Bookkeeping Bulletin Autumn 2014

Posted on Mar 10, 2014 in AFS Bookkeeping, Business Bulletin, HR, Tax updates

Two Things Your Business Can’t Live Without

1. Breakeven Point

As a business owner, you’re in business to generate a profit! But before you make just a dollar of profit, have you calculated how much product/services you need to sell in order to keep the doors open, and just break even? The breakeven point is the point at which a business generates enough sales/revenue to simply cover its total costs and therefore break even. Many business owners do not understand fully the breakeven point and tend not to remain in business very long as a consequence. In simple terms the breakeven formula is:

Fixed Costs divided by Gross Profit Percentage

Fixed Costs are those costs that exist independently of sales; they are not proportional to nor caused by sales. Typically, fixed costs are constant in price and ongoing in nature, such as indirect labour, rent, loan repayments, payroll tax, insurance, etc.

Gross Profit Percentage is the sales less variable costs expressed as a percentage of sales.

Variable Costs are those costs that vary with output or sales. That is, these costs are typically caused by or are influenced by sales. These include direct labour, inventory, materials used in production, etc.

Most advisors who deal with businesses are aware of the importance of the breakeven point and how it should be calculated. Breakeven analysis is a great tool for managing and controlling costs, as well as utilising it as a decision tool to assist in setting prices or determining what volumes of sales might be needed to break even. If you don’t know your breakeven point, it makes it more difficult to set prices for your products/services, or to determine the volumes of sales required to be profitable, and hence the chances of business failure increase significantly.

2. Cashflow Projection

The old adage that “cash is king” still rings true. Whether it be suppliers, the Tax Office, employee wages, the landlord or insurance, you need cash on hand at all times in order to pay your bills. With many studies suggesting that cashflow is one of the leading causes of small business failure, it’s imperative to prepare with your accountant or bookkeeper a cashflow forecast. A cashflow forecast tracks the sources and amounts of cash coming into and out of your business over a given period. It allows you to foresee peaks and troughs, and therefore whether you have sufficient cash on hand to discharge your debts at a given time. This in turn alerts you to when you may need to take action – by discounting stock or getting an overdraft for example – to make certain that your business has sufficient cash to meet its needs. The forecast also allows you to foresee when you have large cash surpluses which may indicate you have borrowed too much or have money that ought to be ploughed back into your business.

Approach your advisors and, in consultation with them, prepare a detailed cashflow forecast.

Business Tip — 2014 Economic Conditions

While 2014 has commenced with a range on negative news headlines on the business front (among them Toyota s manufacturing shutdown and the Federal Government announcing much bigger than expected Budget deficits in the years ahead unless significant cuts are made), there are many reasons to be optimistic about business conditions in the year ahead:

· Despite the dire deficit forecasts contained in the Mid Year Economic and Fiscal Outlook (MYEFO), that document also predicts that economic growth will remain strong at 2.5%, and unemployment will fall to 6% (down from 6.5% which was predicted in the Pre Election Fiscal Outlook (PEFO)). Importantly, global economic growth is expected to rise to 4% in 2014 (up from 3% last year), powered in the main by recoveries in America and Europe.

· The recently released National Australia Bank’s monthly business survey indicated businesses were enjoying the best trading conditions in 2 1/2 years in the weeks after Christmas. According to the closely watched survey of 400 businesses, profits had jumped between December and January, except in manufacturing and construction. While business confidence was unchanged since the previous survey, trading conditions rose to their highest level since March 2011.

· Australian retail spending rose 0.5% in December (the latest available statistics) surpassing economists’ expectations of a 0.4% rise. This was the eighth consecutive monthly rise for retail sales, indicating increasing consumer confidence.

· Interest rates are tipped to remain at historic lows. Therefore the cost of finance (should you be looking to expand your business etc.) will continue to remain cheap.

The take home message is that despite a slew of recent negative news headlines, on the macro economic level there is every reason for business to be optimistic about 2014. That said, the New Year is always a good time to update your Business Plan.

Tax Man — Keeping Your Records

A common question posed by business owners is: how long do I have to keep my tax records for? Keeping records can be a burden from an administrative as well as a storage standpoint. Another common, related question is: how long do you and the Tax Office have to amend your tax return, in the event that you or they discover an error or omission made on the original tax return.Tax man

As the following Tax Office table illustrates, the answer to these questions depends on a range of factors, principally the entity through which you are operating:

Type of Taxpayer/Expense  Record Keeping Requirement  Amendment Time Limit
Small Business Entities (i.e. those
with a turnover of less than $2 million)
Five years* from when the
business record is prepared or the
transaction is completed,
whichever occurs later
Two years
Individuals (including the individual
partners in a partnership)
Five years* from when you
lodged your tax return^
Two years
All other taxpayers (e.g. businesses, 
including companies, trusts, sole traders)
Five years* from when the
business record is prepared or the
transaction is completed,
whichever occurs later
Four years
Substantiation and car expenses Five years* from when the
business record is prepared or the
transaction is completed,
whichever occurs later
Two or four years,
on your circumstances
Fraud and evasion cases Unlimited

*This period is extended if, at the end of the five years, you are involved in a tax dispute with the Commissioner. The record retention period for some transactions, for example, capital gains tax transactions, may be longer than five years

^The Tax Office has determined a shorter retention period for payment summaries, Medicare levy family agreements and taxpayer declarations for returns lodged by tax agents for individual taxpayers with simple tax affairs.

HR – New Bullying Laws

New nation wide workplace bullying laws took effect 1 January 2014.Bullying

For the first time there is now an all encompassing law that makes bullying unlawful and gives an employee the right to redress. Under the law, bullying (which can be perpetrated by a manager/director or by one employee to another) occurs when an individual or group of individuals repeatedly behave unreasonably towards a worker and that behaviour creates a risk to health and safety. It is irrelevant whether the person doing the bullying intends to bully the victim. However, in an “out” for employers, if the conduct complained of is a “reasonable management action carried out in a reasonable manner”, then that does not constitute bullying.

If a worker (including contractors you engage) has been bullied, they can apply to the Fair Work Commission for an order that the bullying stop. However, the new laws do not give the bullied employee an entitlement to monetary compensation from the employer or the person who engages in bullying, nor do they give the bullied employee the right to reinstatement of their position. The following is a brief overview of the anti bullying processes at the Fair Work Commission (the Commission) that will be applied in most cases.

1. Application is lodged a worker lodges an application for an order to stop workplace bullying.

2. Response from the employer or business—the Commission sends a copy of the application to the employer and the person/s alleged to be bullying the applicant, and they are given an opportunity to respond.

3. Application is dealt with by the Commission—by mediation, conference or hearing, depending on the circumstances of each case.

4. Application is settled or determined—the matter may be settled by mediation or in conference, or the Commission may issue a decision and/or an order to stop the workplace bullying.

To minimise the chances of a claim (and the friction that may result, as well as the loss of time to the employer in responding to a claim) it’s recommended that employers have an effective workplace bullying policy in place and that employees are trained in relation to this policy. If a bullied employee feels as though they have redress within the workplace, they are less likely to seek external redress via the Fair Work Commission.

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This article is for guidance only, and professional advice should be obtained before acting on any information contained herein.  Advanced Financial Services Pty Ltd takes no responsibility for any action(s) taken on the basis of the information contained herein or for any errors or omissions in that information.  Advanced Financial Services Pty Ltd expressly disclaims any liability whatsoever, to any person in relation to any reliance, in whole or in part on such information.