McLEAN AND CO. Chartered Accountants

Accounting                               Taxation                                   Business Advice and Development Assistance                                        

 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  SEPTEMBER 2013
 

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

 

NEW CLIENTS

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

INDEX

  1. Reminder

  2. Office Closures

  3. Financial Management Planning

  4. Using Cloud Computing Services to Store Business Records in Electronic Form

 

REMINDER

There are still a number of clients who have not contacted McLean and Co. to advise that they are ready with their 2013 year Financial Documentation so they can listed for a future appointment.  We are ready and very happy to assist, and it is recommended that you do so soon so that we can provide our service to yourselves at a date timely and appropriate to ascertain any tax commitments you may face, so that you can pay these on due dates to avoid penalties and interest oncosts. Contact the Office on 8700952.

 

OFFICE CLOSURES

The Office will be closed for two periods prior to this coming Xmas.  They are:

 

FINANCIAL MANAGEMENT PLANNING

Studies overwhelmingly identify bad management as the leading cause of business failure. Bad management translates to poor planning by management.

All too often, the owner is so caught up in the day-to-day tasks of getting the product out the door and struggling to collect debtors to meet the payroll that he or she does not plan. There never seems to be time to prepare periodic financial statements or Budgets. Often new business owners and managers understand their products but not the financial statements or the bookkeeping records, which they feel are for the benefit of the Inland Revenue Department or the bank. Such overburdened owner/managers can scarcely identify what will affect their businesses next week, let alone over the coming months and years. But, you may ask, "What should I do? How can I, as a small business owner/manager, avoid getting bogged down? How can I ensure success?"

Success may be ensured only by focusing on all factors affecting a business's performance. Focusing on planning is essential to survival.

Short Term Planning

Short-term planning is generally concerned with profit planning or budgeting. Long-term planning is generally strategic, setting goals for sales growth and profitability over a minimum of three to five years.

Long Term Planning

The long-term or strategic plan focuses on  Statements of Income prepared for annual periods three to five years into the future.  You may be asking yourself, "How can I possibly predict what will affect my business that far into the future?"  Granted, it's hard to imagine all the variables that will affect your business in the next year, let alone the next three to five years.  The key, however, is control - control of your business's future course of expansion through the use of the financial tools explained in this section.

First determine a rate of growth that is desirable and reasonably attainable.  Then use budgeted Income Statements and Cash Flow Budgets to calculate the capital required to finance the Stock, Plant, Equipment, and Personnel needs necessary to attain that growth in sales volume.  The Business Owner/Manager must anticipate capital needs in time to make satisfactory arrangements for outside funds if internally generated funds from retained earnings are insufficient.

Growth can be funded in only two ways: with profits or by borrowing. If expansion outstrips the capital available to support higher levels of Accounts Receivable, Stock, Fixed Assets, and Operating Expenses, a business's development will be slowed or stopped entirely by its failure to meet debts as they become payable.  Such insolvency will result in the businessís assets being liquidated to meet the demands of the creditors.  The only way to avoid this "outstripping of capital" is by planning to control growth.  Growth must be understood to be controlled.  This understanding requires knowledge of past financial performance and of the future requirements of the business.

These needs must be forecast in writing - using the budgeted Income Statement in particular - for three to five years in the future.  After projecting reasonable sales volumes and profitability, use the Cash Flow Budget to determine (on a quarterly basis for the next three to five years) how these projected sales volumes translate into the flow of cash in and out of the business during normal operations.  Where additionalStock, Equipment, or other physical Assets are necessary to support the Sales Forecast, you must determine whether or not the business will generate enough profit to sustain the growth forecast.

Often, businesses simply grow too rapidly for internally generated cash to sufficiently support the growth.  If profits are inadequate to carry the growth forecast, the Owner/Manager must either make arrangements for working growth capital to borrowed, or slow growth to allow internal cash to "catch up" and keep pace with the expansion.  Because arranging financing and obtaining additional equity capital takes time, this need must be anticipated well in advance to avoid business interruption.

To develop effective long-term plans, you should do the following steps:

1. Determine your personal objectives and how they affect your willingness and ability to pursue financial goals for your business.  This consideration, often overlooked, will help you determine whether or not your business goals fit your personal plans.  For example, suppose you hope to become a millionaire by age 45 through your business but your long-term strategic plan reveals that only modest sales growth and very slim profit margins on that volume are attainable in your industry.  You must either adjust your personal goals or get into a different business.  Long range planning enables you to be realistic about the future of your personal and business expectations.

2. Set goals and objectives for the company (growth rates, return on investment, and direction as the business expands and matures) Express these goals in specific numbers, for example, sales growth of 10 percent a year, increases in gross and net profit margins of 2 to 3 percent a year, a return on investment of not less than 9 to 10 percent a year.  Use these long-range plans to develop forecasts of sales and profitability and compare actual results from operations to these forecasts.  If after these goals are established actual performance continuously falls short of target, the wise business owner will reassess both the realism of expectations and the desirability of continuing to pursue the enterprise.

