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.

 


The Christmas period and paying your staff

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We’re heading into the silly season again. It’s referred to as that for a reason. In NZ with our annual close down of business we seem to go flat out to squash a months of work into 3 weeks in December. Unless you’re in retail and selling things people want for Christmas, these are never usually profitable months.

For those of us that are employers it’s a particularly expensive time of year. There’s 6 statutory days between Christmas and Waitangi day. That’s 6 days you pay staff not to turn up and do any work. Or, if you’ve got a business that’s open on those days you have to pay more and give them a day in lieu. Then when people return it always seems to take a few weeks for everyone to rev up into full productivity again.

A quick reminder on the statutory day pay obligations:  If someone would normally work on the day the holiday falls you have to pay them for it. If your business is open on the statutory day and your employee works on that day you have to pay them time and a half and give them a day in lieu. This year Boxing day, January 2nd and Waitangi day all fall on a Saturday. So these are all carried over to the Monday – Yes Waitangi Day is now Mondayised and is a statutory day on Feb 8th. If you want help working out any of your holiday pay obligations give Nicole a call, she’s our head bookkeeper and comes across all of these situations.

For some employers, you pay all the staff their annual leave as you close down at Christmas. Then there’s the GST and provisional tax payments due in January to fund as well – so a tough time of year for business cash flow.

Do any of these come as a cash shock to you and your business? If the answer is yes, perhaps your new year’s resolution should be to talk to us about helping prepare a budget and cash flow forecast for next year so you can enjoy that well-earned break.

The other side of this is we all get a chance to spend time with family and put our feet up, rest and recover for the new year. I always come back invigorated and keen to get into a new year.


How to get the best from your Xero

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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

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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

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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.


Property Investment

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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 »


Residential Rental Property Investment

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Residential rental properties are the classic Kiwi investment. We’re often accused of not diversifying our investments and being hung up on investing in bricks and mortar, which doesn’t really invest back into the money go round. There’s lots of media stories about the effects of this and the scourge of the middle aged mum & dad investors all competing to buy the housing stock, beating up the prices so the young can’t afford their first home.

There’s no question that the banks like people investing in them. They make money out of you owing them money and paying interest on that. So once you’ve paid off a reasonable amount of your home mortgage they’re keen to let you use the equity in your home to take on more mortgage to buy investment properties.

Investing in residential rental property is a long term proposition. The idea is that you use the income from the rental to pay off the mortgage. Effectively a forced form of saving. Read More »


Assessing Risk in your business

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Being aware of what risks your business could face allows you to plan to mitigate them.

A risk assessment plan is a “what if…” exercise. You need to:

  • Identify what could happen to or in your business.
  • What would the impact be if it did?
  • How likely is it to happen?
  • Can it be reduced or eliminated?
  • Do you need to get insurance in case it happens?

We undertook a disaster recovery plan a couple of years ago. The whole team sat down and discussed what we would do if a disaster happened, what we expected of each other, how we would communicate, and whose job is it to get us up and running again and in what time frame. It was an interesting exercise and sort of funny. And when we had the quakes in Wellington a bit later we were all prepared; we were almost disappointed that we only had a filing cabinet fall over.

Most risks are not that dramatic. It’s far more likely that a business interruption actually comes as someone burning their lunch and setting off the sprinklers and destroying the computer system.

Any good insurance advisor will be able to walk you through a risk assessment plan for both material damage and business interruption.

We know a few good people so let us know if you’d like to be pointed in their direction.

The more subtle risks I mentioned in my last blog require building a strong sustainable business to mitigate.
Doing a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis helps. As does having a plan, establishing policies and procedures, keeping up to date with your market and keeping your team healthy and engaged.

If you’d like help with undertaking this planning give us a call.


What is Business Risk?

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Business Risk is defined by Wikipedia as uncertainty in profits or the danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes a business to fail.

