Restructuring or selling your business? We can help

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Restructuring or selling your business? We can help

This time last year, you might have been pondering Christmas bonuses or booking your summer holiday, but with a completely different business landscape in front of us, your head is no doubt filled with different questions.

 

I've decided to restructure. What's the best way to do this?

 

Restructuring is never easy but if it's necessary to keep your business afloat, there's a process you can follow to keep stress to a minimum.

 

  • Write a proposal outlining why roles need to change for the business to succeed.
  • Email employees to let them know you're proposing a restructure and invite them to a meeting (at least 2-3 days later) to learn more.
  • At the meeting talk through your proposal on how the restructure should be implemented. It's really important for staff to feel part of the process, so invite them to give feedback via email or book to see you after the meeting. Particularly if redundancies are a possibility, it is vital that you show an open mind as to what should be done to promote your business's objectives.
  • Proposed changes to an employee's terms and conditions must be committed to writing and provided to the employee with notification that they are entitled to seek independent advice. They must be given a reasonable opportunity to seek that advice.

 

I want to sell my business. How do I get it ready for sale?

 

Selling your business involves a lot of homework. You need to get it looking as "shiny" as possible before getting it valued by an accountant.

 

Here's how:

 

  • Sell assets you're not using, stop investing in long-term projects and put together a realistic financial forecast.
  • Prepare a business plan that includes how well the business is running and plans for growth.
  • Sort out any legal issues or staffing problems.
  • Bring health and safety, cloud solutions, and bookkeeping software up to date.
  • How are your website and social media looking? Could a buyer hit the ground running with them?
  • Talk to us about ways to boost your sales revenue and pre-sale profit margin. Remember it's the last two or three years' profit, and future maintainable profit, that determine the value.

For a confidential discussion regarding your circumstances please contact our Principal - John Clarke on john.clarke@clarkemcewan.com.au or book a time for either a face to face or zoom meeting here http://www.clarkemcewan.com.au/contact_us/request_an_appointment 

 

Adopting an Atomic Habits mindset

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Adopting an Atomic Habits mindset

We all have habits; some good and some not. Habits are those almost unconscious behaviour patterns we have... so, how do we build better habits?

In his book, Atomic Habits, James Clear identifies two types of habits; outcome-based and identity-based. Understanding the difference and reframing your mindset will help you adopt an atomic habits mindset and ensure your desired habits stick.

Outcome-based habits

These are the habits that have a specific end point we'll reach; where our focus is on the outcome. Outcome-based habits generally only last for the short-term; as soon as we've achieved that outcome, we're likely to revert to our old ways. If we're too focused on the outcome, we may give up when don't see fast progress.

So, how do we ensure that our habits stick? We form identity-based habits..

Identity-based habits

These are the habits that become part of our identity. We determine which habits we want to adopt, then we change our identity to reflect those behaviours. In other words, what type of person do you need to become to make those habits part of your everyday life?

For example, if reading more is the outcome, you might have a goal to read 12 books during a 12 month period. This would be forming an outcome-based habit and when you're done you're likely to stop reading.

Instead, become the type of person who reads very regularly. Set a nightly phone reminder to read before bed and start small, 10 minutes even, and gradually increase. You'll soon get through those 12 books and continue reading each night. Stacking the new habit to an existing one (i.e. going to bed) is a great way to build momentum.

James Clear defines the recipe for sustained success as a simple 2 step process:

1. Decide the type of person you want to be
2. Prove it to yourself with small wins.

"The goal is not to achieve results at first, the goal is to become the type of person who can achieve those things."
 - James Clear

You can find more information about Atomic Habits at jamesclear.com 

Reach out if you need help adopting an atomic habits mindset!

 

How healthy is your working capital



How healthy is your working capital?

We all know that cash is king when it comes to business success, but what exactly is 'working capital' and how does this financial metric help measure the health of your business?

Working capital is made up of the cash and assets that are available in the business to fund your operations and keep you trading. It's worked out by taking your current assets (the things you own) away from your current liabilities (the things you owe to other people).

So, why is working capital such a critical metric?

Having the liquid capital needed to trade

It's possible for your business to be busy, successful and profitable, but for your cash position to still be in poor health – and that can have a serious impact.

If you can't readily convert your assets into liquid cash, it's a struggle to meet your cashflow goals, pay your bills and fund your day-to-day operations. But with the optimum level of working capital, you strengthen your balance sheet and put the company in a solid financial position.

