Accounting & Business
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Free Wi-Fi costing users millions

Doing business down at the local café or shopping centre may not be the wisest move, with Australians losing $48 million to scammers targeting free Wi-Fi hotspots.

In 2018 alone, Aussies lost about $48 million to financial scammers who targeted popular online shopping destinations and exploited weaknesses in free Wi-Fi to grab sensitive personal data.

The Australian Cyber Security Centre (ACSC) has launched "Stay Smart Online" week in a bid to educate Australian consumers about sophisticated scams that aim to hack into online banking and capture credit card details.

The ACSC estimates that about six million Australian adults have been impacted by a scam.

An increasingly common and sophisticated method for fraudsters is to pose as a popular online retailer - often with a "shopfront" that appears reputable and well known.

Free Wi-Fi, which often has lax security, is also a method scammers use to gain access to data of those who are using the network.

Australians often believe a scam will be obvious, but fraudsters are often using sophisticated graphics, technology and platforms. This is having a material impact on Australian consumers personally, and businesses in Australia more broadly.

Cyber crime is a big problem in Australia and all over the world. The human and financial cost to businesses and society is rising every year," the ACSC said in a statement today.

"It impacts our business[es], our families and friends, costing huge amounts of money, time and pain."

Editor comment: Anti-viral software such as Avast may assist in protecting your confidential data when using public Wi-Fi sites.

SMSFs, Business real property and the small business CGT cap

 

Small business clients often want to transfer their business premises into their SMSF as an in-specie contribution to take advantage of the tax effective superannuation environment.

To facilitate the transfer, some clients have sought to utilise the CGT small business concessions and make an in-specie contribution to super using the lifetime CGT cap - simultaneously.

However, the ATO has indicated via a number of private binding rulings that in-specie contributions of active assets, such as business real property, may not qualify for the lifetime CGT cap where the in-specie super contribution is also the CGT event that qualifies for the small business CGT concessions. 

As a result, a client's ability to access these valuable concessions may be impacted and careful planning is required to ensure they structure their contributions to meet these complex rules.

Lifetime CGT cap 

When a small business owner disposes of an active asset, they may be eligible to disregard some or all of the capital gain resulting from the disposal under the CGT small business concessions.  In addition, they may be able to contribute some or all of the sale proceeds to superannuation and elect for the contributions to count towards the lifetime CGT cap.

The lifetime CGT cap for 2018-19 is $1.48 million (indexed annually).  Contributions that count against the lifetime CGT cap are neither concessional nor non-concessional contributions.

Broadly, to access the lifetime CGT cap it is necessary for an individual, company or trust to qualify for the 15-year exemption or the $500,000 retirement exemption. 

The following table outlines the types of contributions that can be contributed under the lifetime CGT cap:

Contribution type

Amount that counts against lifetime CGT cap

Individual able to disregard capital gain under retirement exemption

Amount of capital gains disregarded under the retirement exemption (up to maximum of $500,000)

Individual able to disregard capital gain under the 15 year exemption

Amount of capital proceeds

Company or trust able to disregard capital gain under retirement exemption

Amount of payment to CGT concession stakeholder of their share of the exempt amount (up to maximum of $500,000)

Company or trust able to disregard capital gain under the 15 year exemption

Amount of payment received by CGT concession stakeholder of their share of capital proceeds

 

When making small business CGT contributions, depending on the circumstances, the contribution must be made within strict timeframes.

Case study - contribution under the lifetime CGT cap:

  • Matthew and Lily (both age 70) are farmers who have been running a primary production business for over 15 years. They run their business on a farm they own jointly which qualifies as a business real property.
  • They decide to retire and sell the farm for its market value of $1.4 million to a third party purchaser.
  • As Matthew and Lily meet all the basic conditions for small business CGT exemptions as well as the 15 year exemption, they can disregard any capital gains as a result of the sale.
  • Subject to satisfying the work test, they can then each contribute their share of the capital proceeds ($700,000) from the sale into superannuation under the lifetime CGT cap.

Note – this applies regardless of whether the value of Matthew and Lily's total superannuation balance at the end of the previous financial year exceeds $1.6m, as the contributions are not non-concessional contributions.  

In-specie contributions and the lifetime CGT cap

In the Matthew and Lily example, the active asset of the farm was sold and a cash contribution made into superannuation under the lifetime CGT cap.  However, the situation is more complex when the transaction involves an in-specie contribution.

