Understanding Your Balance Sheet
To understand the financial position of a business at a specific point of time, look at the balance sheet. The balance sheet may also be called the statement of financial position. Together with the Profit and Loss Statement, and possibly other reports such as the Statement of Cash-flow, these reports provide a complete understanding of the financial position and business performance.
So what’s involved? - The balance sheet has three sections: assets, liabilities and equity.
What are Assets?
Assets are things and resources that a company owns. They have current and/or future value and can be measured in currency.
Assets may be subdivided on the balance sheet into bank accounts, current assets, (receivable within one year), fixed assets, inventory, non-current (or long term) assets, intangible assets and prepayments.
These include banks and other financial accounts held, accounts receivable (trade debtors), supplier deposits or bonds, stock on hand, property, equipment, vehicles, investments and intellectual property. All of these can be translated into monetary value.
What are Liabilities?
Liabilities are amounts owed to suppliers and other creditors for goods or services already received. Liabilities may also include amounts received in advance for future services yet to be provided by the business.
Liabilities are generally subdivided into current, (payable within one year), and non-current liabilities.
These include accounts payable (trade creditors), payroll obligations (salaries, taxes, superannuation), interest, customer deposits received, warranties and loans.
What is Equity?
Equity includes owner funds contributed, drawings, retained earnings and stocks. The value of the equity equals assets minus liabilities.
Transactions that affect profit and loss accounts also affect balance sheet accounts. For example, providing a service increases the accounts receivable balance, which therefore increases the equity.
The Balance Sheet Equation
The balance sheet must always balance! Asset value = liabilities + equity.
For example, if you buy a new vehicle for the business at say $50,000, having paid a $10,000 deposit and taking out a $40,000 loan, the value of fixed assets increases by $50k, but the bank asset value decreases by the $10k deposit paid. The value of liabilities increases by $40k loan, thus leaving the balance sheet balanced on both sides of the equation.
The balance sheet equation shows you how much money you would have left over if you paid all your bills and debts and sold all your assets at a given date. This amount is the Owner’s Equity.
Note that the balance sheet equity total is not necessarily how much the business is worth at market value. Assets are listed on the balance sheet at their transaction value, which may be very different from the market value. Some assets may be worth more, and others may depreciate in value. Business value is calculated not just on the balance sheet figures but many other factors.
Need more information?
Talk to us. Get the complete picture of your business performance and financial position, regardless of what stage of business you are at.
Why you should have a business continuity plan
Keeping your business operational is a full-time job. It’s a balancing act that requires you to keep a multitude of plates spinning, while your executive team and employees support you at every stage of the operational journey. But what happens if these plates stop spinning?
Sudden unexpected threats can catch you on the hop. What if an unexpected circumstance comes up that derails your usual operational procedures? How will you cope? What will you do to overcome the issue? And how will you get the business back on target?
The answer lies in having a thorough business continuity plan.
What’s a business continuity plan?
A business continuity plan is an executive plan that describes the risks that exist in the business, your strategy for dealing with these known and unknown risks, and how you will mobilise your team to overcome any issues, emergencies or gaps in trading etc.
None of us truly knows what lies around the corner. Most businesses were not expecting the 2008 economic crash, or the 2020 Covid-19 pandemic. If you can plan ahead and put contingency plans in place, you'll be better prepared when a worst-case scenario does appear.
How do you formulate your plan?
Every organisation’s business continuity plan will be different. We all have different business models, different company hierarchies and different risks that are peculiar to our own sectors.
But the fundamental basis on which you create your business continuity plan will be the same however your company works.
For example:
- Identify the critical areas of your business – look at your operational business model and think about where it’s most likely to break down under pressure. Are you reliant on a specific supplier to operate? Which are the fundamental departments in your model and what do they bring to the business? Who are your core heads of department and staff, and who could deputise for them in their absence? In short, look for anything that could break down and how this could affect the whole business.
- Create back-up continuity plans for each critical area – you obviously need your main continuity plan to cover the entire business. But it’s also important to look at the risks, essential personnel and key operational activities for each separate department in the company. Your finance team will need a very different continuity plan to your logistics and delivery team, for example. So, tailor each continuity plan to fit the needs of your main business areas, and make sure they’re all fit for purpose.
