McLEAN AND CO.

Accounting          Taxation         Business Advice and Development Assistance           Audits                            

 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  JANUARY 2006
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  Any feedback would be welcomed.

McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay.    Readers are invited to peruse the practice website www.mcleanandco.co.nzwhich lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters,  and has links to other websites that may assist your business.    Being a small firm itself,   McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base.  Enquiries are welcomed.

 

NEW CLIENTS

We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:

www.mcleanandco.co.nz/Documentationrequired.htm

 

INDEX

  1. Relevant Business and Taxation Articles.

  2. New Years Resolutions

  3. Minimum Wage to Increase from March this Year

  4. New Tax Rules for People who Host Boarders

  5. Preparing a Cash Flow Forecast

  6. Dealing with CashFlow Problems

 

RELEVANT BUSINESS AND TAXATION ARTICLES

The McLean and Co. website contains an extensive number of articles prepared by McLean and Co. relating to taxation and business matters.    Here are a selection that will be of interest:

Goal Setting in Business                           www.mcleanandco.co.nz/Page81.htm

Glossary of Financial Terms                     www.mcleanandco.co.nz/Page89.htm

Choosing a Business Name                      www.mcleanandco.co.nz/Page152.htm

Fixed or Floating Mortgage?                    www.mcleanandco.co.nz/Page119.htm

Negative Gearing                                      www.mcleanandco.co.nz/Page126.htm

 

NEW YEARS RESOLUTIONS

New Yearís resolutions can provide you the opportunity to redefine the kind of person, employee or employer you envisage being.  Here are a set of New Year's resolutions that could apply to business and employment: 

I do what I say: If I say I will get back to you by a certain time, I will get back to you by that time. If I say I will do something, I will do it. I am trustworthy and will be held accountable.

I take ownership for what happens: I will not blame others, lash out or make excuses for problems that arise. When something happens, I will look to myself first to see what role I played in it, acknowledge my responsibility and take ownership in resolving the problem.

I am positive: I will be a positive influence on others. I realize that there will be tough times and negativity surrounding me, but I will rise above it. I will focus on solutions, not problems and remain optimistic, with the belief that out of challenges opportunities arise.

I am respectful: I respect others opinions, differences, personal space and time.

I set realistic goals: I know what I need to do and when I need to do it. I have clear goals in mind and work toward these goals everyday.

I use my time wisely: I show up on time, begin and end meetings on time, and I donít waste time Ė mine or others. I avoid gossip and meaningless chitchat, and stay focused on my work.

I am organized: I know where things are and can access them quickly. My desk is clean and organized at the end of each day.

I bring out the best in others: I realize that the best way for me to shine and look good is to make others look good. I will compliment others frequently and be the kind of person I want others to be.

I take pride in my work and will do my best: My job is important and I am important, no matter what position I hold. I will work each day with energy and purpose and make a positive contribution. I realize it will be much easier to feel good at the end of the day if I enjoy the work I do and acknowledge the contribution Iíve made.

 

MINIMUM WAGE TO INCREASE FROM MARCH THIS YEAR

21 December 2005

The minimum adult wage will go up from $9.50 to $10.25 an hour from March 2, 2006, the Government said yesterday. The minimum youth wage - for workers aged 16 and 17 - will also increase by nearly 8 per cent, from $7.60 to $8.20 an hour, Labour Minister Ruth Dyson said. Minimum wage rates are reviewed annually. Ms Dyson said the Government's goal was for the adult minimum to reach $12 an hour by the end of 2008 depending on economic conditions. The youth minimum wage is 80 per cent of the adult rate. Ms Dyson said the increase would benefit about 91,000 adult workers, most of them women, and around 10,000 youth workers. The Council of Trade Unions (CTU) said the increase was an important step towards a $12 minimum wage.

 

INLAND REVENUE DEPARTMENT RELEASES NEW TAX RULES FOR PEOPLE WHO HOST BOARDERS

New tax rules for people who host paying boarders will simplify the process. Under a new practice coming into effect from the 2007 income year (generally starting on 1 April 2006), tax liability will be based on the amount of income received, rather than the number of boarders in a household.

Currently people are not required to declare income to Inland Revenue if they have one boarder, but must usually pay tax on 20% of the payments received from two to four boarders. For more than four boarders, they must return income and claim actual expenditure like a small business.

The new rules also remove the need to keep records for related expenditure by providing an option to claim standard costs when claiming tax-deductible expenses to off-set against their income. If people choose to use these 'off-the-peg' costs for their expenditure, it will make completing and filing tax returns easier, as they will no longer have to keep detailed receipts.

The standard cost that can be claimed for one or two boarders is $200 a week for each boarder, and $162 a week for the third and subsequent boarder(s).  The lower rate recognises that costs for each person are less in a larger household.

People with five or more boarders, however, must complete a tax return and claim actual expenditure incurred, with sufficient records to support their tax position.

 

DEBT FINANCE

There are two main types of capital; debt and equity. They are very different and will have a big difference on the business as it grows and develops.

What is debt finance?

Most businesses when raising finance seek external funding funded by a bank loan. This is the most typical form of debt financing. The loan typically has to be repaid at an agreed interest rate and within a specified period of time. The interest rate can either be floating or fixed rate.

Typically the loan is secured against an asset. This means that if the business fails to repay the loan, the lender has the right to claim the asset. An asset could be a house or other premises or some equipment owned by the business. As the loan is secured, the cost is usually less than other more risky types of borrowing. However, a bank loan also locks companies into a payment schedule that may cause problems for small businesses.

You will have to be able to show how the money will be repaid and are likely to have to provide some kind of security for a loan or overdraft. If you are unwilling to put personal assets on the line, the bank is unlikely to lend you money.

