Plan for Profit 2015 – Webinar Replay

Here’s the recording of our “Plan for Profit” webinar – where we share how you can use the numbers to increase profitability in 2015.

We put this webinar together in response to a few comments to help business owners and entrepreneurs plan their year ahead.

In this webinar, we share:

• Bill Gates’ interesting holiday habit
• The Power of One Number rather than many
• Three Ways to Grow Your Revenue
• Tools for Planning
• Plan to Profit Workshop
• Reading list for Christmas holidays

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4 Step Planning Workflow Sheet

Here’s a visual flow of the planning process that we use to map out the numbers in businesses.

4-Steps-to-Planning-the Numbers

Plan to Profit 2015 – Holiday Reading List

You might be familiar with Bill Gates’ almost life long habit, to go away on his summer holidays with a suitcase of books to read.

And for our upcoming workshop, Plan to Profit in 2015, I’ve put together a list of books that will help you put together a strategy, plan and implement for your biggest year yet.

These titles will change your thinking, your business and your life.

Prefer to watch this article?

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Books on Strategy and Execution

The One Thing – Gary Keller

This book really helped me with focus and was recommended to me by a client.  With the overall message being to focus on just one thing to make everything else easier or unnecessary.

I enjoyed the book to much, and put together an article on ‘the One Number‘, as most businesses need to focus on just one number in order to make everything else easier or unnecessary.

Along with business, Gary also applies it to your life outside of work.

Scaling Up – Verne Harnish

Wow!  Verne calls this “The Rockafella Habits 2.0”.

If you’ve read the Rockafella Habits and have implemented what he’s on about in that, this book will touch up on those points – with tools and templates to cement it.

Verne has gone ‘all out’ with his Intellectual Property here – a $10 eBook, that is actually worth its paperback weight in gold.

There’s all sorts of strategy and planning tools, capped off by the ‘One Page Plan’.  A must to map out over the Christmas holidays.

The 4 Disciplines of Execution – Sean Covey

I learned so much reading to this book – especially around tracking your plans visually, around your workspace.

Sean also introduces new language such as:

• WIG’s (Wildly Important Goals)
• Whirlwinds (the whirlwind of business causing us to fall off our plans)
• Finish Lines (specific outcomes you must be able to see)

The four disciplines, which you must read more about in the book, are:

1. Focus on the Wildly Important
2. Act on the Lead Measures
3. Keep a Compelling Scoreboard
4. Create a Cadence of Accountability

A really great book, especially for the creative and visual people in your organisation to implement.

Books on Customer Service

It is no mistake that I’ve included a few books on customer service for you to read in your planning.

All to often, we can focus on the financial drivers of our business.  The danger is in missing the point, or why we’re in business in the first place: our customers.

This is case in point of why we don’t do timesheets in our accounting firm. (But we do measure things like turnaround time on jobs and broadcast our live average reply time to emails.)

Be sure to read these before you start penning your goals for 2015.

From Worst to First – Gordon Bethune

This is a phenomenal story of how CEO of Continental Airlines, Gordon Bethune, managed to turn around the airline giant from ranking at the bottom, to leading the industry.

A true account of focus, and especially on the customer focused numbers.

It’s just unfortunate that after new management took over the reigns from Gordon, they switched back to focusing on ‘making a profit’ and that is why the airline is no longer around…

Keep your business focused on what matters to your customers!

The Ultimate Question 2.0 – Fred Reichheld

This is a book primarily about the ‘Net Promoter Score’.  An indication of how likely your customers are to be advocates for your business.

I also love the chapter on ‘Bad Profits’ – how the bigger businesses are willing to lose face and grow their for the purpose of making profits.

There’s tonnes of practical tips on how to implement the ‘NPS’ mentality into your business, but best of all how to act on the results that you get.

Taking the ‘Numb’ out of Numbers – Brisbane Business News

ACCOUNTING 101 is enough to drive some business owners mundane mad, but  Ben Walker is turning the tables on the traditional model and the result is proving positive with more clients now saying ‘count me in’.

The Inspire CA founder has built an accounting firm that offers business performance coaching with a focus on understanding the numbers and says many of his clients are often in denial when it comes to the financial side of their business.

Now an increasing number of them are gaining an understanding of how the numbers crunch and in doing so, are playing a proactive role in the success of their businesses.

“At the end of the day the performance of a business comes back to numbers and if they are not healthy then the business goes under,” says Walker.

“In this day and age where things like the global financial crisis wipes out a good percentage of small businesses, I think it is so important to understand the numbers and account for things like the unexpected.”

Walker, who was a finalist in the Brisbane Young Entrepreneur of the Year awards, says he aimed to shake up the accounting sector by providing an alternative business environment for clients and has incorporated a thriving café into his accounting firm (Inspire Café).

