the accounts of the business and coming up with a likely amount we think it’s worth and working out how long you would expect it to take to earn back the purchase cost from the operations).

Then we have to work out how that’s going to be paid. Straight up cash is always good, but the real world doesn’t always work that way. Vendor finance may be required to help the purchaser and make it all work, or forecasts prepared to ask the bank for finance.

Then we have to work out what’s happening to all the other parts of the business and how it’s all going to proceed, in practical steps.

It’s work I love doing. Basically you’ve got 2 or more parties that both want the same outcome and are trying to work out the details of how to get there in a way that’s fair for everyone concerned.

The best way is to get all parties together and talk through all these things so that we make sure everyone understands and has agreed on all points and how it’s going to happen. Then I draw up a basic Heads of Agreement, before it’s taken to the lawyers for the formal paperwork to be completed.

Give me a call if I can help you with this process.