- Assign a continuity lead and department leads – it’s a good idea to assign a main business continuity lead role or champion, so the responsibility for reviewing and updating the plan sits under someone’s remit. You’ll also need to have a lead person for each critical department, so every cog in the wider machine is represented.
- Make sure everyone knows the continuity plan – a business continuity plan is useless unless the whole company is aware of the plan and knows what to do. Have a central phone number, WhatsApp group and email address set up for any business continuity emergency. And use your internal communications team to provide regular messaging, training and updates on changes to the ongoing continuity plan.
- Keep the business operating – ultimately, your continuity plan exists to keep the company operating in challenging times. It could be that your HQ is flooded out and has to be closed down and moved to an alternative location. It may be that significant employee sickness hits you, leaving only a skeleton staff to run each department. Whatever the circumstances, your plan needs a contingency in place, so you and your remaining staff can continue to trade, make sales and bring in revenues.
Talk to us about building a business continuity plan
No plan can completely remove the threat of the unknown – that’s an impossibility. But with a continuity plan that’s well-conceived and ready to implement, you reduce the potential risks and give you and your team a practical strategy and tactics to work with.
Need to get a plan in place?
We’ll help you analyse your business model, look for the critical areas and assess the potential risks. We’ll also help you put together a watertight business continuity plan that’s ready to implement if (and when) specific threats hit the business.
Business tips: Have you achieved your goal for the business?
Founding, managing and growing a business is a BIG commitment. For most business owners, it will take years to build a customer following, turn a profit and create a truly scalable business. It's a journey that can sometimes be pressurised, stressful and risky. – But when your plan really does come together, there is the chance of real success, a lasting legacy and a business that delivers on your initial dream.
So, how do you know when you've truly achieved your goals for the business?
Has the business met its growth targets and scaled up as intended?
You’ll have seen your business idea grow from being a fledgling startup, to an established business and on to become a scaled-up, ambitious enterprise with a solid customer base.
If you’ve met these growth targets, then you know you’re on pretty solid ground as a business. Your idea clearly has legs and you’re delivering a product and/or service that your customers see as valuable – and which they’re willing to part with their hard-earned cash to purchase.
Are you running a profitable enterprise that's in good financial shape?
Running a tight financial ship is crucial. You need solid revenues, positive cashflow and good liquidity to keep your business ticking over.
In the early days of being a startup, cash will have been tight. And your own personal income as a founder and director will probably have been scarce too. But as the business has become more established, you should have found that your business revenue became more stable and predictable – and that your own personal wealth also followed this same reliable pattern. If the business has a solid balance sheet, great cashflow and meets your intended profit targets, you’re onto a good thing – and can be sure that your financial position is in good shape.
Do you have a stable customer base who say good things about you?
Without customers, you don’t have a viable business. Finding your first customers as a startup was probably a significant turning point in your journey. A good customer base brings with it the bonus of new sales, fresh revenues and a business that can actually turn a profit.
When customers engage with you and buy your goods and services, that comfirms your original faith in your business idea. You’re providing something they value and want to purchase, and you’re also building a community of like-minded people who all think your brand is great.
Do you have a team who can operate the business without you?
In the early days, you’ll probably have become a jack (or jill) or all trades. You’ll have run the sales and marketing campaigns, taken care of all the main operational tasks and dealt with the many invoicing, accounting and bookkeeping tasks. Turn the clock forward, and you probably have a team of people around you to take care of these jobs – but could they function with you?
This is really the acid test of whether you’ve scaled and succeeded. If the business is still reliant on you, personally, you have a problem. To be a saleable proposition, a business needs to function effectively without the founder. If not, you’ll never be in a position to sell up. To make this possible, you need a team of engaged and talented people around you – people who share your vision and talents and who can keep the ship on an even course, even once the original captain has set sail on fresh, new adventures.
Do you feel you've achieved what you wanted to achieve?
In your formative years as a founder, you’ll have sat down to draw up a startup plan. In that plan you’ll have outlined a clear vision for what this business was going to achieve.
This vision might have been:
- To scale up over five years, sell-up and retire
- To deliver a new kind of technical widget and make it the global standard
- To help your target audience improve their lives, helped by your product/service
- To provide the income needed for you to live your desired lifestyle
- To plough your profits back into the local community and be a force for good.
