By  John Jeffrey- Director AM-Win Software.

We received so much positive feedback about John's article "Steps to success in business today" published in our last newsletter, that we have asked John if he would "loan" us another article from his business seminar series. 

John's answer - "if it benefits the clients go for it". We went for it and here it is.

Many small businesses become obsessed about reporting a healthy profit because of their legitimate concerns about having to pay tax. These concerns often prompt business proprietors and shareholders to manipulate their financial statements to show their enterprise in a less than favourable light. Unfortunately such actions are misguided as financials are prepared not only for the ATO but also for people with whom they may wish to do business (i.e. banks, financiers, investors, trade creditors, potential purchasers of their business etc.)
 
Whilst the ATO has closed many loopholes in the last 20 years, there are still many legitimate ways to minimise a tax bill. The following suggestions should be considered:

Firstly, ensure your accountant is more than just a bookkeeper or tax agent. An accountant who is alert to current tax law and is aggressive in his tax planning is a must. Accordingly, you cannot spend too much time searching for a good accountant. 

A good Accountant / Financial manager can put structures in place to reduce your tax position. The structure(s) will depend upon your individual situation. However, the following could be considered: 

Should the business be incorporated (i.e. a company) or not?

• Is a family trust appropriate to split income?
• Self managed superannuation fund with interests in related unit trusts.
• Setting up a legitimate structure of loan between entities so that income/expenses can be filtered through those entities.
• Ensuring that all available deductions (motor vehicle, travel, home office expenses etc) that may be construed all personal, are claimed. 

In summary, researching what is available in the tax minimisation area is paramount. A simple first step could be to purchase the current Master Tax Guide (less than $100), which provides a handy layman’s version of the guidelines.

Keep the cash flying

Cash flow is the lifeblood of business, but managing it sometimes means using a calendar with your calculator 

Where does all of my cash go? This is probably one of the most frequently asked business questions. You get to the end of the month. It has been a busy period; plenty of trading activity, some good sales and the cash seems to have been rolling in. Then your bank statement arrives and you realise that there has been as much going out of your bank account as has been coming in. And what’s more, there are still bills to pay. Or you go to your accountant for your end-of year visit and hear about the profit you have made and how much tax you need to pay. Ever asked the question: “ If I’m making all that profit where is it?” 

• Cash goes in five broad areas: 
• Operating costs;
• Capital expenditure;
• Loan repayments
• Tax; and 
• Profits and dividends

Look at the following table for some examples.

Some of these areas, such as operating costs, go out all of the time. Others tend to occur at specific times of the year, such as payment of tax installments. And some tend to occur at irregular intervals depending on what is happening in the business or based on the needs of the owners.

Because the cash doesn’t go out if the business evenly over the year, you cannot predict your cash needs without doing some planning. When you start to map out on a month-by-month basis where the cash is going, you will see that there are some months where cash outflow is much higher than others. These are the months when your bank account will run down and where your liquidity can come under pressure.

This could happen if you lodge your Business Activity Statements on a quarterly basis as this brings together the payment of a number of taxes into one single event and the amount can be substantial. But forewarned is forearmed. If you know these payments are going to occur you can plan and prepare for them. 

The key is to:
Identify where the money comes from in your business; and when you can expect it to arrive.

Once you have done this, write down all of the months of the year and start to plot out how much money will arrive in each month and where it will come from.
 
To do this you need to: 

• Identify any money you are planning to invest in your business over the coming year.
• Know if you are planning to borrow any money.
• Estimate your sales for the coming year.
• Work out how long it will take for your customers to pay you out.
• Identify any other money that is likely to come into the business and when.

Once you have done this, you’ll have a clearer idea of your business’s cash flow needs.

HOW DO YOU MEASURE UP?

We discuss your balance sheet and income statement and a guide of what to look for. 

Taken together, the income statement and balance sheet represent as complete a financial picture of your business as it’s possible to get. 

Sometimes businesses have two sets of financial statements (or maybe three): one for the Australian Taxation Office (with the tax rules and regulations making net profit look as small as possible); one for your banker (adjusted to present the most glowing picture of the business) and one for yourself. But remember you can’t fool all of the people all of the time. And the worst person to kid is yourself. You need clear, concise, decision-relevant information.