For example, if Matthew and Lily transferred their farm into their SMSF as an in-specie contribution, they may not be able to qualify for the lifetime CGT cap as the super contribution is also the event that qualifies for the small business CGT concessions.  That is, the ATO has indicated in a number of private rulings[1], that the contributor is not able to utilise the lifetime CGT cap in the event of an in-specie transfer of an active asset into a SMSF, where the small business CGT exemption is applied for the same CGT event.

The Commissioner has stated that the legislation does not contemplate the CGT event, choice (if paid from a company or trust) and contribution of the CGT exempt amount all happening simultaneously. Therefore, the CGT event must occur before a contribution is made and not at the same time.

This view has important implications as in-specie contributions that do not count against the lifetime CGT cap will instead be treated as personal non-concessional contributions and count against the non-concessional cap (assuming the member does not claim a tax deduction for some or all of the contribution), which may result in excess non-concessional contributions.

Due to these issues, advisers should encourage clients to seek a private binding ruling if they are looking to utilise the lifetime CGT cap for an in-specie transfer where the small business CGT exemption is applied for the same CGT event.

Potential solutions

Below we outline three possible alternative strategies that achieve the goal of moving the asset into the SMSF, without the in-specie contribution issue outlined above applying.

  1. SMSF purchasing active asset from client

The SMSF could purchase the active asset from the client (or their trust/company) where they have the required funds available.  This achieves the goal of moving the asset into the SMSF, as well as providing cash proceeds to the client (or their company or trust) which can then be contributed to super under the lifetime CGT cap.

Coming back to the example of Matthew and Lily, if their SMSF had cash reserves of $1.4 million, the SMSF could purchase the farm from them. Matthew and Lily could then use the cash proceeds to make contributions under the lifetime CGT cap.

When implementing this strategy, there are a few important things to be mindful of:

  • A SMSF is only allowed to acquire certain assets from a related party[2], e.g. business real property that's used wholly and exclusively in any business. Generally active assets other than business real property e.g. goodwill of a business, shares in a private company or units in a related trust, cannot be acquired[3].
  • The purchase must be on arm's length terms and at market value. The SMSF may need to obtain an independent professional valuation to determine the sale price, refer to ATO's Valuation guideline for SMSFs
  1. SMSF uses limited recourse borrowing arrangement (LRBA) to purchase active asset from client

In situations where the SMSF does not have the required funds available to purchase the active asset from the client, an alternative is for the SMSF to borrow the money via an LRBA to complete the purchase.

The cash sale proceeds could then be re-contributed to the fund under the lifetime CGT cap and used to extinguish the outstanding LRBA loan amount. However, it is important to note that this arrangement will incur additional costs as the fund will be required to establish a complying LRBA including the required bare trust arrangements.

Where a fund borrows from a related party, additional care needs to be exercised to ensure the loan complies with the safe harbour guidelines as specified in ATO PCG 2016/5. Otherwise the trustee will need to demonstrate that the loan is on arm's length terms – otherwise any income earned from the asset may be taxed as non-arm's length income.

  1. In-specie contribution of an asset for a different small business CGT event

If a client is disposing of multiple active assets, they could consider triggering a CGT event in relation to one of those assets and then making an in-specie contribution under the CGT cap of a different asset in lieu of the capital proceeds they received.  

For example, in ATO ID 2010/217, the ATO confirmed that where a taxpayer sold an asset that qualified for the $500,000 retirement exemption, the taxpayer could contribute a separate asset under the lifetime CGT cap in lieu of the cash proceeds actually received. This is important as it may allow a client to contribute an allowable asset via an in-specie transfer direct to their SMSF under the lifetime CGT cap.   

Case study: Winston

Winston (aged 60) ran a successful real estate agent business for more than two decades and has now decided to sell his business and retire. The real estate business operated through a company structure.  Winston owned 100% of the shares and the commercial premises. Details are as follows:

Asset

Owner

Ownership period

Cost base

Market value

Shares in SuperAgent Pty Ltd

Winston

20 years

$0

$600,000

Commercial office

Winston

10 years

$200,000

$800,000

Winston wants to sell his shares in the company, but retain ownership of the commercial office within his SMSF which will then be leased to the new business owner.