We all have different goals, and whether they are financial, personal or moral comes down to the individual. The important thing at this point is to assess whether you’ve actually met the vision that you set out to achieve. If your aim was to sell for a profit and then retire, are you ready to do this? If the goal was to become a household name and move your sector forward, do your customer engagement figures and market share stats reflect this?
Deep down, only you and your fellow founders know whether you’ve truly met your intended goal. But if the general consensus is that you aced it, then it’s time to think about the future.
What’s the next chapter in your business story?
If you can answer yes to all five of these questions, then congratulations! You've built a successful, stable and profitable business.
But what do you do now? Do you continue to plough this fertile furrow and live off the profits? Do you find a buyer for the existing business and start on your next business idea? Or do you sell up and look at retirement and enjoying the benefits of your money and lifestyle?
It's a good idea to talk to us before you make what is, essentially, a life-changing decision. If you’d like to talk through your options, do get in touch.
Business tips: Trading in a different country
To successfully set up your export business, you'll need to do your research. This means talking to your accountant, advisers and other business owners in your network so you don't enter the market without enough preparation. With the right planning and organisation, you set the best possible foundations for moving into a brand-new international market.
Create an export plan
When you take the big step of going international, having a plan is going to help immeasurably. Writing an export plan gives you a route map to follow and helps to explain to investors, funding providers and your existing home team WHY you’re looking to expand out into a new country.
As a starting point:
- Explain your business reasons for trading in this new territory
- Give a detailed explanation of your supply chain and how it will work
- Outline your strategy for finding customers, making sales and generating revenue
- Summarise the costs of going international and where you hope to find the funding
- Give an overview of the company’s current financial health and cashflow position
- Set your initial targets for the first year and your timescales for achieving them.
Check if you need an export licence
It’s possible that you’ll need an export licence in your home country to trade over country borders. This will depend on what goods you're exporting, whether they are on any controlled lists and whether there’s an existing trade agreement with your target county.
Free trade agreements (FTAs) may exist between your home country and your export country, reducing or removing some of the regulatory hurdles required to trade between those two territories.
Understand your Tax liability
According to the OECD, 170 countries and territories have some form of Value-Added Tax (VAT) or Goods and Services Tax (GST). These consumption taxes are added to non-essential goods and are paid by the consumer as part of the price they pay at the till.
Knowing whether you’ll need to charge and pay VAT/GST in your new territory is an important consideration. Countries will charge VAT/GST at different rates, on different goods and services. So, it’s important to talk to a specialist who can advise you on how to deal with VAT/GST when trading across borders in your new country.
Move to multi-currency accounting software
If you’ve only traded in your home nation, your finances will have been managed in a single currency up to this point. Unless you’re operating in a trading block with one standard currency (like the EU), the likelihood is that your new export location will use a different currency.
Whether your new location trades in US dollars, euros or Japanese yen, your accounting software needs to be able to deal with transactions in your home currency and your new international currency. Most of the major cloud accounting platforms will offer a multi-currency subscription, giving you the ability to account in multiple currency types.
Find the best way to get paid in a new currency
When you make your first sales in your international territory, you’ll also need a way to take payment in this new currency. With cashless card transactions now so common in many parts of the world, this is less of an issue than it used to be. However, you will need a bank account that uses your new currency and some means of converting funds into your home currency.
International bank accounts with foreign exchange (forex) capabilities make this easier. Providers like Wise Business, OFX or Revolut, give you the option to collect payments in one currency and then export it in your home currency. This makes the forex process much simpler and also much more cost-effective, with rates usually far lower than those your high-street bank would charge for forex transactions.
Market your brand to a new audience
A key step will be marketing your brand to consumers in this new country, or finding other businesses to sell to directly. Remember, you’re starting from scratch when it comes to brand awareness and advocacy, so it’s important to do as much research as possible.
Questions to ask include:
- Is there a need for your goods and services in this new market?
- Who are the current brand leaders and your direct competitors?
- How will you differentiate your goods in a crowded market?
- Do you have the resources to create marketing content in a second language?