Business risks fall into several categories:

Strategic Risk – your market or environment changes drastically e.g. a big competitor comes into your market or you don’t keep up to date with technology changes and your customer moves on.

Compliance Risk – failure to comply with legislation, regulation and/or standards. For example the new Health & Safety Regulations will mean more compliance; failure to follow these could lead to fines.

Operational Risk – a failure in one of your day to day operations. Either technical, like your server dying, or people or process driven, like no one checking payments and an extra zero added onto a payment.

Financial Risk – refers to the cash flowing through your business. Like reliance too much on one supplier, who goes under owing you money?

Reputational Risk – negative publicity about your product or service could cause customers to desert you.

We can all picture the big externally driven physical risks to our business. Someone burning our building down, an earthquake destroying our town. Or even internal, theft by an employee. These are relatively easy to quantify, plan and insure for.

But some risks are more subtle, particularly for small businesses.

  • What happens if the owner or a key employee gets hit by the proverbial bus and can’t turn up to work for a few months, will the business be able to continue?
  • If your plan is to sell your business to fund your retirement, what’s the risk if that doesn’t work out? How do you ensure it will?
  • Negative cash flow leading to financial collapse.
  • High staff turnover, or in reverse an aging or out of date workforce.

Planning, spreading risk and, where need be, insuring are essential for all businesses. Too often we’re too busy working and wrapped up in our business to plan and set up safe-guards. That’s risky!


Marketing tools and technology

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As I said in an earlier blog every business needs to do some form of marketing, no matter how small you are.

Once you’ve fully understood who you are, what your product or service is and who your target market is, you have to find a way to talk to them. My blogs are an example of this.

In this day and age this involves tools and technology. The array of these is overwhelming – just try googling it.

Plan

So, start with a plan. What are you going to say, who to and what media will you use to say it?

We used a consultant to help us come up with some structure around what we are saying (for example, this month is about marketing). Having a structure makes it a lot easier to make it happen and now I don’t spend hours sitting around trying to dream up what to say. Read More »


Running a great business

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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 »


Marketing in a small business

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We, as accountants, used to be in the fortunate situation where we were a necessary evil for all businesses. We had an annual relationship with our clients where we did the scary stuff they didn’t want to do themselves. Times have changed, and the way we do business has changed. So I’ve had to learn a lot about marketing in recent years. What it is, and what it isn’t. It’s no longer just a letter head, a business card and an ad in the yellow pages.  We’ve done some courses and even employed a part time marketer for a while to get us on the right track.  It seems it’s now a great website, social media, public relations and many other things that you have to keep up with on an ongoing basis.

But as one of the courses we did said “there’s no point shouting out to the whole stadium when you’re only wanting to speak to a few of the people there.” So you have to know who your target client is and what you want to do for them. To know that you have to really understand who you are, what your brand is. And of course, what your product is.

I found the following great tips in the Dummies guide to marketing that sums it up:

Making Marketing Work in Your Small Business

You don’t need to be a rocket scientist to be a good marketer. But neither is there a silver bullet or one-size-fits-all solution. Every small business is different — the marketing plan and tactics for a mortgage broker are entirely different from those of a computer reseller. However, the process of building a plan, sticking to it and applying the time and resources it needs is the common secret to success in marketing. Read More »


What are your employment obligations?

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There’s nothing that say’s you’ve got a business more than employing staff. However, doing so brings with it all sorts of obligations. And they’re the same whether you employ 1 person or 100.

Employee records required

For every employee you must have an employee file to keep their records in, this can be a physical file or an electronic file. The documents you must keep on file include:

  • A completed IR 330 tax declaration from an Employee – if you don’t you must deduct tax at 45%. It’s their job to tell you what their tax rate should be.
  • A written employment contract – failure to do so can result in a $20,000 fine
  • Copies of job descriptions / task lists
  • Any notes from staff appraisals

Employee entitlements and further records required

There are 6 weeks and 1 day that you pay your employee not to even walk in the door.

