EMAIL NEWSLETTER
JANUARY 2007
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.nz,
which 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.
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:
INDEX
-
The
Start of the Year- an Ideal Time to Set Your Goals and Budgets
-
Getting
Better Value from your Expenses
-
Tax
Rates for Taxpayers
-
KiwiSaver
Website
THE START OF
THE YEAR- AN IDEAL TIME TO SET YOUR GOALS AND BUDGETS
Whether you're mapping a path to profitability
or simply determining how much to spend on
marketing, setting effective budgets can help
your business manage money optimally. Budgeting
is a crucial aspect of financial planning.
It
forces you to ask questions about the business
decisions you make, which in turn helps you
anticipate the resources you'll need to reach
your goals.
Use these
tips to design budgets that keep your day-to-day
operations focused on success.
1. Set Goals
Your spending priorities will be easier to identify if
you begin the budgeting process with a clear set of
goals and expectations. For example, you can
streamline the development of a marketing budget if
you're clear about what you want to achieve and what
outreach tactics you expect to deploy. Similarly, if
you're setting a budget for technology, it will be
easier to pinpoint the amount you need to spend on
staff training and tech support if you know your
desired return on investment (ROI).
2. Get the Big
Picture
It can be easy to underestimate the amount of money
you'll need in different areas of your budget simply
because you don't anticipate all the costs related to
planned purchases. For example, if you're setting a
budget for technology, include obvious expenses such
as hardware and software, but also take into account
"hidden" costs such as training,
maintenance, and technical support. Many budgets are
quickly thrown out of whack when these unanticipated
expenses pop up.
3. Build in
Increases
Some costs of doing business , such as salaries and
wages, are likely to rise steadily over
time. To make budgets as accurate as possible, these
items should reflect expected annual changes. You
can estimate the amount of these increases by
reviewing cost of living forecasts, inflation rates,
as well as your own historical spending trends.
4. Account for the
Domino Effect
Spending changes in one area of business often impact
others. For example, if you increase advertising
spending, revenues may increase, but so will the
amount you need to spend on customer service and
fulfillment. As you hone your spending plans, be sure
to reflect the impact of changes throughout each area
of your budget.
5. Consider
Losses
Every business will need to grapple with product
returns, unpaid invoices, and other cash
flow drains. Be sure to account for these losses in
your budget.
6. Look at
Industry Norms
You can use standard spending practices in your
industry as a barometer for your budget. For example,
if most businesses in your field spend 6 to 10 percent
of revenues on advertising, this range is probably a
good one for you to target. It's okay to vary from
industry norms, but only with an understanding of how
spending more or less than average will enable you to
reach your goals. If you plan to double ad spending in
your first year, document how the extra money will be
spent and what the expected payback is.
7. Prepare for the
Unexpected
Every business has unanticipated costs . Put a line item in your budget to cover
these expenses.
8. Share it
Review your budget with an accountant or financial
advisor. He or she can verify that you've effectively
covered the budgeting basics, and serve as a sounding
board for spending decisions.
9. Be Ready to
Revise
Chances are the initial budgets you set won't be
perfect. Update your forecast quarterly or when new
information or events impact your company. Compare
initial plans to what actually occurred, and adjust
figures accordingly. For example, if you discover
you're not meeting profitability, look for areas of
the budget that can be cut. If sales are increasing,
note which areas of your business will need to be
enhanced to meet demand, and allocate more money to
these areas.
GETTING
BETTER VALUE FROM YOUR EXPENSES
If expenses are all higher than the averages, chances are the fundamental
problem is that prices are too low
If only some expenses are higher than the average, then action on only
those specific costs is needed.
Increasing prices will make more revenue available without increasing the
cost level, so the cost becomes a lower percentage
Look at the special features of the business, then make allowances for
those:
• if your firm is heavily geared around mail order or phone sales, then
those costs
should be higher
• if your firm has recently upgraded large amounts of equipment, then
high
lease/depreciation should be expected
• if your firm has a lot of employees and few owners, wages expenses
will probably
be higher
• if the firm is small, then some costs will be a high percentage, even
though they may
not be large in dollar terms (e.g. a $2000 expenditure on
advertising in a $100,000
turnover may be necessary, just to match expenditure in other
competitive firms)
Focus not just on reducing expenses, but on getting better value from all your
client spends. This will almost certainly help you decide that some
expenses aren't
worthwhile!
Improved cost control comes from techniques such as:
• budget costs annually
• review costs against budget regularly
• ask whether each expenditure item is necessary?