To achieve this healthy level of working capital you'll need to:

  • Proactively manage your cashflow – cashflow feeds your working capital by pumping liquid cash into the company and keeping the balance between assets and liabilities in a strong position. But to achieve this, it's vital to achieve a positive cashflow position, where your cash inflows are greater than your cash outflows. This means getting paid on time, lowering your outgoings and keeping a close eye on your ongoing cash position.
  • Monitor and forecast your financial position – running regular financial reports helps you stay in control of your finances. With careful monitoring and forecasting of your cash position, you can ensure you don't end up in a negative cashflow position, without the requisite working capital to trade and fund the next stage in your business plan. Cloud accounting software and business intelligence apps have made it easier than ever to create up-to-date, real-time reports and run dashboards that show your key metrics.
  • Use additional finance when required – if working capital is looking thin on the ground, then additional funding may be needed to bolster your balance sheet. Short-term finance options (such as overdraft extensions or invoice finance) and longer-term business loans can be needed to keep working capital on an equilibrium.

Talk to us about optimising your working capital

Working closely with your accountant is vital if you want to promote the ideal level of working capital in the business. We can help manage your cashflow, monitor your financial metrics and provide access to additional finance and funding when your capital needs a boost.

Get in touch to start maximising your working capital.

Forecasting in a Pandemic

      
Now, more than ever, business operators should have a plan in place to manage during uncertain times. Even if your business is not directly impacted, it's likely your customers, your supply chain, and your workforce will be to some extent. 

So, how do you plan for uncertainty when every assumption is subject to change?

Understand where you stand now

Businesses fail (or fail to thrive) for a myriad of reasons, but the precursor is often a failure to understand what is occurring and what to monitor. Strategically, managers need to be on top of their numbers to identify and manage problems before they get out of hand. If you do not know what the key drivers of your business are - the things that make the difference between doing well and going under - then it's time to find out. 

Understanding your cost structure

Do you know what your real cost of doing business is? Your breakeven point is the level of sales activity where your business is neither making a profit or a loss. Calculate your breakeven point by dividing your fixed expenses by your gross profit margin. This figure represents the level of sales income you need to breakeven.  

Understanding your breakeven point is crucial particularly when supply chains are impacted.  

Not only will your breakeven point assist you to monitor business performance, it's critical when deciding whether or not to offer a discount. If your breakeven point is well below your current operating level then you have a good buffer in your profits to manage growth, invest in further capital opportunities, and to protect yourself against further downturns in operating performance. And before you say "I know that," ask yourself how many people actually put this theory into practice. Even some of the largest businesses have been caught out on this one and tie up valuable resources in unprofitable projects and products. 

Putting up your prices during down times is not an act of social betrayal. If your prices have increased you should flow these through unless you are comfortable making less for the same amount of effort, or you are in an industry that is so price sensitive you have no choice but to follow the lead of larger businesses. 

Discounting creates a leverage impact on profits. By discounting you are giving away some or all of your profits. The key is to understand the impact and just how far you can go. For example, a business with a 30% gross profit margin that offers a 25% discount (certainly nothing unusual about that in today's market) needs a 500% increase in sales volume just to maintain the same position – and, in almost all cases, that's just not going to happen. The result generally is that the business trades below its breakeven point and generates a loss. You can only do that for a limited amount of time (and some of your larger competitors might be engaging in a discounting war with you in an attempt to bury you once and for all). 

If your business needs cash and needs it quickly, discounting might be the only way to shift stock but understand the implications.

Plan, review and adjust

Your budget should be your best estimate of what is likely to occur based on current knowledge.  To manage change, you can scenario plan where your budget forms the baseline, but you also forecast best and worst case scenarios based on potential risks and their likelihood (for example, the impact of another lockdown). Or, the simplest method is to use your budget as a baseline and regularly review and adjust depending on current conditions.  

The greatest risk to your profit is unlikely to come from your cost structure. It is more likely to be revenue volatility. Keep your eye on your cost structure and make sensible cuts where appropriate. But, in your search for savings don't remove your essential revenue generating capacity that you need. 

A lack of profit will eventually erode your business, but not enough cash will kill it stone dead. Businesses will fail because they don't manage their cash position. Plan, track and measure your cashflow. This not only means closely monitoring your debtor collections and inventory but also running a rolling three month cashflow position. This should provide an early warning of brewing problems.  

