Meeting your goals during a global slowdown
Meeting your goals during a global slowdown Business owners were definitely more optimistic coming into 2022, but we’ve found a number of factors are now making things a lot more challenging: – Global events are pushing up energy prices to astronomical levels.– Ongoing supply-chain issues are making it difficult to source materials.– A scarcity of talent is causing problems when it comes to staffing and hiring.– The dreaded Covid is still around and making trading complex and difficult. Faced with these hurdles, you might be feeling that your goals are no longer attainable. But is this true? Growth is likely to be a challenge, but not impossible. 5 steps for meeting your goals during a slowdown Moving forward during a period of economic recession is certainly more of a challenge. But what’s needed is an updated plan with awareness of the major external threats. Here are five steps to set you on the right path: Talk to us about your goal-setting for this year and beyond The sooner you start revisiting your goals and business plan, the better prepared your company will be for the ups and downs of a recession. Come and talk to us about your financial position, your core strategy and your concerns about the next six to twelve months. We’ll help you set practical, attainable goals that will push your business forward. ** You might be eligible to get our services funded up to 50%. Contact us here.
The 7 causes of poor cashflow
The 7 causes of poor cashflow. Cash is the life blood of any business. In fact, even profitable businesses can and do fail because of poor cashflow. What’s important is that you understand your key drivers of cashflow. Improving cashflow is often all about changing your business’s processes, for example, how you order stock and pay for it, how you bill for your services, and how you make sure you get paid by your customers. Don’t treat the symptoms of poor cashflow without fixing the underlying causes! Inadequate cashflow is a symptom of management problems in a business, NOT the cause. In order to fix these underlying causes, you need to make the necessary changes to your processes. By making these changes, you will build a much better and valuable business, as well as improve your cashflow. While there are many causes of poor cashflow, most relate to one or more of the following seven categories. 1. Your cash lockup.This is the cash that isn’t in your bank account because it’s locked up in work in progress (work you’ve done but not yet billed for) or you’ve billed your customer but are waiting for payment. 2. Your accounts payable process.If you don’t have spending budgets in place and aren’t taking advantage of the best possible supplier terms, your cashflow will be impacted. 3. Your stock turn.If stock is moving too slowly, it will take longer to turn the stock you’ve already paid for into cash. 4. The wrong debt or capital structure.For example, if your loans are being repaid over too short a term, this will place a big strain on cash reserves. 5. Gross profit margins are too low.Your gross profit margin is what’s left from sales after variable costs are deducted. If it’s too low, it won’t be enough to cover fixed expenses and your drawings from the business. 6. Overheads are too high.Every business should do a thorough review of its overheads each year. 7. Sales levels are too low.If sales levels don’t support cash demands on the business, then sadly, the business is not currently viable. “If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” – Jack Welch
Key numbers to focus on in your business now
As a business owner, it’s always been helpful to have an understanding of accounting – but in the post-lockdown world, it’s never been more important to have a good grasp on your finances. With the business world irreparably changed by the impact of coronavirus, your business is facing a ‘new normal’. Priorities have changed, customer behaviours have mutated and revenue streams have had to evolve and pivot in order to create a viable post-lockdown business model. To track, monitor and drive your financial performance in this new business world, it’s increasingly important to have a handle on your key financial reports and metrics. Getting to grips with your financial reports Whereas in the past, extra cash in the business may have been seen as a surplus that needed to be spent on something, COVID-19 has shown us that having these reserves is vitally important for the survival and long-term health of businesses. To truly be in control of this cash, it’s vital that you can dip into your accounts, financial reports and dashboards and ‘see the genuine story’ behind your financial position. So, what are the key reports to focus on? Let’s take a look: Talk to us about accounting and financial reporting for your business – we’re here to help! We’ll run you through the key reports in Xero, and can help you track performance, take action and prepare your company for surviving the new business normal.
Lessons learned in lockdown
Lockdown has been (and remains) a tough time for business. Having to shut your business at short notice, or switch to an entirely digital, remote-working model, was a stressful experience. But there are things we have taken out of lockdown. Whether it enabled us to explore new ideas or dive into some fresh thinking regarding work, life or a business venture. So, what lessons did we all learn from this enforced period of business shutdown, quarantine and remote working? Carrying over the positives from lockdown Suddenly, your office space lay empty, your employees were spread across various home locations and (crucially) your customer sales and revenue evaporated in the blink of an eye. The amazing thing about human resilience and ingenuity, however, is how quickly businesses DID evolve to cope with this situation. Teams got used to home-working, video meetings and dealing with customers in the online space. And many of us began to see the positives of this low-impact, remote-working approach. Are there things you can hang to now in the return to working life? None of us know exactly what the ‘new normal’ of business trading will look like. But if you want to be ready for a different kind of business reality, we can help. We’ll work with you to update your goals, strategy and financial model – so you’re ready for the future.
