7 WAYS TO BOOST CASH FLOW & MAXIMISE PROFITS

By Bryn Harwood

TOPICS Understanding Your Financial Statements Cash Flow vs Profit: Difference Forecasting Strategies Software and Apps: Job Costing, Time Tracking Structuring

WHY DO YOU NEED TO UNDERSTAND YOUR

FINANCIALS?• Legally

• http://asic.gov.au/for-business/running-a-company/company-officeholder-duties/your-company-and-the-law/

• Morally

• Ethically

UNDERSTANDING FINANCIAL STATEMENTS

• Profit and Loss statements

• Balance Sheet

• Cash Flow

• Budgeting: Actuals vs Targets

• Key Performance Indicators (KPIs)

CASE STUDY: BOB THE PLUMBER

• Bob Plumbing Products was founded in 2012

• Bob is an importer of plumbing products and distributes plumbing products to building sites, major projects and hardware stores

• Bob believes his business is doing extremely well

CASE STUDY: BOB’S FINANCIALS

Profit & Loss 2015 2016Revenue 3,500,000 4,000,000Gross Margin 1,050,000 1,200,000Overheads 675,000 800,000EBIT 375,000 400,000Interest 116,590 136,348Tax 77,523 75,141Net Profit 180,887 188,511

Balance Sheet 2015 2016Cash & Equivalents 100,000 90,000Accounts Receivable 671,233 952,652Inventory 1,033,690 1,624,854Current Asset 1,804,923 2,667,506Fixed Assets 850,000 950,000Total Assets 2,654,923 3,617,506Accounts Payable 402,855 555,780Short term debt 501,974 755,402Current Liabilities 904,829 1,311,182Long term debt 900,000 1,285,343Total Laibilities 1,804,829 2,596,525Share Capital 200,100 200,100Retained Earnings 649,994 820,881Total Liabs & Equity 2,654,923 3,617,506

CASE STUDY: RATE BOB’S COMPANY• Rate out of 1 -10 the financial performance

• Rate from 1-10 the cash flow position of the business

FINANCIAL PERFORMANCE

FINANCIAL PERFORMANCETargets not achieved:

ActivityActivity ratio: Annualised Revenue/Total Invested Capital

Asset UsageAsset Turnover: Annualised Revenue/Total AssetsWorking Capital Absorption: (Accounts Receivable + Inventory + WIP – Accounts Payable) / Annualised Revenue

LiquidityQuick Ratio: (Cash & Equivalents + Accounts Receivable) / Total Current Liabilities

CapitalNet Variable Cash Flow: (Annualised Revenue – Annualised Variable COS – Annualised Variable Exp – Operating Working Capital) / Annualised Revenue

2016 CASH FLOW

WORKING CAPITAL

THE RESULTS - EXPLAINED• Bob was funding his inventory purchases with debt• He was not selling his inventory fast enough and this was leaving him

with a major cashflow problem• Bob also was holding a lot of money in debtors• Bob was forced to call an administrator because he could no longer meet

his commitments

HOW TO AVOID BOB’S MISTAKES• Regular meetings to discuss your financial performance

• Using an accountant or adviser to explain the numbers

• Using other predictive software to analyse the results

• Structuring your business to mitigate risk in case of an emergency

FINANCIAL YEAR END PREPARATIONTax Planning – Year End

• Bookkeeping: coding and reconciliations completed at 30 June

• PAYG Payment Summaries & Contractor Payments Reports

• Performance overview & tax estimate for 2016

• Strategies to minimise tax for current FY

FINANCIAL YEAR END PREPARATIONTax Planning – 2017 Financial Year

• Budget for 2017

• Establish if financing may be required with accountant/bank manager

• Total wages – payroll tax? ($1.1 million in QLD)

• Review Insurances & Salaries (is payroll tax applicable?)

ACCOUNTING SOFTWARE

APPLICATIONS: ADD-ONS

ADVANTAGES OF USING AN ADD-ON/APPLICATION:

Systemise Your Business

Save Time

Track Job-Costing

Track Key Performance Indicators (KPIs) in Detail

STRUCTURING TO MINIMISE TAX

Company vs. Trust Structure

TAX MINIMISATION:TRUST EXAMPLE

Tradies-R-Us makes $300,000 Taxable Profit. Trades as a Trust.Profit Distributed to 2 Beneficiaries.

Tradies R Us Pty Ltd (Trustee)

Director 1

Director 1 (Beneficiary)$150,000 Distribution

Tax: $46,132

Wife (Beneficiary)$150,000 Distribution

Tax: $46,132

Trust

Tax paid by Beneficiaries at personal marginal tax rates.Total tax payable: $92,264

Family Trust (Corporate Trustee) - All profits distributed- Must be taxed at the beneficiaries’ marginal tax rate

TAX MINIMISATION:COMPANY EXAMPLE

Tradies-R-Us makes $300,000 Taxable Profit. Trades as a Company.Director’s wage: $90,000 ($22,732 tax payable)Admin’s wage: $30,000 ($2,397 tax payable)

Tax paid Director on his wage.Company tax: @ 28.5% = $51,300Total tax payable: $76,429

Tradies R Us Pty Ltd (Trustee)

Director 1

Company Retains ProfitsTax Profit (post Director's

wage) $180,000Tax: $51,300

Admin Wage: $30,000Tax: $2,397

Director's Wage: $90,000Tax: $22,732

Company Retain profits in the company (28.5 cents)Dividends can be paid to shareholders out of retained profits

TAX MINIMISATION: STRUCTURES

In the example, company structure results in $15,835 in tax savings.

Other Considerations:

• Risk mitigation

• Growth Plans

• Ease of use

• Exit Strategy

2 THINGS ARE CERTAIN IN LIFE:TAX & DEATH

QUESTIONS

1. Do you have a good understanding of your financials?

2. Do you know what questions to ask your adviser?

3. Have you thought about what you want out of your adviser?