Every employee is entitled to 4 weeks holiday a year and there are 11 statutory holidays in NZ. Then they’re also entitled to 5 days sick leave per year, which can be accumulated up to 20 days, bereavement leave for certain family members and even a new father is entitled to 2 weeks parental leave, though this is unpaid.

It’s important to keep regular and clear records of all your staff leave taken. Most computerised payroll systems can record this, but if you’re calculating payroll manually you will need to keep separate records.

If you think that your employee records are not complete or need help setting up appropriate records we can help, give us a call.

Payroll records

You need to keep records of what you’ve paid someone and any deductions you’ve made on their behalf each month. It’s your obligation to deduct the tax, any student loan repayments, KiwiSaver and any other deductions set by the IRD. Failure to pay this on to IRD is theft and can result in being sent to prison.

Once again, a computerised payroll system will keep all these records. Talk to us if you think you need to update your payroll system, or even if you find this just all to much to fit in. We could do this for you.


Business Technology

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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 »


Technology in Business

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We use technology to help our businesses in many different ways, including:

  • Communications
  • Marketing and customer engagement
  • HR and payroll
  • Accounts
  • Record keeping

The most useful purpose though is to help create efficiencies – to streamline procedures and increase productivity. To help make sure your product or service is delivered in the most consistent, cost effective and efficient way.

I often say to clients that you need to get a computerised system that helps your business do what you do. For example, with us, it’s a work flow and a time and cost system, for a retailer it’s a stock and point of sale system.

That system needs to get to the point of you being able to produce an invoice. Then we tack on an accounting system. Gone are the days when the accounting system was the main focus, which then had a stock or time and cost system tacked on. It’s completely reversed. Read More »


Help us to help you

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How you can help us to be more efficient with producing your end of year accounts and tax returns – so we can keep the costs down for you?

We understand that most people only have their accounts and tax returns done because they have to; it’s not a favourite expense of the business and you often don’t understand the time and cost it takes.

There’s a certain amount of work we just have to do in preparing your annual accounts and tax returns. I spelt some of it out in my last blog.

It is possible for you to help make this process more efficient, therefore quicker and cheaper.

We send you a checklist with a list of the information we require. Most of this is around compiling the working paper file to support your balances.

  • Make sure your bank reconciles to your accounting system. If you prepare a spread sheet cashbook and the totals don’t agree to the bank statement, we have to go through and find the difference. Even in straight forward systems like Xero there can be items that sit as unreconciled in the bank account. Check the bank reconciliation report. If you need help fixing these up, we’re happy to give you some training.
  • The same applies to any other operating systems you use. For example a stock system or fixed asset system. It needs to agree to your accounting system, or we have to find the difference.
  • Provide bank statements as at the balance date, for all bank accounts, credit cards and bank loans.
  • If you only keep cash records through the year we need to pick up all amounts owing to you and by you at the end of the year, provide us with a list.
  • Take a physical stocktake at balance date. If you have a computerised stock system, compare the totals. It’s the cost of that stock we’re after, not your selling price.
  • If you’ve had any unusual transactions bring them to our attention and provide supporting documentation.
  • Provide copies of all invoices requested. Generally this is around being able to prove the cost of an asset, or why an expense in repairs and maintenance or computer expenses is not a fixed asset. It also helps make sure we list the asset correctly on your asset list and claim as much depreciation as we can.
  • Provide details of any loans or hire purchases taken out during the year.

Read More »


A few things to remember as we head towards 31 March.

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For most NZ businesses and people it’s the end of the financial year. Time to draw a line in the sand and total up how your business has gone for the last year, or how much income you have made and file another tax return. There are a few things to remember as we head to the 31st of March:


Stock takes need to be done – For all businesses carrying more than $5,000 of stock we need to record the closing stock balance at 31 March, at its cost (or net realisable value).