Sale of shares in the company (CGT event no.1)

Winston sold the shares in SuperAgent Pty Ltd to an unrelated purchaser for $600,000. As he meets the basic conditions for small business CGT exemptions and qualifies for the 15 year exemption, he can fully disregard any capital gains associated with the sale of these shares. He is also eligible to contribute the capital proceeds up to $600,000 into super under the lifetime CGT cap[4].

Small business CGT contribution strategy

While Winston could use the cash proceeds from the sale of shares to make a contribution under the lifetime CGT cap he instead chooses to contribute his commercial office into his SMSF under the lifetime CGT cap instead – as per the scenario in ATO ID 2010/217.

In-specie transfer of commercial office (CGT event no.2)

When Winston in-specie transfers his business real property into his SMSF it will trigger an assessable capital gain of $600,000. However, as the commercial office qualifies for the 50% individual exemption the assessable gain is reduced to $300,000. Winston can then apply the $500,000 retirement concession to fully offset the remaining $300,000 assessable gain - assuming he skips the 50% active asset exemption.

In this case, Winston is then eligible to contribute an additional $300,000 under the lifetime CGT cap – being the amount of the gain offset by applying the retirement concession to the transfer of the commercial office to the SMSF. In this case, Winston could then use $300,000 of his original cash proceeds from the sale of the shares to contribute to super under the lifetime CGT cap.

Mixed contributions

In the above scenario, it is important to note the market value of the BRP ($800,000) contributed in lieu of the share sale proceeds exceeded their value ($600,000) by $200,000. Therefore, only $600,000 of the property can be contributed under lifetime CGT cap. However, as Winston is under 65 years of age (and hasn't previously triggered the bring forward provision) the additional $200,000 could be treated as a non-concessional contribution. He can then make additional non-concessional contributions of up to $100,000 under the bring forward rule.

Summary of contributions:

  • In-specie transfer of BRP valued at $800,000:
  • Cash contribution of $300,000:

The end result is that Winston could make total contributions of $900,000 under the lifetime CGT cap (relating to two separate CGT events) and a non-concessional contribution of $200,000. He also has the option of making a further non-concessional of $100,000 to maximise his NCC cap.

The following diagram illustrates the strategy:

 

Important note

The above example is for illustrative purposes and does not consider the application of the anti- avoidance measures in Part IVA of Tax Act. As this is a complex area of tax law, clients should seek advice from a registered tax agent or obtain a private binding ruling from the ATO before making any decisions relating to the sale of their active business asset, and in-specie transfer of business real property into their SMSF.

 [1] Private ruling PBRs: 1013008906784; 1013054081138; 1013021531190; 1012862148885

[2] Section 66 of the SIS Act prohibits a SMSF from acquiring assets from a related party unless an exception applies. A related party is defined as: a member of the fund; a standard employer-sponsor of the fund; and a Part 8 associate of either of these two entities.

[3] Note – SMSFs can acquire units or shares in related companies and trusts under the 5% in-house exemption.

[4] CGT cap election form must be submitted at or before the time of contribution

Disclaimer: This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Taxation Information in this document should not be relied upon without seeking specialist advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2018. © Copyright 2018

 

 

Increased scrutiny of Home Office claims

Last year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for 'other work-related expenses', which includes home office expenses.

Reportedly, due to a high number of mistakes, errors and questionable claims for home office expenses, the ATO has recently advised that it will be increasing attention, scrutiny and education on these claims this tax time.

In particular, the ATO has flagged their concerns relating to taxpayers who are claiming:

  •    expenses they never paid for;
  •    expenses that their employer has reimbursed them for;
  •    private expenses; and
  •    expenses with no supporting records.

Whilst additional costs incurred as a direct result of working from home can be claimed, care must be taken not to claim private expenses as well.

The ATO has indicated that one of the biggest issues they face is people claiming the entire amount of expenses (e.g., their internet or mobile phone), rather than just the extra portion relating to work.

Provided the taxpayer is able to demonstrate that they have incurred additional costs of running expenses (e.g., electricity for heating, cooling and lighting), then these are generally deductible.

In contrast, employees are generally not able to claim any portion of occupancy-related expenses (e.g., rent, mortgage repayments, property insurance, land taxes and rates).

Taxpayers are warned that the ATO may contact their employers to verify expenses claimed for working from home.