“I don’t like the old way of doing things and I wanted to create a firm that our clients enjoy coming to,” says Walker.

“We offer a much different environment to your standard boring accountants office so when a client walks in they are like ‘what is this place?’.

Inspire CA was founded in February 2013 with $30,000 in annual equivalent revenue and grew to employee four people in four months and produced ten times in annual equivalent revenue.

The business has also partnered with B1G1: Business for Good and have integrated the ‘habit of giving’ into both the café and accounting firm.

“For each coffee we sell and email we send, one child gets access to clean water in Malawi,” says Walker.

“For each planning session we hold with a client, we provide training for 75 women in India to learn the skills to run micro businesses to provide for their family.

“We have given 82,170 gifts as a result of our clients working with us.”

The Newstead business also offers meeting room and boardroom hire, a gluten free menu and event hire.

[Award] Brisbane Young Entrepreneur of the Year 2014 Finalist

In November 2014, I was excited to be announced as a finalist in the Brisbane Business News “Brisbane Young Entrepreneur of the Year” awards.

Each year, the Brisbane Business News searches from Brisbane’s most ambitious entrepreneurs who are carving out their own unique position in the business community.

This award recognises game changers in the industry, bringing together innovation, stellar success, disrupting their market with grit and determination.

To Increase Cash Flow: Know Your Working Capital Days

We all know that cash is king. And what is more necessary than optimal cash flow in your business?

While Revenue and Profit are a “must” to measure, neither of them give any insight into your business’ cash position. Working capital days gives us the context to Revenue and Profit.

Working capital days is an interesting metric – and it can be broken down into a few components.

In short, working capital days measures the number of days between you paying for your cost of sales, and receiving payment from your customer.

The Goal is to Reduce Working Capital Days

The shorter or smaller the Working Capital Days are, the better the business’ cash flow, as the cash is “tied up” in working capital for the least amount of time.

So if we increase Payable Days, and reduce both Work in Progress Days and Debtor Days, this will reduce working capital days and improve our business’ cash flow.

And yes, it is possible (and desirable) to have negative working capital days!

Calculating Working Capital Days

As working capital is made up of other figures, we’ll need to work out what the following numbers are:

1. Payable Days
2. Work in Progress Days or Average Stock Days
3. Debtor Days

Payable Days

Also called Creditor Days.

Although technically working capital days doesn’t include payable days, the date that you pay your suppliers is the ‘start day’ of working capital days.

So what that means is, if we extend our payment terms with suppliers, we’re shortening our working capital days if all else stays the same.

It’s an important lever to measure, as a few words of negotiating credit terms can reduce some pressure.

Work in Progress Days or Average Stock Days

Depending on your business, whether service (WIP Days) or selling products (average stock days).

For the service business, I like to refer to WIP days as “turnaround time”. The time from when the job comes in the door, to when it is delivered to the client.

For businesses who carry stock, there is an art to reducing the number of days your stock is sitting on your shelf (and that cash is tied up too!).

You can also use this formula as a service business if you put a dollar figure on your WIP.

For those without a dollar figure, please keep a track of your turnaround time using a visual scoreboard or workflow management system. Turnaround time is critical not only for cash flow, but in most cases it matters to your customers.

Debtor Days

Debtor days is fairly similar in process to calculating payable days.

Debtor days is calculating using the following formula:

Improve all 3 to Help your Cash Flow

All in all, if you focus on improving all three of the above numbers, then it will have a dramatic effect on your overall cash flow.

Can I claim the kitchen sink? Do’s and Don’ts for Home Office Deductions

With the rise in cloud technology making the need to have a fixed ‘place of business’ outside the home far less important than it once was, many small business owners are choosing to operate from home. Meeting your clients at a decent café is a far more relaxed and friendly environment than a stuffy little serviced office anyway, right?

However, while your business can operate from your private residence with ease, this trend has also created confusion at tax time.

• Which home expenses can you claim as a tax deduction?
• How do you split expenses that are partially private and partially business?
• You used your car for business related trips during the year but are these kilometres deductible?

To help business owners navigate this minefield, we have pulled together the Do’s and Don’ts we usually share with clients who wish to claim deductions for expenses that would usually be seen as private (or ‘non-deductible’ in ‘accountant-speak’):

Household Expenses

The ATO refer to these types of expenses as ‘occupancy expenses’. These include your rent or if you own your house, things like council rates, home and contents insurance and interest on your mortgage. We can also expand this list to include the costs of running the home such as the electricity, water, gas, telephone and internet.

Do claim ‘occupancy expenses’

Before you run off and claim all of your rent in your next tax return, there are some important rules to keep in mind.

