This means pre-planning and being proactive. When you’re not in the office, there are still overheads and salaries that need to be sorted. If taking time off means that less cash will be coming in, it’s essential to plan for this period to make sure that these costs can be comfortably covered. Make sure you have a clear picture of your payroll, and any other planned expenses that will need to be accounted for.
If there’s even a possibility that there could be a shortfall, it’s essential to meet this head-on. Whether this means talking to your supplier or creditors to figure out an arrangement, or compromising on other business outgoings, you must make a plan to ensure that the business, or your staff, won’t suffer.
Tips to minimise the stress of cash-flow over the holiday period
Invoice early – Send any invoices that you can, and in advance if possible. Perhaps consider whether you have any regular clients or customers that you could offer a retainer or similar deal to if they book services or make a purchase from you in advance.
Chase payment – use this opportunity to chase up any outstanding payments. Strong communication and relationships matter – talk to clients and chase invoices.
Talk to suppliers – a little honesty can go a long way. Perhaps they can extend a line of credit for your payments to them. In most cases, a good supplier would rather offer a little flexibility to keep an ongoing business relationship.
Review your costs – it’s also a good idea to do a general review of expenses. Business costs can creep up, and it’s a great idea to make a time to check on your expenses regularly, no matter what your financial situation. Review all of your regular payments and subscriptions as well as upcoming costs. There may be travel, functions or purchases which you can decide on an alternative approach to.
Talk to the bank or tax department – if cashflow is tight, make sure you have conversations early so you have everything in place to see you through. Click the link for advice on how to make your GST paymens easier?
When you’re planning for a break, book an appointment with us. We can help you navigate the holiday period and help you alleviate cashflow worries. So you get a well deserved break.
Here are 6 tips on what do to when economic times get tough.
Want to make your tax payments just a little bit easier? Download our free book.
Calculating Customer Lifetime Value
Customer lifetime value is an essential metric for businesses to monitor growth. It helps them understand the cost of acquiring new business, as well as the projected value of each customer. Here is how you calculate it, and why you should be using it as a key performance metric.
What is Customer Lifetime Value?
Customer lifetime value (CLV) shows how much revenue you can expect a single customer to generate throughout your business relationship with them.
This metric allows you to estimate the present value of the projected future cash flows that you will receive from that customer relationship. Does the cost of acquiring a customer exceed the profit made? If it does, the customer is unprofitable and something has to change.
Customer lifetime value is an important part of customer relationship management. The longer that someone is a customer and continues to purchase from a company, the higher their lifetime value. If a customer generates $100 in revenue over their lifetime but costs $120 to obtain then the customer is unprofitable.
You want to minimize the expenses of obtaining new customers while maximizing the revenue generated over time. Customer segments with the highest CLV are the most valuable to your business.
Customer lifetime value is the product of the customer value and the average customer lifespan:
CLV = Customer Value x Average Customer Lifespan
Before you can calculate customer lifetime value, we must first break down the individual components.
Customer Value
The customer value a function of how much the average customer spends, and how often they make a purchase:
Customer Value = Average Purchase Value x Average Purchase Frequency
Firstly, determine how much revenue is generated each time a customer visits your business or the average purchase value. You can calculate this by taking your monthly revenue divided by the total number of purchases made within that month.
Average Purchase Value = Total Revenue / Total Number of Purchases
Next, calculate the average purchase frequency, or how often a single customer buys from your company. To do this, you must divide the number of purchases in a month divided by the number of unique customers.
Average Purchase Frequency = Total Purchases / Total Number of Customers
Average Customer Lifespan
The average customer lifespan is how long the average customer will continue to make purchases from your business. To determine this value, you average the number of years that a customer is retained.
Average Customer Lifespan = Sum of Customer Lifespans / Number of Customers
Now that you have calculated the customer value and the average customer lifespan, you can multiply them together to estimate how much revenue a customer will generate during their relationship with your business.
Benefits of Measuring Customer Lifetime Value
Measuring customer lifetime value allows you to determine how long it takes to recover the investment needed to bring on a new customer. This includes the cost of sales and marketing expenses.
If you have multiple business segments, you can also calculate the customer lifetime value for each one. For instance, the customer lifetime value of a client that has a monthly subscription with your business will be different than a customer who makes a one-time product purchase.
Since CLV allows you to know how much a customer is worth in monetary terms, you can determine how much you should be spending on customer acquisition. Consider a customer that has an estimated lifetime value of $100. You still want to be profitable, so a reasonable cost to acquire that customer could be anywhere from $10 to $90. Anything beyond that and the customer becomes unprofitable and not worth the cost of acquisition.
Calculating customer lifetime value also helps to measure the impact that spending additional marketing dollars may have on the average lifespan of a customer, or the average purchase amount. It encourages businesses to look at the long-term value of a consumer instead of spending too much effort on quick sales that have low total revenue values.
The goal is to find the ideal balance of ongoing marketing activities that will allow your business to achieve the maximum return in terms of customer value. Research published in the Harvard Business Review found that gaining a new customer can cost anywhere from five to twenty-five times more than retaining one!
Download our client value calculator tool
These 5 accounting mistakes might be costing you money. Effective financial management is key to your success but many of us find that lack of knowledge, frustration and even avoidance can add up to accounting mistakes that curtail future growth.
You can stop making these 5 accounting mistakes to protect your business and reduce your stress.
Accounting mistake
1: Mixing personal and professional finances
From day one, you should have a separate bank account for your income and to pay business expenses.
It’s also crucial to designate a business-only credit card. When it comes to tax time, separate statements will make submitting expenses quick and easy.
This is an easy mistake to make, especially in the early days and if you’re investing your own capital into your business. Start the way you intend to go on and get this straight from the outset.