In addition, the ATO expects to disallow a lot of claims where the taxpayer has not kept adequate records to prove that they have legitimately incurred the relevant expense and that the expense was related to their work.

As with the claiming of deductions in general, supporting records must be kept when claiming work-from-home expenses, which may include receipts, diary entries and itemised phone bills. 

Importantly, only the additional work-related portion of the relevant expense is deductible.

Advancement in technology has allowed the ATO to deploy sophisticated systems and analytics to spot claims that do not 'add up' and claims that are out of the ordinary compared to others in similar occupations, earning similar income.

Finally, the ATO has reminded taxpayers of the 'three golden rules' to follow when claiming work-from-home deductions, being:

  • the taxpayer must have spent the money themselves and have not been reimbursed;
  •  it must be directly related to earning the taxpayer's income, not a personal expense; and
  •  the taxpayer must have a record to prove the expense.

Need more information on this Tax Topic ?  Click here for a guide to the ATO's list of misunderstood tax deductions

Quote of the week

"Mathematics is the study of patterns.

At a higher level, accounting is not just about doing a sum, it is understanding a pattern and then identifying options to the client and delivering advice based on the pros and cons."

Clio Cresswell, Mathematician and Author
#clarkemcewan  #numbernerds #brisbaneaccountant #sunshinecoastaccountant

 

Whether hiring bookkeeping resources into your business or partnering with a practice, finding the right talent to work with can provide significant value to your business's finances.

Your working relationship with your bookkeeper is as important as your accountant, and it's critical that they work well together to ensure the company's books are always healthy and up to date.

From providing useful insights into cash flow and perhaps dipping into the occasional data forensics, a good bookkeeper will act as your financial Swiss army knife.

So what questions should you ask a bookkeeper before hiring them?   CPA Tracey Sharah has a comprehensive list of questions that  to ask, and her responses are laid out in detail below.

1. What qualifications do they hold?

The Tax Agent Services Bill 2008 that took effect from 1 March 2010 means that anyone providing BAS services for a fee will need to be a registered BAS agent.

At a minimum, your bookkeeper should have qualifications such as Certificate IV Financial Services. Look for someone who is a member of one of the various professional bookkeeping associations in Australia, such as The Institute of Certified Bookkeepers (ICB) or the Association of Accounting Technicians (AAT).

Finally, ensure the candidate has had vast experience in all accounting software platforms and has used payroll and inventory options.

2. What insurances do they have?

At a minimum, professional indemnity insurance is desirable.

3. Who will undertake data entry and BAS preparation work?

Establish whether the work will be consistently undertaken by the same bookkeeper or by any member of the team and whether the work will be reviewed.

4. What experience and references do they have?

References may not always be reliable, but it is worth taking the effort to do a little research before hiring a bookkeeper.

5. If the work is done in an accounting package, who retains the ownership of the data file?

Many bookkeeping organisations will process the work on their own data file, which will save you the expense of purchasing the software upfront. If in the future you wish to bring the bookkeeping in-house, the transfer of ownership will cost a nominal fee.

6. Would they maintain reliable, off-site data backups?

Make sure that no matter where your bookkeeper works, they keep accurate backups of your files in case of an emergency.

7. Who will be responsible for rectification work?

Mistakes may date back years, and corrections can be costly exercises, involving re-keying data, reworking BAS, and reviewing end-of-year financial statements. Will the bookkeeping work be redone free of charge, or will the charges be reimbursed?

8. What is required to process the work?

Before hiring a bookkeeper, establish what they will need from you on a regular basis. Do they want the receipts sorted? Are you required to write account codes or explanations on the receipts? Unless you're paying extra for mind-reading services, expect this to be the case.

9. How will they communicate with your accountant?

You need to establish how the bookkeeper will communicate with the accountant and how the accountant will charge you. Introduce your bookkeeper to your accountant, and to encourage a professional relationship between them.

10. How much will it cost?

Today, bookkeepers' work is often vastly undervalued. Remember, if you pay peanuts you get monkeys. Once you have found your bookkeeper, don't simply outsource and ignore. You need to look at your management reports on a regular basis and incorporate them into your decision-making processes.

If you're looking for a bookkeeper contact us for a referral.  Clarke McEwan also offers training to your staff and outsourced bookkeeping solutions if you prefer for us to manage the entire process.