The straitjacket of making a set payment at what may be a fixed interest rate can also cause a lot of problems for fast-growing companies that consume capital very fast.

For these reasons, loans are more suited to tried and tested business models that offer good prospects for profitability.

Debt finance can also take the form of an overdraft. This is generally linked to working cashflow rather than capital expenditure. It is repayable on demand and exceeding the limits can be expensive.

Other types of debt finance that are increasingly popular include leasing, a way of borrowing to buy specific equipment or machinery, or factoring and invoice discounting, where the small business borrows against sales.

If your business needs some working capital but the amount fluctuates, an overdraft is probably best for you. The interest rate is agreed in advance and you only pay interest for the time and amount that you are overdrawn. Businesses that need longer-term finance, in particular for a specific purchase or planned expenditure, should look to take a loan that can be repaid over a set period.

There are many reasons why debt finance could suit your business Ė it is accessible, flexible and tailored. Debt finance will be the first option for most small businesses. With debt finance, whether it is loans, overdrafts, leasing or invoice discounting, the company is borrowing against reserves rather than giving someone ownership of shares.


PREPARING A CASHFLOW FORECAST

 Use Cashflow Forecasts to figure out when you'll have cash available and when you'll be short.

A Cashflow Forecast enables you to track cash as it flows in and out of your business and reveals the causes of cashflow shortfalls and surpluses.

  1. First, try to predict the total amount of money coming into your business over a specified period, for example, over the next quarter. This requires forecasting sales for the period, and then estimating the average dollar amount collected for 15, 30, 45, 60 and 90 days, as well as accounting for bad debts.
  2. Second, predict cash outflows over the same period, using sales forecasts, estimating the timing of material costs and other production costs. Youíll need to allow for tax payments, wages, rent and all other outgoings. If youíre planning on expanding your business, youíll need to allow for those costs too. If youíre planning to buy assets, you can either fund them from cashflow surpluses or borrowings or cash reserves from previous years. If youíre thinking of funding them from cashflow surpluses, include them in your forecast to see if you can afford to use your cashflow in this way.
  3. Once you have predicted cashflows, you can develop a cashflow forecast with a variety of best and worst-case scenarios for payments by looking at the first (discounted) date for variable payments and then the last date before penalties. You can now forecast cash availability by adding projected payments to opening cashflow and subtracting variable and recurring expenses.

Cashflow Forecasts help you make sure you have enough money to pay your bills. They also help you identify periods when youíll have surplus funds which you can use for expansion or to reduce debt or pay dividends.

You will be able to use the Cashflow Statement not only to analyse your sources and uses of cash from year to year but also from month to month. You will find the Cashflow Statement to be an invaluable tool in understanding the howís and whyís of cashflowing into and out of your business.

 

 

DEALING WITH CASHFLOW PROBLEMS

Many small businesses experience cashflow problems occasionally and need working capital.

For most, the immediate response is to go to the bank and ask for an overdraft or overdraft extension. But the money might be there in your business. To unlock your hidden funds, and make your business more efficient at the same time, you need to look closely at your assets, customers and suppliers.

ASSETS

Your assets include debtors,  stock, pre-paid expenses, vehicles, plant and equipment, fittings and property. Each of these is a possible source of funds.

DEBTORS

Are you letting some customers have the free use of your money for months? This is a common occurrence in small businesses where the owners are so busy getting products out the door or services completed that they don't pay enough attention to basic business procedures. Many customers will take advantage of this 'free money', but your business isnít a bank. Hurrying up outstanding debts due to you will assist in increasing your cashflow.

STOCK

Do you have excessive capital tied up in stock? This can occur if you are carrying large numbers of of items that you could obtain from suppliers at short notice, or if you have too many slow-moving items.

Itís important to regularly review your stock levels and turnover rates, and your purchasing policies.

Can you free up money by reducing stock? What about moving out of the slow-moving lines or having a quick sale of the slow-moving stock? It might pay you to discount some items quite heavily to get some money in quickly. If you need additional funds to purchase more stock, make sure that you're replacing slow-moving stock with the faster selling lines.

PRE-PAID EXPENSES

These pre-paid expenses often relate to services. For example, you might pay your insurance bill for the year all in one hit, but you could arrange to pay small monthly amounts. There might be an additional cost for doing this, but you must weight the extra cost against the advantages of 12 small payments which your cashflow can comfortable handle versus one large annual payment.

FIXED ASSETS

Fixed assets can often be the source of a significant amount of cash. Do you really put all your assets to full use? You might be able to sell off little-used assets and hire suitable replacements when you require them. You might be able to sell vehicles and lease others instead.

CUSTOMERS

Your customers can be a source of business funds. Apart from the good debt collection tactics referred to above, try these tactics:

Ask some of your credit customers (start with the ones you know best) to pay you using their credit cards. They have access to 30-55 daysí free credit and you get the cash immediately, less the credit card commission.

If you're starting a new business, consider establishing it on a cash-only basis to keep the funds inside your business rather than locked up in Debtors.

If you supply goods over a period of time, or if you're a service business, ask if you can invoice for progress payments. Otherwise, youíll have to wait until the job is finished and then another 30 days or more before you get paid. This approach also gives you an early warning if the customer isnít going to be pay, allowing you to cut your losses and get out. Itís a very suitable approach for tradespeople subcontracting to a developer.

SUPPLIERS

Ask your suppliers if you can buy on consignment, meaning you donít pay until you make a sale. Or ask them for extended payment terms to give you the opportunity to sell the goods before you have to pay.

If the supplier won't budge, try splitting the order in two and offering to pay normal credit terms (30 days) on one half and 90 days on the other half. Your suppliers will be more likely to agree to this kind of arrangement if you've paid them promptly in the past.

 

The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.    

 

If we can assist further, please email McLean and Co as follows:

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