Article Series

This article is part of a 7 part series. Other articles in this series are shown below:

  1. A Word from the Chairman
  2. Personal property securities regime
  3. Employment law changes that will impact your business in 2011
  4. Markhams - meet our newest member firms.
  5. Funding business expansion
  6. Division 7A - another sting in the tail
  7. Have you overpaid GST?

As we rise from the depths of the GFC, businesses who have positioned themselves well – by focussing on efficiencies, should really now start to reap the benefits of those initiatives.

It is important however, to ensure that as business owners you take the time to ensure that you have a clear vision and plan for the next 1-3 years.

Business review and planning is not a set and forget strategy. Successful businesses revisit their structure and business planning periodically to ensure it is relevant and aligned with their objectives.

Some key strategic areas that every business owner should address periodically include:

Structural efficiency

Tax

Do you have a business structure which allows you to fund growth in a tax efficient way?

  • you do not want to be paying tax at the top marginal rate on income that is being used to fund business growth
  • recent changes to Division 7A tax legislation affect the way in which trusts can utilise a corporate beneficiary, particularly when the trust distribution can not physically be paid in cash.

Gearing

Too many business owners are adverse to using debt in their businesses yet at the same time turn a blind eye to the amount of nondeductible debt they have elsewhere i.e. their home loan debt.

  • when considering your overall debt levels, you should aggregate both your personal and business debts and make sure that as much of that debt is "good" (tax deductible) debt rather than "bad" (non-deductible) debt
  • restructuring your debts will incur costs, yet in our experience the improved cash flow, tax deductibility and improved wealth accumulation benefits often far out way these costs
  • the overriding message is to use appropriate financing facilities in your business where it makes sense to do so as it often delivers longer term benefits in meeting your business objectives.

Asset protection

All too often we see excess working capital inside active trading businesses or funding being provided to businesses without any consideration to the asset protection issues that were originally paramount when the business structure was established.

  • Consideration of charges over assets of a business should be considered to protect these assets in the event the business is challenged financially
  • similarly, businesses are often funded or guaranteed by business owners' personal assets and these too should be secured where possible to ensure they are repaid prior to non secured creditors in the event of litigation or liquidation proceedings
  • it is imperative that business owners keep the objective of separating business and personal assets at the forefront of their mind particularly as a business grows. It is often difficult to unwind personal securities once they are offered as security.

New business partners/succession planning

Quite often your current structure may not permit you to take on a business partner or bring in outside parties into your business.

  • A discretionary trust requires careful planning when bringing in 3rd party interests and in some cases requires the whole business to be restructured into a more commercially viable structure such as a company or unit trust
  • these issues can be complex and can often be a overlooked component of any future expansion plans or succession planning initiatives.

Adequate funding & credit control

Having worked with many growing businesses, one of the most common questions we get asked is: "I am making profits but why don't I have any cash?"

  • All too often the answer to this question lays in their balance sheets, usually a large increasing debtor balance, work in progress or surplus stock

  • for example, If you think about the cash flow of a labour intensive business, the business is paying out various costs within the month such as:

    • salaries
    • on costs (often up to 20%)
    • overheads to house those staff (rent and amenities) and
    • GST on the income
  • the list goes on!

For most businesses "Cash is King!" and often the ability to ensure your business has sufficient liquid funds is the difference between surviving and prospering.

  • Problem areas often include:-

    • debtor days are running at 60+ days,
    • creditors being paid before due dates when no discount offered for early payment
    • not negotiating better payment terms with key suppliers
    • GST being paid on an accruals rather than a cash basis
    • timing of tax payments and
    • poor use of debt facilities.

When these characteristics are present in a business it should come as no surprise that you are continually short on cash, impacting the ability to grow the business or repay existing liabilities.

  • The question business owners should be asking is: "How healthy is my balance sheet and how can it be improved?"

  • Areas of focus should be –

    • Does your business have sufficient working capital?
    • Is there a temporary cash shortfall and how will it be funded?
    • Are debtor collection days being enforced?
    • Is credit control tight enough? i.e. not dealing with bad customers.
    • Do you know the cash flow effect of your rising sales?
    • Do we have funds tied up in slow moving stock?
    • Do we have funds tied up in low margin products or services?
  • if you operate a business which is notorious for slow payers, consider using COD for clients with no trade history and limit credit for clients with large outstanding balances
  • there is no logic in incurring costs for customers who have little regard for actually paying you on time, or if at all.

Understanding your business – three-way financial forecasting

Too many businesses fail to plan. As the saying goes "failure to plan is planning to fail".

To understand the health of your business operations and to consider growth and planning objectives it is important business owners prepare forecasts looking forward one to two years rather than relying on historical information that merely highlights the problems.

  • That is, have you prepared detailed three-way budgets (P&L, Balance Sheet & Cash flow) to model the effect of your profit and loss assumptions?
  • Do you have the capability to undertake "what-if" scenarios of taking on new staff for larger jobs with extended payment terms?
  • Many business owners will produce income and expense budgets for their business but are ignorant of the effects of these on cash flow
  • subsequently they get distracted on wondering why they don't have sufficient capital to fund growth.

There are many easy to use forecasting programs available to business owners that are relatively inexpensive and can be used together in conjunction with your accountant.

  • Forecasting tools are great to use as the base for monitoring the financial performance of your business
  • can be used with senior staff members to encourage buy in to the business financial objectives
  • banks are now requesting three-way financial forecasts for finance applications and reviews and
  • for you as a business owner it provides comfort that you actually know where you are headed and what is happening in your own business.

Should you require assistance in implementing any of the above principles within your business, contact your local Moore Stephens office.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.