 

A guide to simplifying staff expense claims

Reimbursing employees for on-the-job expenses need not be the time and money-guzzling task it can appear to be.

Businesses spend a huge amount of money each year reimbursing workers for on-the-job expenses they have paid. While no single agency tracks exactly what this amount is, looking through the ATO website on fringe benefits tax rules, employee reimbursement requirements and deduction versus expenses outlines, it is abundantly clear that this is no small process for the collective business community.

Among the most common expenses reimbursed by businesses are:

  • Vehicle mileage
  • Travel
  • Entertainment/hospitality
  • Stationary
  • Accommodation

It is not only the expenses themselves that cost a business, but how they are processed can also have a direct impact on profitability.

When staff expenses are being processed, there is likely to be higher costs or lost earnings resulting from:

  • Increased strain on the finance/accounting team
  • Lost productivity from employees while completing expense paperwork
  • Difficulties in fact-check expenses are legitimate and work-related
  • Constraints on cash flow (reimbursing employees promptly can crimp business cash flows, especially when unexpected claims are lodged; while delaying repayments strains employee budgets, leading to workplace tension)
  • Determining and overlooking possible fringe benefits tax (FBT) liabilities

The most common method is for employees to provide their own receipts, and the accounting department then reimburses this as one lump sum into employee bank accounts, either at regular intervals (such as weekly) or alongside the regular salary payments.  Yet despite being the most common means, it is also the most cumbersome.  There are other options available to businesses or virtually any size, including:

  • Corporate credit cards: Providing employees with a company credit card means they are not forced to dip into their own funds for work expenses, and the business receives one itemised statement each month, making verification much simpler than sorting through a pile of individual receipts.
  • Pre-paid allowances: In some cases, it can work out to be simpler and more efficient to pre-pay employees an allowance as part of their salary package (such as a car allowance for workers who regularly drive between sites, or an entertainment allowance for salespeople who regularly entertain clients and prospects). This allowance covers the expected costs and is not a taxable portion of the employee's income, making it much faster and easier to administer than retrospective expense analysis.
  • Company vehicles: Having company-owned vehicles can reduce the burden of travel expenses, since all costs are directly borne by the business. Employers can further streamline the process by using a fuel card to manage all fuel purchases. Alternatively, some businesses will seek to hire cars as needed, particularly when travel isn't frequent enough to justify the business owning its own vehicles.
  • Digital processing platforms: There are digital platforms that allow employees to upload expenses on the go simply by taking a photo of the receipt. The platform then automatically processes expenses, tax and employee refunds, saving both the employee and the accounting team considerable time and effort.

To process in-house or outsource?

Whether your business decides to retain direct ownership of expense management or outsource it either to a digital platform or relevant bookkeeper, a number of factors should be taken into account. The volume of expenses and their value, the number of employees claiming expenses, cash flow position and the size of the overall business can all influence this decision.

The pros and cons of each method should be considered before determining the best approach to managing staff expenses in your business:

  • Efficiency: Arguably the biggest cost of expense claim management can be having employees organising their own claims. Such a task is taking them away from the money-making duties for which they were employed. So what is the most time-effective means of processing expenses for employees, not just for the business itself?
  • Cost: Weigh up the cost of outsourcing expenses management with having someone employed by the business to process these claims.
  • Convenience: The more convenient the process, the less inclined staff will be to put off lodging their expenses, in turn allowing the business to keep better control over its outgoings.
  • Rewards: A number of tools for managing expenses, (such as credit and fuel cards) may also allow the business and even its employees to enjoy additional rewards and benefits simply for going about their everyday job.

 

 

The Australian Taxation Office has hit out at cash-only businesses, citing internal research that proves customers find such firms to be "inconvenient" and potentially dishonest.

Research conducted by Colmar Brunton, commissioned by the ATO, found that almost half of Australian consumers are inconvenienced by businesses that do not accept electronic payments.

Even more (around two-thirds) suggested businesses that do rely solely on cash are likely to be dodging their tax liabilities – regardless of whether or not this is true – suggesting that reputational damage can also arise in addition to lost sales.

"The real cost of cash to business seems to be twofold. Consumers are twice as likely to associate 'cash only' as negative rather than positive. While the majority of businesses are run by honest Australians who want to do the right thing, being cash-only may have a direct impact on reputation," said Matthew Bambrick, the ATO's assistant commissioner.