Manage your debt levels carefully (your bank is likely to). While there is nothing wrong with debt, it is likely that the banks will be closely watching customer accounts. Where you have loan facilities in place make sure that you understand the loan terms and any debt covenants that you have entered into. These covenants could include regular reporting to the bank, debtor and working capital ratios, or debt to equity ratios. Where the banks may have been more relaxed about these in the past, this year will be different. If you believe that you need additional funding, talk to your bank early and don't wait until the last minute. You'll need to present your case on why you need it, how much, for how long and when it will be repaid. 

Cash flows, operating budgets, cost control and debt management all need to be part of your business management. The more in control you are the lower your risk position.

Understand the external environment

The COVID-19 pandemic has implications well beyond the economy; it has changed how business operates and how consumers act. While comparisons are made to the 2008 Global Financial Crisis and the recessions of the 1980s and 1990s, the reality is, we have no case study. There is no rule book for the post pandemic road to recovery as this is not an economic event. The pandemic pulls the economy up short curtailing both supply and demand; businesses are not operating at capacity and fewer people are working.  

The Federal Budget is released on 6 October and we're expecting to see the Government invest heavily in job creating projects. Many of these will be focussed on infrastructure. Each of these projects will have a flow through effect to the broader economy. We'll bring you our insights the day after the budget and you should loom to see if there are opportunities your business can capture. 

Understanding your supply chain is important. Risk manage and plan for changing conditions. For example, what is your business's ability to manage a surge in demand, do you have a small supply base and what would happen if your primary supplier went into bankruptcy, do you have a good flow of information across your supply chain or is there a lack of transparency and knowledge, do transport problems risk your ability to supply? Assess it, understand it, and manage the risks. 

When it comes to demand, there is no instant fix. The RBA suggests the decline in GDP in the first half of 2020 is around 7% and the contraction in hours worked around 10%. The economic impact of the restrictions in Melbourne extend well beyond Victoria and are impacting more generally on consumer sentiment. This week we expect Australia to have a formal "recession" label added to our economy, formalising what most business operators already know. 

But it is not all bad news with confidence lifting on early signs that revenue is no longer declining for the majority of Australian businesses. The latest ABS data on the impact of COVID-19 shows fewer businesses reported a decline in revenue in August (41%) compared to July (46%), and fewer still expect a decline in September (28%).   

However, 35% of businesses expect it to be "difficult or very difficult" to meet financial commitments over the next three months, with small and medium businesses almost twice as likely as large businesses to fall into this category. Understandably, the response to this question is heavily weighted towards those operating under Government required restrictions and lockdowns.  

The RBA is working with three scenarios for Australia's economic outlook: a baseline, upside and downside scenario. In the baseline scenario, conditions improve in the second half of 2020 and slowly improve over 2021 and 2022 but fall short of returning to pre COVID forecasts with Victoria's lockdown not materially extended and Australia's international borders remaining closed until mid 2021. The upside scenario saw no extension of the Melbourne lockdown, and further easing of Government restrictions nationally, which in turn bolster consumer confidence, encouraging spending and the reversal of GDP decline over 2020-21. The downside scenario envisages a global resurgence in infections with Australia facing periodic outbreaks and rolling lockdowns. The RBA notes that the downside scenario has a sharper fall than the increase of the upside scenario because of the damage to consumer confidence of further lockdowns. 

Business investment is also expected to be relatively flat with the ABS survey showing that 37% of those surveyed had no actual or planned expenditure. Of those that are spending, IT hardware and software, and equipment and machinery topped the list. The instant asset write-off is helping to stimulate business investment in the small and medium business sector. In general, large businesses are paying down debt rather than spending and small and medium businesses have not sought to extend debt to fund investment. 
Note: The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

 


 

Covid-19 Relief Update

JobKeeper 2.0

The Government has announced further changes to the JobKeeper scheme. The good news is that employees that missed out on JobKeeper because they were not employed on 1 March 2020 might now be eligible. The proposed changes would enable employees employed on 1 July 2020 to receive JobKeeper payments from 3 August if they meet the other eligibility criteria. If you have employees impacted by this change, you will still need to work through the eligibility requirements including providing JobKeeper Payment Employee Nomination, but just remember that these changes are not yet law. 

JobKeeper will also be extended beyond 27 September 2020. To receive JobKeeper from 28 September 2020, employers will need to reassess their eligibility with reference to actual GST turnover for the September 2020 quarter (for JobKeeper payments between 28 September to 3 January 2021), and again for the December 2020 quarter (for payments between 4 January 2021 to 28 March 2021).