• look for better or less-costly ways of operating the business
Most costs can be analysed by looking at three component parts
of the total: The Process; The Volume; and The Price. Each is looked at in
turn, to show how this approach will diagnose a problem.
The Process - looks at the underlying activity which creates the
demand for the cost
• look at the flow of the product or the process - where does the
material come from or go to?
• is there excess handling - too many 'pick ups' and 'put downs'?
• too many stops and starts?
• have you looked at whether it's better to do it 'in-house' or to
sub-contract?
The Volume - looks at how much of the particular item you really
need, compared to what you are presently using:
• is some of the volume 'wasted'
• is there any theft? Unauthorised private use? etc
• is the incoming purchase properly recorded and paid for? Otherwise,
you might pay for items not received
• is the order or purchase of goods properly controlled, or can anyone
spend money without proper review?
• is 'portion control' needed to standardise the amount of the service
required?
The Price Paid - this lets you tighten the way goods or services
are bought
• do you periodically put purchases out to competitive tender?
• are you buying goods of too high a quality relative to the use?
• can you benefit from bulk-purchase? Either by buying (eg) a year's
supply, or by a co-operative order with a similar firm?
• are settlement discounts worthwhile?
The outline can be used to review most expenses - eg phone calls, or
insurances etc. It does not just apply to purchases of 'stock'.
In the case of (eg) high phone cost, it could be applied like this:
Process - review the way people use the phone - do they plan calls to
outline what has to be accomplished in a call? Do they make repeat calls
because all required info was not obtained in the first call?
Volume - is every call necessary? Are all calls business-related? Could
email or fax get the same info at a lower cost?
Price - is it cheaper to use a mobile or a desk phone? Is the firm in a
suitable 'plan' with the phone company? Is there a time during the day
when it is cheaper to call?
How do I get better value from my …
Advertising and Promotion
Firstly, don't assume that more expenditure on advertising means 'better'
advertising. Some low-cost ads or promotions can be very effective in
generating new or repeat sales
Drop the campaigns or concepts that don't work! Try another approach.
Think about the 'referrers' you should regularly deal with...people who
are in a position to influence customers' behaviour - e.g. real estate
agents are a source of referrals for landscape gardeners, removalists,
cleaners etc
How intensively do you 'farm' your current customer base - special deals,
preview nights for new products, follow-up offers targeted at your known
use of certain products or applications, etc
Can you add a new but related product to the current range? This creates
scope to re-contact current customers or clients to advertise the new
product, given your client's knowledge about their usage.
The best-value 'advertising' might well be this type of re-contact with
current customers, rather than spending lots on advertising cost to
get new customers. It's generally much cheaper to deal with current
customers than to chase new customers.
Interest and Bank Charges
Build a positive relationship with your bank by providing accurate
information, regularly.
Estimate your cash needs throughout the year so that the right finance
facility can be put in place.
Periodically seek quotes from other financiers, to see that your banking
package is still competitive.
Select a suitable mix of short-term and long-term debt in order to lower
the overall interest cost.
Ask the bank for tips on reducing your fees.
Look at greater use of electronic transactions, rather than 'over the
counter' transactions.
Insurance
Sit down with your broker to assess exactly which types of cover you
need. You should examine a list of packages that you consider to be a
minimum cover.
Get the broker to check policy conditions (the most important part of the
equation) and then the premium, in order to get a good value policy
Realistically assess the insured values, especially for: stock, debtors,
equipment (watch whether the policy is for an 'agreed value', or 'new for
old', as this will impact on the figure you will need to use).
Once you have gone through this review, make sure your assets are
protected and protection has been bought at the 'right price'. Accordingly
the total expense will be right no matter what % of turnover it
represents!
Lease & Depreciation
Do you really need that piece of equipment? Can a similar piece of
equipment be rented occasionally, rather than owned all the time?
Is the equipment of a suitable standard for your use (ie a cheaper piece
of equipment might not last long enough or be reliable enough for the work
you need it to do; or buying 'Rolls Royce' standard might be more than the
business needs)
Have you shopped around to get the best possible purchase price and
value-for-money? (this reduces your lease or depreciation cost)
Is there a large amount of equipment leased? Is all of the leasing handled
by the same financier? Can this be refinanced to a cheaper rate elsewhere?
When comparing lease quotes do not just compare the interest rates. Look
at the repayment amounts as well (some dealer fees are not required to be
disclosed, but may be included in the repayment amount).