(Incidentally, two or three sets of statements do not imply two or more sets of books – that is, the general journal and general ledger – as having more than one set of books implies falsifying financial transactions.)

With that in mind, let’s take your financial information and develop a set of measurements that will allow us to monitor both your current position and your progress. We will do this through the development of a series of financial relationships – or ratios. Remember a ratio is nothing more than one number in relation to another. A ratio doesn’t care about the absolute size; it only cares about the relationship. And it’s this relationship we will use to measure and manage your financial effectiveness. 

The question arises as to which relationships to measure. There are many possibilities and I have chosen to use the K.I.S.S (Keep it short and simple) principle – that is, enough to get the job done, but not so much as to become confusing. The following table has three basic parts: the name of the ratio, how it is derived, and what it measures. In the next issue, I will address the key point: why would anyone in their right mind do this? 

Taking action

For now, let’s explain the action steps. 

First, you need at least three years’ financial statements. 
Second, set out your statements in a spreadsheet – put all the financial data on one sheet, side-by-side, by year. 
Third, use the same spreadsheet format to calculate your financial ratios. Take a few minutes to read the ratios in the table. Note how the ratios are broken down into three functional areas: balance sheet ratios, profitability ratios and asset management ratios. 

We will be looking to develop financial “balance”; no one ratio is the entire story. Taken together, we can begin analysing your performance – and more importantly, planning for the future.

In general, there are three ways to use these ratios to analyse your business: first, to compare your current performance to your performance in prior years (trends). Second, to compare your present performance to others in your industry (benchmarking). And, third, to compare your ratios to your plans in developing a workable operating strategy.
 
You operate and manage your business with limited resources, management, capital and time. You can’t fix current problem or spot developing ones unless you know where to look. The process I’m describing is merely an efficient, effective method to keep your finger on the pulse of your business. 

Next issue from John - Less time for more work

Viki's AM-Win Tips

End of Month processing

Vicky from National Support has told us that many of our clients [especially the new ones] are still unsure about what to do at the end of the month so we she has written a "how do I' document. It's probably worth a quick read for the old hands but it's definitely worth reading if you are one of our newer clients. 

End of the month processing. 

Speak to your Accountant 

Talk to your accountant about the reports that they want and what they expect. Your accountant will charge you to prepare and finalise your financial figures and as such the more efficient you are and the easier you make it for your accountant, the less you will have to pay for his / her services. (Well that's how it should be anyway). 

Your accountant will require certain reports such as balance sheets etc. Some accountants vary in the reports they expect and a discussion with them prior to ending your year may save you a lot of time and grief [and Tax] at a later stage. Your accountant should also be made aware of your chart of accounts in advance to ensure they are aware of what each account represents and where they need to place it on their system. 

Not all accountants would understand your terminology for what you call an account.

Backing up your data

It is the responsibility of the user to ensure that you keep adequate backups of your software to avoid any data loss due to corruption, power failures, processing errors or any other event, which may cause the loss of data. Do at least 1 (one) backup of your data just prior to processing the month end and ensure that these backups are done correctly and stored in a safe place. The backup should be clearly labelled - e.g. EOM November 2005

Bank Reconciliation. 

You should have been performing regular and accurate bank reconciliation's and so reconciling prior to the end of the month should be the same simple process. If you have not you have a tedious process to go through to ensure that you bank account statements match the transactions that you have processed through the computer. 

You must process Bank charges, Loan Payments, Lease payments or any other direct debit or automatic payments that come and go into or out of your bank account. Your bank statement is normally the only advice that you get that these transactions have occurred and as such they can easily be forgotten.

Rolling over Month End

To run the Month End select the Ledger / GST end of month/year end of month/year option and the month end processing window will appear automatically stating that you are running the month end process.

This process will advise you that it will update and roll forward your accounts from the current month to the next month. You will then be provided with an option to backup your data to a disk first prior to running the month-end process. However, it would be expected of you that you have already done so prior to getting to this stage. There are also two other housekeeping functions, the first being to remove redundant stock, and the other to auto flush old history invoices according to your settings in the job item master file. It is recommended that these housekeeping functions be performed by the AMWIN tools program rather than during the year-end process. 