Understanding Tax: Terminal vs. Provisional
Tax. It’s the dirty word all business owners flinch at. Newcomers stress about that second year hit, and everyone winces when the lump sums leave their bank accounts. But how many business owners understand tax? And how many newcomers know what to expect? We thought we’d put together a blog breaking down some of the basic facts about tax. That way, maybe, when you next hear the word you feel a little more prepared to face it. The Second Year Sting How many business owners have been warned about the tax hit, come their second year of business? In their first Financial Statements meeting we’ve heard many express their worry over it. After close to a year of trading without worrying about tax, suddenly the shadow of it looms over them and they can’t focus on anything else. How well their business is going, or how they could improve upon it, falls on ears deafened to all but tax. But what causes this second year sting? Terminal + Provisional Tax If trading has gone well, a new company will have a full year of profit to be taxed. On top of that, if they have done well enough, the IRD now also expects them to make instalments towards the tax they are going to have to pay for the coming year. This means that effectively they are paying two full years of tax in one. For the year that’s just been, they will be paying terminal tax. For the year that is still happening, they will be paying provisional tax. Terminal Tax Terminal tax is the wash-up tax, based on the tax return detailing the final profit for the year just been, the last tax instalment for a finished financial year. In the first year of trading it is the total tax to pay on that profit. But in other years the terminal tax is the leftover tax to pay on the total profit after provisional tax is accounted for. Provisional Tax Provisional tax is tax that the IRD asks you to pay for this year based on your historical profit as the year progresses. You are only required to pay provisional tax when your total tax to pay for a year is greater than $2,500. When this happens, the IRD estimates that for the coming year your profit will grow by another five percent, and instead of waiting for a full year for you to pay that tax, asks you to pay the tax on your profit as you earn it – PAYE for your business in a sense. Let’s break it down further. To do this, we’ll use an example of a fictitious company, The Mad Scientist Limited. In this example we will ignore Use of Money Interest, but please keep watch for our next blog post! The Mad Scientist Limited – First Year The directors at The Mad Scientist have had an excellent first year in 2016. After hunting down every opportunity they have ended up with a profit of $100,000 in their company. This means that the total tax they have to pay on their profit for that year is $28,000. As they have not paid any tax so far, this full amount is due as terminal tax on the 7th of April 2017. Because their total tax to pay is over $2,500, the IRD now expects them to begin paying provisional tax as they go while they are still earning their profit for the year – much like PAYE is paid as a salaried worker earns their wage. However unlike those on a salary, the IRD won’t know till the end of the year when the company’s tax return is filed exactly what the profit is. Instead, the IRD assumes that The Mad Scientist will grow by another 5% to earn $105,000 profit the next year. Based on this profit the total tax to pay would be $29,400, and the IRD splits this into three equal amounts during the year for you to pay, $9,800 on the 28th August 2016, 15th Jan and 7th May 2017. The Mad Scientist Limited – Second Year Example One: Let’s assume that The Mad Scientist completely exceeds the IRD’s expectations, and manage to increase their profit by 50%, earning $150,000 in their second year of business. This means that the total tax to pay on that profit for 2017 is $42,000. Remember that they have already paid $29,400 in provisional tax for 2017. This means that they only have $12,600 left to pay in tax, and this is called Terminal Tax to pay for that year. Once more, provisional tax is calculated based on a 5% increase on $150,000. Then $44,100 in tax is divided into three payments of $14,700 during the coming year. Example Two: But what if in the second year of business The Mad Scientist flounders? This year their profit doesn’t even break $100,000, and they only make $80,000. Based on this, their total tax to pay is $22,400 for 2017. However, due to Provisional tax, they’ve already paid $29,400. What happens now? As they’ve overpaid their tax by $7,000, they will receive this amount back as a refund. This means that for their second year of trading they won’t have any terminal to pay at all. They will still have provisional tax to pay however for the coming year, and this will be based on $84,000 in estimated profit. To Conclude Terminal tax is the wash-up of the tax for the year just been. Provisional tax is paying for the profit you are currently earning. As for Use of Money Interest? I think we’ll leave that till our next piece! Thanks, the MHCO team.