"Secondly, time is money for business. Tap-and-go payments cost an average of nine cents less than cash payments, and are nearly twice as fast. This research suggests cash-only businesses take a hit to their bottom line by not offering electronic payment."

Mr Bambrick added: "While cash is legal tender and we know that some businesses may be used to dealing only in cash, this research suggests that business owners may want to think about the benefits electronic payments can bring and consider what might work best for them."

Surprisingly, the research found that of the businesses polled that are cash-only, 42 per cent have "never" investigated the use of electronic payments, while 20 per cent cited the cost of electronic payments as their reason for maintaining cash-only payments.

However, the ATO did not include a sample size for the poll, nor did it reveal the full research. A request has been made for both to be provided.

Last month, the tax office released separate research that suggested only one in five shoppers continue to use cash to make purchases.

It comes as the government is attempting to crack down on tax dodgers and the black economy, including a proposal to limit all cash transactions to a maximum of $10,000.

 

The "Ad of the month" that has set a benchmark

Innovation is a great way of creating a point of difference. But what if you are producing a product that that is pretty standard, and perhaps not even your best customers want you to change? Why change the box it comes in!

This pizza restaurant has released this new packaging for Father's Day, which is sure to win them some new fans just from its sheer novelty. I particularly liked the way they revealed the innovation, teasing you to watch to the end.

Unfortunately it doesn't come with a deodoriser to get the pizza smell out of your bed. A new innovation opportunity perhaps? What can you do to innovate something about your product or service that will get people talking and get you noticed? 

 May Your Business this Year be - As You Plan It.

 

Are you holding back your business?

Overcoming the biggest problems in business often comes down to the simple things. Here are a few simple things you can do to capitalise on your opportunities and reduce your risks.

  

"I didn't get time…" No more excuses

Most people simply don't set aside the time to do the forward planning they know they need to do. Here's a simple test: write down your goals for the business. Now ask yourself, are you doing something to achieve those goals every day or every week? If not, it's not a goal. It's just a nice thought.

  

Set a realistic budget 

 

Financially mapping your business reduces your risk and removes some of the surprises that can occur. Your budget needs to be realistic – not just a percentage increase on last year. 

Start with an operating budget and assess each line critically. Map your revenue to see where, how and when the money is coming in to create a reliable estimate of your income for the coming year.   

 

Once you have your revenue expectations in place, look at what is required to generate that income. For example, what advertising, marketing and resources will be required? 


Once you are comfortable with your revenue, work up your expenditure budget. Be tough on costs. Don't forget to allow for growth and the increases that are likely to flow through. 


Once your budget is complete and you have a good idea of your likely profit margins, do a couple of alternative estimates for your key revenue drivers so you understand the impact of changes to your assumptions. Once you have all this in place, track and measure it throughout the year. Where possible, your management team should be a part of this process and take responsibility for achieving the budget numbers they give you. When people don't take the steps that they knew were required to achieve the budget the gaps become obvious fairly quickly. Having a budget in place that you need to report on regularly makes you focus on what really needs to be done.  

Map your cash

Even some very large businesses have failed because they ran out of cash.  Understanding your cashflow needs is vital:  particularly for high growth business.

Understanding your cash position is about understanding the timing differences: How long will it take for your customers to pay you? How much stock will you need to hold? And, what are the payment terms required by your suppliers? With your cash flow, don't forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be 'big ticket' items and if you don't allow for them then you will get caught out.

As part of your cash flow forecast identify your capital expenditure requirements. Don't deal with these on a one-off basis as they arise, plan them in advance.

Expect the unexpected 

Growing to death is often the result of unplanned growth opportunities. It's ironic that seizing a major sales contract or big new client can be your business's ruin but its more common than you think. 

Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in-depth knowledge of sales performance and revenue. Few however, have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not part of the vocabulary. As a result, there can be a sudden and unintended impact on their financial position. A rush of sales might be a great thing but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.

Take all the tax advantages you can

For small business in particular there are a range of concessions and funding you can access. Many businesses simply don't realise the opportunities available to them.  A simple example is trading stock valuations. Your trading stock is an asset that is recorded on your balance sheet. In most cases it should be tax neutral to you. The cost of purchasing stock is expensed in your profit and loss account and offset by the value of the stock asset, until you sell it. While the amount of stock you are carrying will impact on your cash position, because you have your funds tied up in it, there is no direct impact on your profits or taxable income until you sell that stock. However, if at 30 June some of your stock is worth less than its cost price, you have the option to value it at the lower figure and take the tax write off, rather than wait until the stock is sold. This reduction in your stock value will produce a tax saving for you.