Remember to also check on cultural sensitivities in your new country. Do you understand the cultural, social and religious differences between your home nation and your new territory? Using the wrong words, phrases or colours in your marketing could be disastrous, so learn as much as possible about your new country and get to know the local traditions.
Going international is a significant step for your business. We can help you draw up an export plan and get your tax and accounting ready for operating in a new territory.
Talk to us about writing your export plan.
Keeping your data safe as a remote worker
Using public WiFi in cafes, hotels and coffee shops is something we all do. It’s convenient and gives you the benefits of working online wherever you happen to be. But are you aware of the data security issues of working from a public network?
In an age where remote and hybrid working are now the norm for so many employees and self-employed people, it’s important to know the key ways to keep your data safe
Secure ways to work from a public network
Remote working is a flexible approach to work that’s increased in popularity hugely over the past few years. A recent study from Buffer found that 97% of people would like to continue working remotely, at least some of the time, for the rest of their career.
Working remotely is here to stay, it would seem. But what can you do to make sure you’re applying the best possible security protocols? And what are the key dangers to look out for?
We’ve highlighted the important elements of cyber safety to be aware of:
- Unencrypted public networks and their flaws – a public network isn’t a safe environment when working. When you use your home network, only you and your family have access to the WiFi. If you log into a public network, literally anyone can join the network – and this can lead to all kinds of security issues and concerns.
- Malware and other suspicious activity – hackers and those with malicious intent will see a public network as a potential backdoor to your data. Malware (malicious software), Trojan horses and other hostile programmes can be easily uploaded to your device, allowing hackers to access your programmes, hard drive and data.
- Using a personal VPN to access the internet – if you’re using a public network to work, the chances are that you have access to confidential information and customer data via your device. To protect your device, it’s important to use a VPN (virtual private network). This creates a secure network for you, so you can safely share and access your important data, with fewer worries about hackers and malware etc.
- Having proper security software on your device – it’s a good idea to also have cyber security software installed on your computer or smart device. Providers like Norton, McAfee and Kaspersky all offer complete internet security suites that include firewalls, regular scans of your drive and other tools to keep your data safe and sound.
- Keeping up to date with the latest threats – no security system is 100% safe. But you can do a lot to improve your internet security by being aware of the current threats. Keep an eye out for news stories about cyber breaches and read the updates and social posts from your internet security provider. The more you’re in the loop about present dangers, the more you can do to update your security arrangements and keep your devices safe.
Start improving your internet security
We’ve all enjoyed the additional flexibility and time-saving benefits of working from somewhere other than the office. But as remote working becomes a standard working practice, it’s vital to improve your internet security and be more aware of the potential threats to your data.
Minimum wage and award minimums are set to rise July 1st
The Fair Work Commission’s annual wage review has resulted in two announcements made this week:
- The National Minimum Wage will increase by $40 per week, (an increase of 5.2%) from 1 July 2022
- award minimum wages will increase by 4.6%, which is subject to a minimum increase for award classifications of $40 per week and based on a 38-hour week for a full-time employee.
Costs are increasing
In July 2022, the superannuation guarantee statutory rate will rise 0.5 per cent to 10.5%.
In addition to the rising cost of labour, inflation is forecast to put upward pressure on everyday items. That will likely increase your general running costs and the price of materials. Petrol prices are up, for instance, and supply chain issues have driven up the cost of many imported products.
Time to review your pricing
Is it time to put your prices up? Ideally, your business should increase costs by a tiny amount each year, rather than by a big jump every five years, for instance. Small increases help prevent price shocks for customers, and keep your business in line with the rest of the market.
Can you also cut costs?
If you don’t think increasing your prices is an option, or you still need to make more of a change, you may need to cut back your spending. We look at your business line by line, so we can help you identify areas where you might be able to trim the fat.
Give us a call or drop us a note – we’re here to help.
Tax Tips for Trusts
Whether you have a trust set up for investment or business purposes, there are some common elements to getting ready for the trust’s tax return.
Contrary to popular opinion, a trust is not actually a legal entity; rather, it is a formal relationship between other entities, where one entity holds property for the benefit of another entity, which could be a business or individual.