You should do a physical count of all stock; if you keep a computerised stock system you should still do a physical count and compare it to your computerised records. Dispose of any obsolete stock so we don’t have to include it.


Write off any bad debtors – in order not to have to include bad debtors in your accounts, and pay tax on them, you should write off any bad debts prior to 31 March. It doesn’t mean you have to stop chasing the debt, but you do have to write them off your normal debtor’s ledger.


Keep copies of all bank statements, loan statements and Interest & Dividend statements that arrive in the coming weeks to give us poof of the balances at 31 March.


Are you likely to have tax to pay?
I’ve had a few clients contact me and ask this question, not only are they really busy but money’s sticking to the sides too. (Yeah finally!) So they’re thinking that a tax bill may be coming. And of course there may be the double whammy of having to pay tax on an increase in profits in the 2015 year and then the increase in provisional tax on the anticipated income for the 2016 year.

Also, remember that for a company, or a Trust or a high earning individual IRD charge interest on your tax. Clients hate paying the IRD interest. So even though the tax isn’t due yet it may be sensible to make some voluntary payments to keep the interest to a minimum.

Even if you choose to only pay when it’s due, it really pays to be aware that the bill is coming. Make it a financing decision, rather than a shock. There’s nothing worse than when a client gets a shock at their tax bill, or they’ve spent all the money! Give us a call if you think you’re business has been doing better than previous years, you’ve got cash in the bank or been able to buy expensive assets or repay debt. We can look at your management accounts and tell you what to expect, we don’t have to wait until your end of year accounts are done.


What is it we do for your end of year accounts? Why do you have to have them?

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It’s coming up to the end of the financial year for most of our clients. That means we start another annual cycle of preparing the financial reports and tax returns for our clients.

You might wonder why you have to have this done.

It’s called compliance for a reason. There are laws that say you have to prepare annual accounts.

The Companies Act and the Financial Reporting Act 2013 state that a company has to provide its shareholders with an annual report every year. These need to be prepared in accordance with Generally Accepted Accounting Practice (GAAP) and include all the things that Clayton spelled out in his blog “Will you still need to prepare Financial Statements?”

It’s also an obligation under the Income Tax Laws to file an annual Income Tax return for the year ended on the businesses Balance Date. Fortunately these two things tie together and can be done at the same time. Read More »


Budgets and Forecasts

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Following on from my last blog which was on planning this one talks about budgets and forecasting.

So, you have a great strategic plan, you have goals and targets, but can you turn this into a viable business proposition? Will it make a profit? And even if it will, when will the money hit the bank?

We know that not everyone “gets” accounts! But they’re the way of recording the financial impact of what’s going on in the business; they measure the results of what actually happens.

Putting the two together, a budget is the financial version of a plan. It’s a prediction of what you think the numbers will be as a result of how you expect the business to operate. For example: if you’re going to introduce a new line of sales, what impact do you think it will have? What income will it bring in? What will it cost you to bring it to market? Will you have to employ more people to bring it to market? Will you need to pay more overheads? Read More »


Business Planning

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There’s a quote that says “Failing to Plan, is planning to Fail.” (Alan Lakein, adapted from a saying from Winston Churchill).

That sounds a bit drastic, I’m sure nobody plans to fail but there’s an element of truth in it. Every business does need to continue to grow, adapt and develop, even just to stand still. Otherwise it will stagnate and lose ground in the market place.

You have to have goals to be able to plan forward. So the first step in any plan is working out what your goals are (both for the business and the business owners). We know that not everyone wants their business to grow into a huge multi-national corporation, or even to become a business that a multi-national corporation would want to buy. But what do you want from your business? It may be to have an amount of money in the bank; it may be a certain lifestyle. It may be to be able to work doing something you love, in the hours you want to spend in it, and earning enough to have a comfortable lifestyle. And the money, time and energy to do the other things in your life you enjoy.
(The kiwi goals of bach, boat and bmw). Read More »