For further information on JobKeeper 2.0 see the ATO links

 

JK 2

 

JobKeeper extended until March 2021

The government has announced changes to the JobKeeper payment scheme, which will see it continue until March 2021.

The current system will remain unchanged until 27 September 2020 as planned, providing $1,500 per fortnight for employees and eligible business participants.

However, from 28 September the changes will apply.

There are several amendments that business owners need to be aware of, including different tiers of payment that apply over two separate time frames, as well as further eligibility tests. This means that some businesses currently receiving JobKeeper will no longer be eligible after 28 September, and others will continue to be eligible but will receive less subsidy from the government.

New Rates for 28 September 2020 to 3 January 2021

 New Rates for 3 January 2021 to 28 March 2021 

  • $1,000 per fortnight – this rate applies to eligible employees and business participants who, in the four weeks prior to 1 March 2020, were working 20 hours or more per week.

  • $650 per fortnight – this rate applies to employees and business participants who, in the four weeks prior to 1 March 2020, worked less than 20 hours per week. 

Business eligibility

 To continue to receive JobKeeper payments, businesses will be required to prove an actual reduction in turnover of 30% or more for both the June and September quarters to continue to receive the subsidy from September 2020 to January 2021. 

Businesses will then be required to again satisfy a reduction in turnover test for all three quarters of June, September and December, to receive the subsidy from January 2021 to March 2021. 

The eligibility rules have not changed – check the ATO Eligible Employers webpage for details of proving reduction in turnover. 

Businesses that have not satisfied the reduction in turnover tests in previous months can still enter the system any time upon meeting the eligibility requirements. 

Plan now for the reduced rates 

Although we have another couple of months before the changes apply, now is the time to start planning for the reduced JobKeeper rates, both for employees and business participants. We can help you assess your eligibility for remaining in the system beyond September 2020. 

Talk to us about how the changes will affect your business operations and costs, and to update cash flow plans and budgets. 


From 1 July 2020, parents accessing the Government's parental leave pay (PPL) scheme will have greater flexibility and options. Targeting the self-employed and small business owners, the changes introduce a new 30 day flexible paid parental leave pay period. Previously, new parents could apply for PPL for a continuous block of up to 18 weeks.

The changes split this time period into two:
• A continuous period of up to 12 weeks, and
• 30 flexible days. Parents can take the 18 weeks in one block or, under the new rules, take the 12 week period and then use the additional 30 days at a period and in a way that suits them but before the child turns 2 years of age.

For example, assume that when Jane, who works five days per week, has a child, she initially claims 12 weeks. Jane returns to work part-time for three days per week. In that case, Jane would apply for paid parental leave pay on the two days per week that she is not working. The administration of the PPL will change in some scenarios.

For Jane's case above, the employer would administer the scheme for the first 12 weeks but then the Government would directly pay Jane for her flexible days. If an employee wishes to access flexible parental leave pay, they will need to negotiate time-off work or a part time return to work with their employer. If the employer is unable to accommodate the request, then the employee may take the 18 weeks as one block.

The changes to the paid parental leave scheme apply to babies born on or after 1 July 2020. The scheme commences from 1 April 2020 to give parents applying for leave the flexibility to use the new arrangements (but only if their child is born on or after 1 July 2020).

Small Business Superannuation Clearing House

The Super Guarantee timing trap for employers

How employers are being caught out by the timing of superannuation guarantee payments.

Employers can generally only claim a deduction for superannuation contributions in the income year in which the contribution is made. Super contributions are made when the payments are received by the trustee of a complying superannuation fund.

 

It's not uncommon for employers to be caught out by timing problems, many in the belief that the contribution has been made at the point the payment is made rather than when it is credited to the superannuation fund provider's account. Many forms of electronic transfer however are not guaranteed to be automatic or next day. BPay for example may take up to 2 days, a delay that is often not factored in.

 

A new practice statement from the ATO highlights the problem created by the use of clearing houses.

 

There is a specific element of the law that enables payments made to the Government's Small Business Superannuation Clearing House (SBSCH) to be accepted as contributions when the clearing house receives them, rather than when the trustee of the superannuation fund has received the contribution. The SBSCH is only available to small businesses with 19 or fewer employees, or with an annual aggregated turnover of less than $10 million.

 

Private clearing houses are treated differently and as such, employers need to allow sufficient time for their superannuation contributions to be received, processed and paid by the clearing house to the superannuation fund, before their SG obligation is discharged.