Firstly, you need to set up an actual ‘Home Office’. Sitting on the couch with your laptop in front of the TV is not a home office. No questions asked. There needs to be an area in your home set up as a working space specifically allocated to your business.

Don’t claim the kitchen sink (or your floor area that is not an office)

Secondly (and most importantly) you will need to apportion your household expenses based on either the floor area of your home office or the actual usage depending on which expense you want to claim.

To claim occupancy expenses based on the sizes of your home office the calculation is as flows:

(Floor Area of your home office)     x     $Amount of the expense
(Floor Area of your entire house)

For example, if I have a 200 square metre home and I use a 5 square metre bedroom as my home office, I can claim 2.5% of my rent and other occupancy expenses as a tax deduction in my business’s income tax return.

Do apportion your expenses

Typically some expenses will have a higher business use percentage than that calculated by the floor area method. For example, your home internet and your mobile phone may be closer to 90% business related (if not 100%) so using the floor area method would significantly reduce the available deduction.

In this case you are permitted to calculate a reasonable estimate based on your actual usage. If your usage of your home internet based on hours used is 75% then you can claim that percentage of your monthly internet bill as a deduction.

So which method do you use for each type of home expense? The short answer is whichever method gives you the highest deductible portion, while still being easy to support in the event that the ATO requests evidence.

Do choose which method provides the best deduction

Typically the floor area method will be the most appropriate for occupancy expenses while other home office expenses are usually claimed under the actual usage method.

In the event all of the above just sounds like too much hard work, the ATO does allow a flat rate deduction for home office expenses to cover the extra electricity and deprecation on any furniture used. This deduction is claimed at a rate of $0.34 per hour for every hour spent working from home.

If you are looking to claim your home office expenses on a property you own, its worth keeping in mind the potential Capital Gains Tax (or “CGT”) issues that can arise from using your ‘main residence’ to produce taxable income.

Motor Vehicle expenses

Once you have established your residence as your ‘place of business’, trips from your home to see clients, visit work sites and attend any other business related function are tax deductible.

Do claim your trips from your home office to clients, work sites and engagements

The specifics of claiming motor vehicle expenses for a business owner are the same as those for an employee.

You can claim up to 5,000 work related kilometres per car in a given year without a logbook. This deduction is intended to cover all your motor vehicle expense (fuel, registration, insurance, maintenance, depreciation etc).

Business owners who wish to claim deductions in excess of this amount will need to keep a logbook for a 12 week period, that begins in the financial year you wish to claim the deductions.

The real ‘Do’

The main take away from this article is always make reasonable estimates that you can support when claiming tax deductions. This does not just apply to home office expenses but in all areas of tax.

If you are reasonable with the ATO they’re usually reasonable with you!

Do be reasonable!

How Do I Pay Myself From My Company or Trust?

We have been asked three times in the past week, “How do I pay myself?”.

This is a very valid question, and one that has a few complexities.  Let me try to keep it simple…

This Differs Between a Company and a Trust.

While you can draw money out either a Company or a Trust the way we treat that money for tax purposes is very different depending on which structure you are using.

Here’s a few concepts you’ll need a basic understanding of

Loan

If you’re looking to take money out of a Company or Trust (an entity), a loan account can be used to record the amounts taken.

When you draw the money out of a company (but not a trust) there are rules that are commonly referred to as ‘Division 7A’ or ‘Div 7A’.  These rules require that you draw up a loan agreement between you and the company (or between a relative of the shareholder and the company if the funds were not withdrawn for the shareholder directly).

The Division 7A rules are a significant drawback when considering loaning money from a company to a shareholder and make this type of arrangement inappropriate as a long term strategy. In fact it is better to avoid loans from companies to shareholders at all wherever possible.

If you’ve got a trust and you draw money as a loan, this just sits on the balance sheet as money you owe to the trust.  When the distributions are paid for the year, this reduces the balance owed back to the trust and you’re loan account is left at the net amount (cash withdrawn – Distribution).

Drawings

Drawings are simply another word for loans – and with Division 7A, it provides the same problems within a company, just with a different name… As with loans, you’re ok with a trust.

Wages or a Salary

This is a simple way of paying out money from an entity.  You essentially become an employee of your own company or trust.

Paying a wage or salary while simple, also requires that superannuation is paid on the gross figure and also that PAYG withholding tax is taken out.  This can be a disadvantage depending on your age and cash flow requirements.

Directors’ Fees

Like drawings are to loans, Directors’ Fees are to Wages or Salaries.

The superannuation laws had previously allowed Directors fees to be paid without the need to make a superannuation contribution on behalf of the director. This was changed quite a few years ago and now there is little difference between Directors’ Fees and a salary / wage apart from the name.