For tax purposes, there are a number of ways of valuing stock. Once you have done your stocktake (assuming you need to do one), you can choose what method to apply depending on the stock and your circumstances. The different ways of valuing stock can produce different results. Most businesses chose to value trading stock at cost – but you have the option of valuing your stock at cost, market selling price or replacement value. 

 

For example, if you have stock that is about to become obsolete, valuing it at cost price for tax purposes is not going to help you. In this situation you might be better off to value the stock at market selling price, particularly if it is a large quantity. The tax rules also allow you to use a value that is lower than cost, market selling price or replacement value if this is warranted because of obsolescence or other special circumstances as long as the value you elect is reasonable. Take the example of vitamins with a use by date that only has a month or two left on it. Leading up to and once the vitamins reach their use by date they are unsaleable. In this case, you would estimate how much of the stock you are likely to sell prior to the use by date and at what price. Using previous sales as a guide, if you only expect to sell 15% of the stock prior to the use by date, you would use the market value of this 15%. Other than when you sell your stock, your tax return gives you a once a year opportunity to adjust your stock values and realise any losses.


Another way businesses disadvantage themselves is not taking the Government concessions available to them. The R&D tax incentive and Export Market Development Grant are a classic case. In the case of R&D incentives, if you develop new technologies or products, you might be eligible for a 43.5% tax offset (if your business has a turnover under $20 million). The Export Market Development Grant reimburses up to 50% of eligible export promotion expenses above $5,000 provided that the total expenses are at least $15,000.

Measures small businesses can take to prevent debt

As a small business, bad debt can be a financially painful and even disastrous experience, especially if cash flow is tight. When it comes to bad debts, prevention is always better than the cure, particularly when it comes to the impact on customer relations. As a small business owner, there are a number of steps you can take to prevent late and unpaid client invoices from happening in the first place.

Check their credentials:

For larger transactions, conducting a credit check on a potential customer can give you some idea of their ability to pay on time. We can provide varying levels of credit and financial reports for businesses you are considering taking on as a client or customer. It may also be a good idea to speak with industry contacts such as other suppliers or business owners. In some cases, you may be able find out about customers who have a frequent habit of making late or non-payments.

Upfront payments:

For large sales or long-term projects, it may be advisable to ask for partial upfront payments before delivering the product or service, according to Small Business NSW. For example, a business may ask for a 25 per cent upfront payment before beginning a project, with the remainder to be paid on completion.

In the event the client fails to pay in full, your business will still have recouped some of the losses. Alternatively, it may be possible to ask for staggered payments, with customers invoiced for each stage of a work project. This can be especially useful for freelancers and contractors who may need a regular source of income while working on the project.

Agree on payment terms:

Where possible, ensure you have an agreement in writing regarding payment policy. This not only provides clarification to your customers, but can also assist in the event of legal action. Invoices need to be professional and detailed, listing each specific charge and how it relates to the products or services your business provides. It is also extremely important to detail payment terms and payment options on invoices – otherwise, your customers may decide to pay by their own terms!

Offering incentives to pay on time can also be effective, such as discounts for early repayments. Alternatively, attaching late penalty fees or interest can motivate customers to pay on time or reap you financial compensation for late payments, but it may also damage the relationship with your clients.

Communication:

In many cases, customers who fail to pay on time may have simply forgotten the matter. If you don't hear back from a customer shortly after sending an invoice, follow the matter up. Send regular but polite reminders by mail or email. If the customer fails to respond, try calling. However, avoid any form of harassment or even publicly "naming and shaming" late payers – this is not only unprofessional, it can expose you to legal action.

Record keeping:

With so many other duties to tend to, small business owners can often fall behind on collecting payments. Ensure you have an efficient, up-to-date database of customers and outstanding payments. Accounting products such as MYOB usually include invoice records software, or you can use a generic spreadsheet product.

Of course, if all else fails, you can take the next step outsourcing your debt to an experienced debt collection agency. This allows you to receive more cash sooner, focus on core functions and reduce your operating costs.


Contact Clarke McEwan