 

Take the example of an employer who brings forward superannuation contributions before 30 June to be able to claim the tax deduction in that year.  If a private clearing house was used, and time was not allowed for the clearing house to process the payment, and as a result the payment was not received by the trustees before 30 June, then the deduction cannot be claimed until the next financial year.

If you need assistance with scheduling or advice about the Small Business Clearing House system, contact us.

 



The countdown to Christmas is now on and we're in the midst of the headlong rush to get everything done and capitalise on any remaining opportunities before the Christmas lull. Busy period or not, Christmas causes a period of dislocation and volatility for most businesses. This dislocation and volatility mean that it is not 'business as usual' and for many businesses, it is the change that causes the problem.

Most business owners cope well with consistent trading conditions, where trading and business conditions are predictable as are the solutions to issues that arise, but it is a different story during periods of disruption. Here are some things to watch out for:

1. Ho, Ho, No. The trading stock headache.

If business activity spikes over the Christmas period and you sell goods, then there is a temptation to increase stock levels. That makes sense as long as you don't go too far. Too much stock post the Christmas period and you will either be carrying product that is out of season or you will have too much cash tied up in trading stock. Try to work with suppliers who can supply on short notice. Better yet, see if some of your suppliers will supply you on consignment where you only pay them once the stock is sold. It might be better to miss a few sales than carry a trading stock headache into the New Year.

Managing your trading stock is not just about managing cost, consumers will go online if they cannot find what they need in store. Some savvy retailers are capitalising on this with opportunities to purchase online while in-store if stock is not available or providing free shipping codes.

2. The discounting trend

Consumers now expect a bargain and can generally find one. The attraction of the Black Friday sales is that stock is generally available. Those waiting for bargains in the week immediately prior to Christmas, can only choose from what's left.

If you choose to discount stock (or the market forces you to), it's essential to know your profit margins to determine what you can afford to give away. A business with a 30% gross profit margin that offers a 25% discount (certainly nothing unusual about that in today's market) needs a 500% increase in sales volume simply to maintain the same position. The result generally is that often businesses trade below their breakeven point and generate losses. So, think carefully about your strategy and what you can sustain.

3. The Christmas cost hangover

Costs tend to go up over Christmas. More staff, leave costs, downtime from non-trading days, as well as increased promotional costs all mean that the cost of doing business increases. Keep an eye on them. It's great to get into the Christmas spirit as long as you don't end up with a New Year hangover.

Many businesses also bring on casual staff. It's essential that you pay staff at the correct rates and meet your Superannuation Guarantee obligations.  Under the Retail Award, the rate for adult casuals (21 and over) start at $26.76. There is also a 3 hour shift minimum for all casuals regardless of whether you send them home early. Check the pay calculator to find the correct rates.

 4. New Year cash flow crunch

The New Year often leads into a quieter trading and tighter cash flow period. The March quarter tends to be the toughest cash flow quarter of the year. You will need a cash buffer going into the New Year. Don't over commit yourself in the run up to year end and end up in trouble in the New Year.

5. Take a lesson from Scrooge

If you work with account customers, start your debtor follow up now. If your customers are under any cash flow pressures, the Christmas period will only increase that pressure. The creditors who chase hard and early will get paid first. Don't be the last supplier on the list; the bucket may be empty by then.

Christmas is a great time of year. Just don't get caught up in the rush and let things get out of control.



We are all aware of the pressures that small business owners face on a daily basis and recent research has shown that owners who regularly visit their accountants tend to have lower rates of anxiety.

According to Andrew Conway, the chief executive of the Institute of Public Accountants (IPA) "mental health issues for small business as an issue has almost reached epidemic proportions".

However the IPA's research has shown that more than 90 per cent of small and medium sized enterprises report that engaging with their accountant significantly lowers their anxiety.  

Which makes sense because if anyone knows what it is like to be going through a rough patch your accountant is the one person who will have heard it before. Accountants nationwide are increasingly becoming a sounding board for the mental stresses facing business owners, alongside their financial concerns.

"There won't be an accountant in the country that would not be prepared to have a conversation with the person who walks in their door saying, "I'm in trouble, I've got an issue here." Conway said. 

And who better to dispel the small business owner's misconceptions of legislation or explain what might happen if the ATO comes knocking.  Nine times out of ten there is a solution before the matter gets out of hand and communication is the start of it.

Our experience at Clarke McEwan has found the ATO to be very obliging if it knows what is going on, and the same can be said of financial institutions and creditors.  

Hear more insights from Andrew Conway on mental health and how to better engage with your accountant and important accounting matters on the My Business Podcast.