Engine Room Blog

If you only meet with your accountant once a year it is vital that you use that time to really understand how your business is performing and what you need to do over the next year to achieve your goals.  

The three key questions are:

1.  How did my business do compared to the previous year?

Sales may be up but profits down (or preferably sales are down, though profits are up).  Understanding whether this is a trend or caused by a one off event is essential to making decisions on how to have a better year.  

2.  Where has the money gone?

Often business owners are hit with a tax bill at the end of the year but have no cash available to pay it.  This may be caused by cash tied up in stock or debtors, or because cash taken out of the business by the owner is greater than the funds generated.  Often cash has been used to fund growth in the business without any cash flow forecasting. (If you want to know more check out our next 'where has the money gone?' seminar at www.engineroomca.co.nz/events ).  Cash is always King - if you cannot turn profit into cash your business may be growing too fast, or you are neglecting to put enough time into managing your business finances.

3.  Is my pricing right?

Pricing is 20% science and 80% art, but fundamentally if you are not making a profit on every sale, you need to review your costings and how you set your price.

4.  What is my business worth?  

While valuing a business is a project all of its own, your accountant should be able to give you an indicative valuation.  Understanding what your business is worth is vital to making decisions about getting it ready for sale, retirement and succession.

These three questions will lead to a whole lot more...

What can I do to increase sales?

How can I increase my profit?

How do I keep more cash in my business?

What do I need my business to be worth to fund my retirement?

I'd love to know what key questions you ask your accountant to help you with building your business.

We all know that there are two certainties in life – death and taxes.

 Your accountant can help you plan for paying your taxes – though a savings account with money in it is a good start!  Death is slightly more complicated.

It never ceases to amaze me the number of times I ask a client if they have a current Will to find that they have no Will at all.  

While it is easy to assume that you are young and don’t need one, life doesn’t always work that way.   You need a will if:

1.                              You have dependents – to ensure they will be cared for by someone you trust.

2.                            You have assets – so they can be distributed as you wish not as the state requires. This article has more information on the distribution of assets.

3.                           You have specific wishes for how your funeral will be conducted.

Preparing a will is relatively straight forward – most law firms will prepare them for a modest fee or you can find a “do it yourself kit” on line.  If you prepare your will yourself you do need to make it sure it is appropriately witnessed to be valid.

With 1 October rapidly approaching, business owners need to be thinking about how they will handle the GST increase.

B2B businesses generally have little problem other than making sure their accounting software can cope with the changes and that they understand how to complete the transitional GST return.  Be alert to the effect of GST changes on existing contracts that carry over in to the new regime.

If your business is direct to consumers (B2C) things are more complicated:

1. Will you increase all prices on the due date? If this is a big job you may want to put two prices on all stock starting now (pre-increase and post-increase).
2. Do you have slow moving stock that you will want to hold prices on?
3. Lay-bys outstanding will be at the old price and the GST increase generally cannot be passed on – this means a loss of profits to the business owner.
4. Will you have a sales spike pre 1 October? And a sales decline afterwards?  This is particularly likely with high value items. What will be the impact on cash flow if this occurs?

Many of these issues need decisions soon….

It is wise to check this with your accountant if you are unsure or send us a message through contacts and we will send you our information sheet.

1. You really do have a business…

If your business only makes enough money to pay what you would earn in wages, it is a job not a business, and probably a badly paid job at that.

When you work for someone else you finish work at 5 o’clock and go home to your family. If you are an owner/manager and only make an average income you are probably earning less for the hours you work than you did on wages.

2. Taxable income makes your business more valuable…

Businesses are valued based on the return on investment - that is the return paid to the owner based on the money invested in the business and the risk involved.

An investment of $500,000 in the bank returning 3% reflects the safety of the investment, the same amount invested in business would need to return a much bigger amount after normal salaries are paid to owners working in the business to reflect the higher risk.

3. Taxes pay for…

Roads, hospitals, schools, police, welfare…. no taxes mean no government funded services for you, your families or friends.