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A Presentation by Making Good Businesses Great

Accounting4 success making good businesses great

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Accounting is important for determining if a company's earnings reports are accurate and also important for stakeholders, regulators, bankers and potentially someone looking to buy your business. In this webinar, Accounting4Success Director, Tim Goh discusses: • Making the right decision with the correct information • Making a profit but no cash- why? • Benchmarking – the deadly ATO approach to audit • Banks love a good report • Expansion and growth – is this working? • Are we selling our product and services at the right price?

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Page 1: Accounting4 success making good businesses great

A Presentation by

Making Good Businesses Great

Page 2: Accounting4 success making good businesses great

ACCOUNTING FOR SUCCESS

What is it?

Page 3: Accounting4 success making good businesses great

ACCOUNTING The language of business

It paints a picture of your business

Page 4: Accounting4 success making good businesses great

Stakeholders The picture shows the typical stakeholders of a company.The stakeholders are divided in internal and external stakeholders.

Page 5: Accounting4 success making good businesses great

What then is accounting for success?

• Decision making • Budgeting and cash flow management • Bankers • Insurance claims • Surviving a tax audit • Business sale

Page 6: Accounting4 success making good businesses great

Decision making • A fundamental role of accounting is the

provision of information for decision making • Should we finance the asset purchase? • Which employee should we pay a bonus and how much? • Is this the right time to employ? • The deal is good but it’s a 60 days credit term • We should own our business premise • Take advantage of the tax concession and contribute super to

the max • This product will make money for us, let’s manufacture it

Page 7: Accounting4 success making good businesses great

Cash flow management

• What is wrong with this? Sales $500,000

Gross profit $350,000

Net profit $240,000

Cash at bank $10,000

Accounts receivables $30,000

Trade creditors ($10,000)

Plant & machinery $250,000

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Cash flow management

• What is wrong with this? Sales $500,000

Gross profit $350,000

Net profit $240,000

Bank overdraft ($50,000)

Accounts receivables $300,000

Trade creditors ($10,000)

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Cash flow management

• Accounting for cash flow helps you: – Get off your comfort zone and call your customers

to collect – Know when you commitment are due so that you

don’t go on holidays with the kids before your income tax is paid

– Buy or finance a much needed machinery – Arrange for finance way before you need it

Page 10: Accounting4 success making good businesses great

Budgeting and cost management

• It surprises me that some small business owners do not budget or are aware of their cost

Sales 100 Product A and 50 Product X

$150,000

Expenses $135,000

Net profit $15,000

Page 11: Accounting4 success making good businesses great

Budgeting and cost management • Is this better?

Product A Product X Total

Sales (in volume) 100 units @$400

50 units @$2,200

150 units

Sales (in $) $40,000 $110,000 $150,000

Cost of sales 100 @$410 50 @ $1500 $116,000

Fixed overheads

$101,000

Net profit $15,000

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Budgeting and cost management

• So what do you do? – Increase the selling price of product A or find ways

to reduce its cost – Stop selling product A and concentrate your

resource to selling product X – Know how many product X you need to sell to

start making a profit

Page 13: Accounting4 success making good businesses great

Budgeting and cost management Fixed overheads $101,000

Selling price of product X

$2,200

Cost of product X $1,500

Contribution $700

Number of unit to breakeven

145 units @$700 $101,500

Page 14: Accounting4 success making good businesses great

Insurance claims

Poor accounting Unlikely to get the proper claim

A picture of success

Difficult for insurer to refute a claim

Page 15: Accounting4 success making good businesses great

Insurance claim

• Without good financial information to demonstrate your business performance its unlikely you are going to get a fair compensation for loss of business in a claim

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Bankers and figures If you ever approach a bank for money, they will ask you to provide your business financial report for the last three years prepared by your accountant It paints a picture of the state of your business and how you manage it It’s from this financial statement the risk department assess whether you are good for the money or just simply too risky to lend. They will extract from it the pattern of your spending, how you deal with your customers and suppliers and whether you have provided for income tax, GST etc.. And most of all if the ***it hits the fan, can they recover from you.

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Surviving a tax audit

• Allocating and categorizing your information correctly might just camouflage you from the tax office computer

• Benchmarking • Ability to account for your cash movements and the

deposits you make in your bank • If you are in the cash economy bank all your cash so

that you can account for it or ….

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Surviving a tax audit Tax payer • Turnover $250,000 • Cost of sales (60%) $150,000 • Total expense $225,000 /turnover (90%) • Non capital purchases $175,000 as per BAS (70%) Taxpayer operated a fish and chips shop This will send alarm bells to the ATO and mark for audit

ATO Benchmark • Turnover $250,000 • Cost of sales 45% to 50% • Total expense / turnover 80% - 88 % • Non capital purchases 57% - 67% Fish and chips shop benchmark Source: ATO small business benchmarks

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A story about a Tax Audit • Benchmarking was used by the tax office to identify a client for an audit. • My client was a small business who wasn’t doing too well • He kept his records in order and his tax return was compiled according to the records

he had • But because he was in an industry in the cash economy, he was audited • We spent two days with the tax office dispelling the notion that my client did not

record some cash takings because his business did not meet the benchmark they compiled for his industry

• The tax office benchmark gauges a range of what a business should make based on key indicators such as wages paid, rent, cost of goods sold.

• In the end, they could not refute the fact that the accounts were consistent with his records.

• The fact is, he sold below the lowest benchmark price for his product in order to survive and he employed only his immediate family members.

• Thank god he had audit insurance so our fees were covered and because we were involved they could not insist that he took $40,000 in cash without paying taxes!

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Is your business worth that much?

• Why do you think your business is worth that much? • Can you support your value? • Will the due diligence process set it back? • Accounting for success helps you to paint the right

picture for your business and in most cases bring awareness of your strength and weaknesses way before your put it up for sale

Page 21: Accounting4 success making good businesses great

Summary

• I like to end this webinar by highlighting the value of accounting for success.

• To some small business owners the fear of the cost of this level of accounting service may outweigh its value… but do you really know the value it brings?

• A CCH survey of business failures states.. "A lot of SME owners are fixated on their craft and what they do and they tend to chase revenue, they may send out lots of invoices and not understand the cost drivers."

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Questions?