If you are currently a Level 1 or Level 2 user then you must also process your end of GST period at this time if a GST period ends at this time. Furthermore, if you are a monthly GST client and you have not already closed off your prior GST period then you will be required to do so before processing Month end. 

Click on the continue button after selecting no on all of the options then to go to the next step. The computer will ask you if you have closed all files before running Month-end, This is an opportune time to go around the office / workshop/ front counter and ensure that all computers are not logged into the AMWIN program or any of its modules [e.g. History etc.] 

Continue onto the next step after checking. This will open up a window allowing you to print off your end of month reports. However, you should only do this at this time if you are absolutely sure that you are not going to back post any entries into the previous month once the month has been closed. You can always print them off at a later date. Therefore, it is better to cancel past this reports window and then print your end of month reports in a few weeks time when you have back posted any required entries. Better still you can open your others /control system/options 2 and tick the box on the left hand side that says - "do not show end of month/year reports at month/year end processing". By doing this you will never be asked again if you wish to print your end of month or year reports while processing your end of month or end of year. 

At this point the system will automatically process any standing journal entries that you have previously set up in the program. You are then required to process your Month-end. 

To do this click on the process button, which will then begin the procedure. The system will then display a message that the month-end has been successfully completed and advising you to close AMWIN and restart the program. You are then ready to begin using AMWIN in the new month. 

Back posting entries into the previous month

There is now a separate process for the GST period end and for the month end processing. The system allows the user to finalise the month end and then close the GST period (if the period is due to be closed) at any time until the next month end is processed. Until the GST period is closed you are able to back post invoices, purchases, cheques, journals etc. In fact all transactions except for BAS payments and standing journals can be back posted to the previous month. 

To back post a transaction to the previous month, simply date the transaction with a previous month date and say yes when you are asked if you want to back post.If the GST period has not been closed then the system will give you the option to post the transaction to last month. If you say YES then the transaction will be back posted. If you say "NO" then the transaction will be posted to the current month. NOTE:  If you back post a transaction then you should reprint your monthly reports. 

Printing your End Of month reports.

What reports to print. - The following reports are generally considered essential as part of your end of month reporting. Customer Aged analysis,.Supplier Aged analysis, Trial Balance, Income Statement,  Balance Sheet, Invoice Register, Wage reports (If you use the wage system). 

Optional Reports 

The following reports maybe printed as part of your month-end reporting but are generally considered not essential unless you or your accountant require them. GST Report (if not intending to back post further), Bas Report (if not intending to back post further), Cash Bank Activity Ledger  Activity (very long report), Customer Activity (Very long report), Supplier Activity (Very long report), Stock Sales by Group 

Jokes 

This month we asked Kate at ICS Queensland to pick the yarns for the newsletter. Here's Kate's selection from the choices that we gave her.

Make sure he's dead

A couple of hunters are out in the woods when one of them falls to the ground. 

He doesn't seem to be breathing, his eyes are rolled back in his head. The other guy whips out his mobile phone and calls the emergency services. He gasps to the operator: "My friend is dead! What can I do?" 

The operator, in a calm soothing voice says: "Just take it easy. I can help. First, let's make sure he's dead." 

There is a silence, then a shot is heard. The guy's voice comes back on the line. He says: "OK, now what?" 

You truly are a kind man." 

A man and a friend are playing golf one day at their local golf course. 

One of the guys is about to chip onto the green when he sees a long funeral procession on the road next to the course. He stops in mid-swing, takes off his golf cap, closes his eyes, and bows down in prayer. 

His friend says: "Wow, that is the most thoughtful and touching thing I have ever seen. You truly are a kind man." 

The man then replies: "Yeah, well we were married 35 years." 

Explain what happened

A turtle was walking down an alley in New York when he was mugged by a gang of snails. 

A police detective came to investigate and asked the turtle if he could explain what happened. 

The turtle looked at the detective with a confused look on his face and replied "I don't know, it all happened so fast."

There are only nine words here

An Alsatian went to a telegram office, took out a blank form and wrote, "Woof. Woof. Woof. Woof. Woof. Woof. Woof. Woof. Woof." The clerk examined the paper and politely told the dog: "There are only nine words here. You could send another 'Woof' for the same price."

"But," the dog replied, "that would make no sense at all."

Merry Christmas Everyone.

See you all next year.