3. Develop long-range plans that enable you to attain your goals and objectives.  Focus on the strengths and weaknesses of your business and on internal and external factors that will affect the accomplishment of your goals.  Develop strategies based upon careful analysis of all relevant factors (pricing strategies, market potential, competition, cost of borrowed and equity capital as compared to using only profits for expansions, etc.) to provide direction for the future of your business.

4. Focus on the financial, human, and physical requirements necessary to fulfill your plan by developing forecasts of Sales, Expenses, and Retained Earnings over the next three to five years.

5. Study methods of operation, product mix, new market opportunities, and other such factors to help identify ways to improve your company's productivity and profitability.

6. Revise, revise. Always use your most recent financial statements to adjust your short and long-term plans. Compare your company's financial performance regularly with current industry data to determine how your results compare with others in your industry. Learn where your business may have performance weaknesses. Don't be afraid to modify your plans if your expectations have been either too aggressive or too conservative.

Planning is a perpetual process. It is the key to prosperity for your business.

 

USING CLOUD COMPUTING SERVICES TO STORE BUSINESS RECORDS IN ELECTRONIC FORM

IRD are aware that "cloud computing" is becoming a popular way for businesses to set up their IT infrastructures, and  are concerned that the use of cloud computing may mean businesses are not meeting their record keeping obligations under the Inland Revenue Acts.

Features

Cloud computing is an internet-based computing service where users are provided with access to servers, software, applications, storage and networking, or any other aspects of computing, all of which are delivered over the internet.

Cloud computing services are provided by software providers operating data centres that can be located anywhere in the world. The data centres are where the services are usually delivered from and businesses that use cloud computing services will have their data stored in these centres.  Generally, end users of cloud computing services do not need to know the underlying technology that supports these services and it is usually unknown to them which data centre their business records are stored in.

Current View

Section 22 of the Tax Administration Act 1994 ("TAA") requires a person who carries on any business or any other activity for the purpose of deriving assessable income in New Zealand, to keep sufficient records in New Zealand, in the English language, to enable the Commissioner to readily ascertain information about their tax affairs. The same requirements for GST records are contained in section 75 of the Goods and Services Tax Act 1985. Similarly, section 32 of the TAA requires that all gift-exempt bodies must keep in New Zealand sufficient records to enable the Commissioner to determine both the sources of donations made to them and the application of their funds.

It is the Commissioner's view that only business records stored in data centres physically located in New Zealand will comply with the record keeping obligations in the Inland Revenue Acts. Taxpayers are responsible for ensuring they comply with their record keeping obligations. Therefore, taxpayers using a cloud computing service will need to be satisfied that all their business records will be stored in data centres located in New Zealand.

The failure to keep the books and documents in New Zealand as required by the Inland Revenue Acts is an absolute offence under section 143 of the TAA. A person convicted of this offence is liable to a fine.

Despite this, using cloud computing to backup business records will not breach record keeping obligations, provided the primary business records are stored in New Zealand.

Current Status

As well as the obligation to keep sufficient records in New Zealand, Standard Practice Statement ("SPS") GNL-430 Retention of business records by electronic means published by Inland Revenue in 2003 provides guidelines on the retention of business records in electronic form.

Users of cloud computing services should be aware of their obligations to keep sufficient records in New Zealand and follow the guidelines in SPS GNL-430 when retaining business records in electronic form.

SPS GNL-430 requires that, regardless of how business records are kept, business records must be kept in a manner that allows the Commissioner to readily ascertain information about the taxpayer's tax affairs and there must be sufficient detail to ensure a complete audit trial that allows tracing the retained records to and from accounting records and to tax returns.

Further, records kept in electronic form must be capable of being retrieved and produced to Inland Revenue upon request, either in legible hard copies or in electronic form. Taxpayers must be able to demonstrate that their electronic records are secure from both unauthorised access and data alterations. This will usually involve developing and documenting a security programme that provides backup and recovery of records and minimises the risk of unauthorised alteration to the data.

Going Forward

If taxpayers are using or thinking of using cloud computing services as part of or as their entire IT infrastructure, they must ensure this use meets their record keeping obligations.

This may involve obtaining an assurance from their service provider that their data will only be stored in data centres in New Zealand and that there will be back up and recovery procedures sufficient to guarantee the availability of the records. Without this assurance, taxpayers risk not meeting their record keeping obligations under the Inland Revenue Acts.

The Commissioner has the discretion to authorise a taxpayer to keep their records outside New Zealand. This is subject to the records being readily available in New Zealand on request, in English, and at no cost to Inland Revenue in obtaining the information. Each application will be considered on individual merits, having regard to the taxpayer's compliance history and whether storing business records offshore is likely to impede Inland Revenue compliance activities.

 

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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:
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  • This document must not be distributed for profit.    

 

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