Because a trust is not a person or business entity, its income is usually taxed differently, although this depends on the setup and type of the trust. But even though the tax return is different, many other administrative aspects are the same as for any taxpaying entity.
Trust Administration
One of the most important administrative tasks to attend to is to hold a formal meeting before midnight on 30 June each year to document the basis of distributions to beneficiaries.
If you haven’t already done this for the 2022 financial year, talk to us as soon as possible so we can check your accounts and advise you on the best arrangements for beneficiary distributions.
Record Keeping
The other essential element of trust administration is record keeping. Although a trust may not be a legal taxpaying entity in the same way a person or business is, all records related to income and expenses must be kept for five years after lodgement of the income tax return.
Particularly important are records for any property owned by the trust. If a trust owns multiple properties, you’ll need to separate income and expenses according to each property.
If the trust earns income from overseas interests or investments, all these records must also be kept.
Capital gains, interest earned, and dividends received must also be documented.
The trustee must keep records of the trust deed, trustee contact details, trustee resolutions, statements of assets and liabilities, all business contracts, and for employing trusts, all records relating to wages and superannuation.
Trust Management
Trust management can be complex but well worth the time spent keeping good records to maintain asset protection, streamline the tax return process, and maximise the allowable tax deductions.
We'll help with record keeping, managing investments, checking trust deed compliance, and simplifying the administration. Talk to us now and start preparing for your next trust tax return.
Business tips: Using forecasting to help your decision-making
Producing regular management information is one way to help improve your business decision-making. But looking at historical numbers can only tell you so much.
In business, you want to know what the future holds. And to make truly informed decisions about your future strategy, it’s important to use forecasting tools to project your data forwards in time. By running projections, based on these historical numbers, and producing detailed forecasts, you can get the best possible view of the road ahead – that’s invaluable.
Run regular cashflow forecasts
Positive cashflow is vital to the short, medium and long-term success of your business. Without cash, you simply can’t operate the business efficiently. Running regular cashflow forecasts helps you overcome this challenge. With detailed projections of your future cashflow, you can spot the cash gaps that lie further down the road, and take action to fill these cashflow holes.
Income can often be unpredictable, especially in challenging economic times. If customers fail to pay an invoice, or suppliers increase their prices, this can all start to eat into your available cash. Using forecasting, you can extrapolate your numbers forward to which weeks, months or quarters are looking financially tight. And with enough prior warning, there’s plenty of time to look for short-term funding facilities, or to get proactive with reducing your spending.
Run sales and revenue forecasts
Keeping the business profitable is one of the key foundations of making a success of your enterprise. You want your sales to be stable and your revenues predictable if you’re going to generate enough capital to fund your growth plans. And you need to know how those revenues will pan out over the course of the coming financial period.
Revenue forecasts work much like a cashflow forecast. Instead of looking at your future cash position, a revenue forecast gives a projection of your sales and how much revenue is likely to be brought into the business in future weeks and months. With better revenue information, you’ll be more on top of your profit targets. You can manage your working capital in a more practical way. And you can improve your ability to invest in new projects, additional staff or funding of the long-term expansion of your business.
Run different scenario plans
What’s going to happen to your business in the future? None of us have a crystal ball to predict this future path exactly. But by looking at different possible scenarios, you can run projections to see what the potential outcomes and impacts may be.
These ‘What-if scenarios’ can be exceptionally useful tools when thinking about big business decisions. What if there’s an economic recession? What if our sales increased by 25%? What if we raised our prices by 10% next quarter? What if we lost a quarter of our customers? By plugging the relevant data into your forecasting engine, you can run these scenarios and see how each option pans out. That’s massively useful when the worst (or the best) does happen.
Update your strategy, based on your forecasts
By making the most of your forecasting tools, you give your board, your finance team and your advisers the most insightful data and projections to work with.
A good business plan is designed to flex and evolve to meet the needs of the changing market – and the changing needs of your own business strategy. By making use of your cashflow forecasts, revenue projections and what-if scenario planning, you give yourself the insights needed to update your strategy and your business plan. You can make solid, well-informed decisions and keep yourself one step ahead of your competitors. In the dog-eat-dog world of business, that’s a competitive edge that can make a huge difference.