Dividends

Dividends are payments (or loan movements if not paid in cash) that are made from the balance of retained profits (aka retained earnings) in a company.

You may have also heard of the concept ‘franked dividends’.  These are simply dividends where the company issuing them has paid the tax on them already.  What happens then is that you can claim back these ‘franking credits’ when the dividends are paid to you.

Distributions

Distributions are to a trust what dividends are to a company. They’re the method by which we allocate the entity’s profits to the owners of the business. We can only ‘Distribute’ from a trust.

Distributions are also paid out of current year profits, as opposed to retained profits from prior years (when paid in the form of dividends from companies).

The owners of the business (the trustees) need to make decisions about the distributions for an income year before the 30^th of June. It is important to ensure these decisions are consistent with the clauses in the trust deed.

How We Recommend Getting Money Out of a Company

The easiest way here is to pay a salary to the owners.  If not paid in cash there’s no problems at all – it will simply sit on the balance sheet as owing to the owner.

What we would recommend too is considering a restructure to allow for a better flow of profits and cash from the entity.

It is also important to regularly ’empty out’ the retained earnings in a trading company, so that it does not become a juicy target to be sued by creditors or disgruntled employees.

How We Recommend Getting Money Out of a Trust

As the cash flow of the money coming out of a trust does not necessarily dictate where the tax is paid, you are fine to take money out of a trust and treat it as a loan from the trust.

We would then record the final balance owing to the trust, less any distribution of profits paid throughout the year – which would leave the net loan between yourself as an individual and the trust.

It is also extremely important to work with an adviser who has their finger on the pulse when it comes to distributions.  You must work this out before the financial year ends, or you could be in all sorts of strife with the ATO when it comes tax time.

At the end of the day, you need to know you’re doing it right

Taking money out of entities is a fairly complex area. If done without advice, it could lead to mistakes that can cost tens of thousands in tax.

When talking with your adviser, make sure you understand exactly how you can take money out in your circumstances.  Even play out the practical ‘to do’ as well – whether raising a pay slip, paying PAYG withholding etc.

Oh, and please ask clarifying questions below in the comments section too 🙂

Why you should eat a GST Free Diet with one of Anthill’s 30 under 30, Mr Ben Walker – Bond Appetit

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Ben Walker is the Chief Inspiration Officer of Inspire CA (the accounting firm) and the Beer Development Manager of Inspire Cafe. Inspire CA’s mission is to inspire people to build phenomenal businesses. The dream for the cafe is create a place where you can enjoy a good coffee and something decent to eat with entrepreneurs and business people.

Business Structuring Made Easy! Part 6: The Dangers – What if I Get it Wrong?

In order to reinforce the importance of selecting the right business structure, our final article in this series looks at the consequences of getting the choice wrong and the potential costs associated with the transition to a new structure.

Quite often clients start business operations with little to no thought about business structuring and are confronted with multiple complications a few years down the track when changes need to be made.

Income Tax

Any profits made on the transfer of items such as plant and equipment or trading stock between business entities is taxable income in the hands of the entity making the sale. These profits will be reported on the income tax return of the relevant entity and tax will be payable at the applicable tax rate.

Click Here to Download our eBook “Business Structures Made Easy”
If you are transferring out of a company structure, careful consideration must be given to any advances, loans, or intended debt forgiveness by the private company to shareholders and shareholders’ associates. These amounts could potentially trigger Division 7A and create unforeseen income tax consequences for the parties involved.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax charged on capital gains that arise as the result of the sale or disposal of certain assets.

While we cannot hope to cover all of the potential CGT implications of transferring various business assets between business structures and the concessions available to manage the tax on these gains, it is important to highlight that Capital Gains Tax must be considered when changing your business structure.

Stamp Duty

Depending on the state you live in and the type of asset in question it may also be necessary to pay stamp duty on the transfer of assets between business entities.

While most states offer concessions, they do not apply in all cases so you must ensure you have given due consideration to the stamp duty implications on any asset transfers.

Administration Costs and Business Interruption

While not as costly as the other areas of discussion, there are some smaller considerations which may be overlooked in a “big picture” approach to changing your business structure.

The accounting and legal fees incurred in establishing your new business structure and to wind up the old structure can vary from a one thousand to tens of thousands depending on the structural choice and level of advice you require. This process will involve the creation of the new structure and all the associated registrations.

Your new structure will generally have its own Australian Business Number (ABN) and Tax File Number (TFN). This, in turn, means that you will need to establish new bank accounts, update all agreements with your current staff, customers, and suppliers as well as updating the ABN on your existing marketing material.

During the financial year in which you make the transition between business structures it may be necessary for your accountant to prepare financial statements and income tax returns for both business entities. This will increase the cost of your compliance work for the year.