Motor Vehicle
Are all costs business related?
Are you using the right vehicle to suit the business' needs?
Do you control costs through good driving habits
Are running expenses excessive? Are repair and maintenance costs high? Is
replacement of the vehicle necessary?
How many vehicles are operated by and for the business? Is each necessary?
Repairs & Maintenance
Are 'high repair costs' typical of the way the business runs, or was there
a high one-off expense this year?
If expenses are ongoing, is replacement a cheaper alternative in the long
run?
Who is completing the repair work? can someone else do as good a job for
less?
Is it worth establishing a contract with a preferred contractor for repair
and maintenance work? Will they agree to a lower hourly/repair rate?
Rent
If your rent is high, is your location
appropriate? Llook for factors such as: high passing
trade (allows lower advertising cost); location in a Shopping Centre
('rent' might include a promotional levy paid by the Centre's tenants)
Rent can be reduced by: renegotiating rent per square metre (perhaps by
referring to similar properties, or entering into a longer-term lease);
sub-letting part of the premises, or to a firm needing some storage space,
etc
Moving premises is worthwhile only if substantial savings are possible.
Consider the total payback period, after comparing the cost of moving
(pack up, removal, setup and fit out of new premises, change of stationery
etc) with the rent to be saved.
See whether extended trading hours would increase overall sales and gross
profit more than the cost of servicing those sales (this causes rent to
remain constant and so become a lower percentage of income)
Perhaps you can negotiate a lower rent in return for paying for certain
improvements to the presentation of the building itself (e.g. improved
lighting, or new shop front windows etc)
Salaries of
Employees
When looking at this area, look at a combination of indicators: staff
wages as % of turnover, revenue or gross profit per
person; average salary per head.
The number of people can be kept to a minimum by balancing the available
people to match the likely workload: more casuals/part-timers; have other
jobs that staff can do (e.g. clean and tidy shelves; plan advertising,
etc)
The number of people can also be kept to a minimum by having: minimum
'paperwork' necessary to keep proper control over the business; tight,
efficient operating methods; well-trained people who know their roles and
who don't need a lot of assistance
Staff On-Costs
Some of these are governed by legislation (e.g. Holiday Pay, Sick Pay).
Make sure your business is paying the required amount as a minimum.
Others are more discretionary - uniforms; training; superannuation etc. Make sure each expenditure is necessary for the
long-term viability of the business. After that, satisfy yourself
that higher payments are delivering a happier, more productive workforce.
Travel
Are travel costs excessive? Are all trips necessary for the business?
Could any of the costs be reasonably paid for by the employee? Could a
maximum allowable expenditure budget (eg daily meal allowance) be placed
on reasonable travel expenses?
Are there cheaper travel alternatives that could be used?
TAX RATES FOR
TAXPAYERS
Different tax rates apply to different entities such as individuals
and companies. These rates can also change if legislation changes.
Click on the links to find respective tax rates.
Generally if you have more than one job, you should use a secondary tax
code for all jobs other than your main job. In some cases if you used a
secondary tax code you would be taxed at a rate that is too high for your
circumstances. Instead you may qualify for a special tax code, which may
reflect your circumstances more accurately.
A list of current income tax rates including and excluding earners' levy
for individuals.
Find out about non-profit organisations, how they work, what the tax
rates are and income tax exemptions.
In general the initial amount of money you put into a trust is not
taxed, although you may need to pay gift duty. Find out more here about taxing
trusts and trustees.
Your tax code is what decides how much tax is deducted from your income.
The tax code that you will need to use depends on how many sources of income
you have, and whether you have a student loan.
A sole trader is a person trading on their own. Find out here about how
a sole trader works, what drawings are, and the tax rates for sole traders.
In a partnership, two or more people run a business together. Find out
about how a partnership works, paying a salary to a partner, and more.
A company is a formal and legal entity in its own right, separate from
its shareholders.
KIWISAVER
WEBSITE
Here are links for the KiwiSaver website.
People who are interested in learning more about KiwiSaver and how it
works can visit www.kiwisaver.govt.nz
Employers can find out how KiwiSaver will affect them in a new section
on this website www.ird.govt.nz/kiwisaver/employers/
Potential KiwiSaver scheme providers who want to learn about becoming a
scheme provider can find out more here www.ird.govt.nz/kiwisaver/providers/
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:
If
we can assist further, please email McLean and Co as
follows:
CONTACT
McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK
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