Business Accounting and Planning

If you’re new to business, there are some key areas that will need your attention.

If you overlook these, they can carry a high price ranging from being and under-performer, to insolvency.

We’ve put together some information below to help give you a general overview.

We suggest that you have a read, then get in touch to make an appointment to come in and discuss things further.

Seeking advice early will avoid tax, accounting and legal pitfalls. It will also maximise benefits for business owners!

We’re here to help, and look forward to meeting you.

Ownership Structure

The advantages and disadvantages of the four most common types of ownership structure are set out in our Ownership Structure page.

Learn more about Ownership Structures…

It is best to adopt the required ownership structure from the start of business if possible to save transitional costs and to avert and appearance of tax avoidance.

The IRD can investigate any situations where restructuring to avoid or reduce tax liability may have taken place.

Tax Compliance

Businesses can face a range of taxes including (most commonly) Income Tax, GST, Fringe Benefit Tax, PAYE, and Withholding Taxes.

It is important to identify the taxes applicable to your business and schedule their due dates.

A very common problem is for a business to overlook paying tax in its first year of business. When the catch up comes, it is often in the second tax year, so it is faced with the second year tax liability also. This tax double up can be terminal!

To avoid this, tax can be paid voluntarily to IRD, paid on the shareholders salary via PAYE, or saved in a separate bank account.

It is important to have an approximate idea of how the business profit/loss and GST can be calculated after business transactions have been processed using in-house, cloud software, or by your Accountant.

Taxes can be one of the larger costs of business and the most difficult to calculate. Deciding on who should process business transactions and calculate the tax should be made when the business starts.

You should choose an Accountant who you can communicate comfortably with, especially on complex matters. A proactive Accountant will bring to your attention, tax planning and minimise the amount of tax that needs to be paid.

Cashflow

For a business, running out of cash is much worse than a car running out of petrol. Even if more cash is obtained later, it may be too late. Customers may be lost, key staff may have left, the lease may be terminated and equipment may be repossessed.

You need to know the level of Working Capital required to pay for purchases, stock , wages, taxes, etc until cash is received from the customer. The amount required will increase with increases in production and purchases.

An expanding business will be cash hungry. Don’t just plan to finance additional equipment or assets, you should ensure that additional working capital is obtained to cope with the extra operating costs until cash is received from customers.

Do not “steal” from your working capital to pay for long term assets like vehicles or equipment. This mistake has cost many businesses dearly.

Collecting from Customers

Training customers to pay on time and follow up of late payers is important.

Better still, ask for deposits up front. At least one bank allows even smaller businesses to use direct debits to collect cash.

Having “Terms of Trade” contracts in place is like gold. It is difficult enough to collect what you are owed from customers (if selling on credit) so why make it harder by neglecting to put in place a “Terms of Trade” contract specific to your industry?

The Privacy Act can restrict credit checking and the sharing of defaulting customers details. The cost of dealing with debt collectors can be prohibitive unless the Terms of Trade shift these on to the defaulting customer. To retain title (ownership) of goods that are sold (so that they can be reclaimed in the even of non-payment by a customer) generally requires legal documentation to be in place in advance of the delivery of goods.

Managing Your Business

The saying “If you don’t measure it, you can’t manage it” applies to any business.

There will be key success factors that can be monitored regularly. Some can be monitored monthly, others daily, or to suit.

It’s preferable to prepare financial statements for management reporting monthly, quarterly or certainly more frequently than once per annum.

Sales compared to budget, or year to date (YTD) actual sales versus last YTD sales gives a good guide as to business trends. Charting a graph to compare these helps to focus attention on fluctuations and provides early warning signs to managers.
Key expenses and gross profit calculated as a percentage of sales helps these to be managed, compared, and explained from month to month despite sales fluctuating.
Customer Collection Frequency – By dividing YTD or annual sales by the total of accounts receivable at any point in time will show on average how quickly collections are being obtained from customers. This product will show as the number of times per annum. Twelve times per annum means that accounts receivable are on average, being collected once a month or within 30 days.
Inventory Turnover Frequency – A similar calculation for inventory turnover can be made by dividing the YTD or annual cost of goods sold by inventory at any point in time. Because inventory ties up funds until it is sold, this turnover should be as high as possible.
Other liquidity ratios such as the working capital and acid test ratios are useful for identifying trends and as an early warning.
Return on Investment calculations will enable the business’ rate of return to be compared with other alternative investments including bank interest rates.
Proportion of Borrowing – The ratio of debt to total assets shows how high borrowing levels are. You will need to decide what level of debt is acceptable; a worsening trend over time will require some “hard decisions” to be made, in order to stay in business.

Companies – Legal Requirements

All companies must be able to calculate their financial position at any point in time and must not distribute funds to “owners” ahead of creditors.

This is a requirement of the Companies Act and mandatory declarations / documents are required before distributions are made. This is in order to protect creditors eg: suppliers and lenders.

In addition, decisions made by the directors or a company must be recorded by way of a resolution. Failure to do so can, for example expose the directors to legal action and even force shareholders to repay salaries to a liquidator (if appointed).

Summary

To manage a business involves balancing a variety of responsibilities.

It takes time over and above working on the usual production and sales functions that can be all too absorbing.

Managing requires planning for the future and identifying the important aspects that should not be left to chance.

Fortunately, much can be delegated to your accountant and we are on hand to provide guidance.

Seeking advice early will avoid legal, accounting and tax pit falls and maximise benefits for business owners.

Get in touch and make an appointment to see how we can help you and your business.