If you want to delve deeper into the positive benefits of forecasting, please do get in touch. We can showcase the latest forecasting software and apps, and show you the value that’s delivered through well-executed forecasting and longer-term projections.
Speak to the team at Solve Accounting to see how our specialists can help with your business.
Ways to Maximise Your Super
A little goes a long way with compound earnings. The earlier in your working life you start paying attention to your super, the better off you will be at retirement. However, it’s never too late to take an interest in your super fund’s performance and take action to grow your super!
While the best strategy is to get familiar with superannuation contribution options as soon as you start earning money, you can take strategic action to increase your super balance at any stage.
Your strategy will necessarily change over time as your work and financial situation evolve. When you’re not earning much at the start of a career, you may be unable to contribute extra. However, as soon as you earn more than you need to live off, start making extra contributions and reap the benefits of compound growth.
Compound Growth
Compounding happens when you contribute a specific amount to an interest-earning fund and leave the interest in the same account. This way, you keep earning interest on your interest. Check out this table for an example of compound interest earnings. This example clearly shows the advantage of starting to build your super early!
The compound earnings will naturally accumulate as you and your employer continue to contribute to the super fund.
Tips for Growing your Super Balance
- Consolidate super into one fund so you are not paying more fees than you need. If you’re unsure which fund you have accounts with, search for lost super in case you have multiple accounts that you can consolidate.
- Make contributions from your after-tax earnings – this may be a good option if you receive unexpected extra income such as a bonus. The government will also make a co-contribution of up to $500 for eligible low to middle income earners.
- Talk to your employer about sacrificing part of your salary into your super fund, which will reduce your taxable income and make it easier to commit to regular contributions that increase your super balance.
- Check options available for your spouse – it could benefit both of you if you’re able to contribute to their fund as well as your own.
- Take advantage of the bring-forward rules if you haven’t contributed the maximum amount of super in recent years.
- Make downsizer contributions from the proceeds of the sale of your home.
- Sole traders should consider making personal contributions as a tax deduction – this will require the ATO Notice of Intent form to be submitted to the super fund.
- Check whether your super fund is paying for any insurance – review and adjust or cancel if the insurance is not required.
Get Advice for Your Super Strategies
It’s important to get financial or tax advice before making any large payments to your super fund, to ensure you’re getting the most tax benefits from your contributions. There are limits to how much you can add to your super fund in a financial year and other thresholds that apply to different types of contributions.
Fringe Benefits Tax and Business
Benefits provided to employees or their associates in addition to salary or wages are known as fringe benefits. These benefits are paid for by the employer from pre-tax earnings, making the provision of benefits attractive to employees as it may reduce their taxable income while receiving payment in other forms.
Fringe benefits tax (FBT) may apply based on the type of benefit provided.
Tax is payable because the benefits are a different form of payment by an employer instead of salary and wages. The tax is calculated on the taxable value of the benefit, which reflects the grossed-up salary the employee would have had to earn to pay for the benefits from post-tax earnings.
Employers can generally claim a tax deduction for the benefits and related FBT payable.
Types of Benefits
There are many different types of fringe benefits employers may provide to employees. These include:
- Vehicle owned by the business provided for private use
- Vehicle lease arrangements
- Car parking
- Entertainment, such as golf club membership or tickets to major events
- Expense payments, such as credit cards or health insurance
- Other types include debt waiver, living away from home allowance, or property benefits.
Some benefits provided to employees don’t attract FBT. If you pay for expenses that an employee would otherwise have been able to claim as a work-related tax deduction, FBT won’t apply. For example, if you pay for employees to attend a professional development course, there won’t be any FBT liability on this benefit. COVID-19 tests required for employment are also exempt from FBT.
FBT Administration
The fringe benefits tax year runs from 1 April to 31 March. You must then include the reportable amount for each employee on their Single Touch Payroll finalisation by 14 July, so it flows through to their annual income statement.
As with all business transactions, keeping accurate records is essential to determining whether FBT applies or not and how much needs to be included on the employee’s income statement, if any.
If you’re interested in seeing how fringe benefits might apply to your business, talk to us about FBT registration and administration. We can advise on the types of benefits available, how much tax is payable or how to reduce the FBT liability. We’ll also get your bookkeeping software set up to make record keeping easy.