2: Not staying on top of accounts receivable
It’s easy to lose track of which customers have paid you and which clients are late. Create a strict policy and schedule to track accounts receivable and follow up unpaid invoices.
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- communicate clear expectations from the outset
- ask customers to pay at the point of purchase or no more than 30 days later;
- contact clients to confirm they have received your invoice and to agree on a payment date;
- follow up, if you take your accounts seriously, so will your clients;
- keep records of each client’s payment history.
Make this easier to manage by taking your accounts online to a cloud-based accounting solution. These are easy to use, cost effective and make invoicing easier to send and track and have less potential for errors or missing things.
3: Not tracking your expenses online
Are you tired of chasing down missing receipts and struggling to justify claims at tax time? There’s an app for that! Quickbooks, Xero and MYOB all have apps to enhance their desktop software programs. Streamline your accounting and keep everything together, even when you’re out of the office.
4: Neglecting to plan for long-term growth
Accounting isn’t just about seeing where you’ve been, it’s about looking where you’re going and achieving your highest potential.
A lot of cloud-based accounting programs, take your tracked data and generate reports and provide analytic tools you can use for future forecasting. We’re also pretty good at this, if you’re looking for a more personal approach, get in touch.
Look into what your software can do to help you with goal setting and planning. Talk with us about which reports and metrics are most important for your business and how to get the best results from them.
5: Thinking you can do it all
Unless you’re a trained accountant, don’t try to manage your company’s finances all by yourself.
Get a trusted accountant, invest in quality systems and spend some time learning the relevant tools and trends.
You’ll feel empowered, more confident in the status of your business and your goals and start having a more love-filled relationship with small business accounting! Seriously, it’s possible. Resolving these 5 accounting mistakes, will set you up for better success by having strong foundations in place. Your business will thank you.
Not keeping up to date with tax payments is one of the biggest causes of business failures. It’s an easy trap to fall into. A tight month cashflow-wise, a missed PAYG or BAS payment and then you’re scrambling to catch up. Here are some common traps tax payers fall into and a few tips to get out of them.
The key tax payment issues
There are several areas where small businesses can struggle when it comes to tax payments.
- Not paying employee PAYG
- Missing superannuation payments
- Missed GST payments
1. Not paying employee PAYG
The amount you are required to withhold from employees’ salary and wages as tax payments. is called PAYG. For most small employers, this is usually required to be remitted monthly or quarterly to the ATO. The calculations are usually performed by your payroll software, so you know exactly how much to withhold.
With the the advent of Single Touch Payroll systems for all businesses (except currently micro employers, with one to four employees, who will only commence under the new system from 2021), the ATO now has near real-time data on payments to employees and how much should be withheld. The ATO follows up non-payment quickly. While they won’t usually persue you for the odd missed payment, make it a regular habit and they will start chasing.
2. Misssing superannuation payments
Historically, missed superannuation payments have been a bugbear of employees and the ATO. Too few employees regularly checked their super balances to make sure they were being paid and the ATO had no effective way of checking whether payments had been made. Employees would sometimes find they were owed thousands in back super payments. Unscrupulous business owners would send one company into administration, leaving large unpaid superannuation amounts.
However, with the implementation of Single Touch Payroll and more data matching between superannuation funds and the ATO, there is now near real time monitoring between what employees are paid and what they should be receiving into the super fund.
Historically, non-payment of employee super has been an issue for some small businesses. It was also the easiest payment to miss, because employees wouldn’t notice until they checked their annual superannuation returns (if they checked at all).
Tax law now imposes significant penalties for missing super payments. These range from a small administrative charge ($25 per employee per period missed), to disallowing a tax deduction for superannuation, through to large fines and jail time for the most flagrant breaches.
Another trap that occurs is when business owners miss payments into their own, personal super accounts. It easy to understand why – you own the business and if the employees are all paid up to date, who is actually out of pocket – right? After all, its your money. Unfortunately, the superannuation law is not written that way. You, as the business owner, are considered separate from the company or trust that holds the business. Whether you’re a director or an employee of the business, the company (as distinct from you) has to make the super payments to your superannuation fund.
3. BAS / GST payments
Missing GST payments happens because businesses receive GST upfront, but don’t have to remit it to the ATO until weeks or months later. For many service based businesses, they collect more GST than they receive from supplies and so have to make GST payments to the ATO. If you forget that you owe the ATO a tax payment, it can come as a nasty shock later on.
How to avoid missing tax payments
The best way to avoid the trap is not to fall into it in the first place. Effective cashflow management and good record keeping are key.
PAYG cashflow strategies
Start by having a cashflow forecast prepared in conjunction with your accountant. This can assist by giving you a longer term perspective on your likely cashflow. It doesn’t have to be too complex. A simple spreadsheet showing expected cash in and out over the next 12 months is sufficient. Your accountant can also assist with calculating your likely PAYG instalments for income tax purposes, as well as GST payments.
A simple yet effective trick that helps is to use a two-bucket strategy. That way, you never run out of cash to pay your tax bills. Another great strategy is to put aside cash from every sale you make, as outlines in the book Profits First. Tax payments are made quarterly or monthly for most businesses, with the timetable set well in advance and readily available on the ATO website. We also include a useful timetable with our regular newsletter.
When planning to hire staff, include on-costs, including superannuation. As a rule of thumb, add 15% to each employee’s before-tax salary. This covers on-costs such as superannuation, payroll tax and workers compensation insurance. Add this to your cash flow forecast.
Use payroll software and get it professionally set up. This will ensure that you correctly withhold the right amount of PAYG and super for your employees.
GST cashflow strategies
Put aside cash each week to pay upcoming GST payments and use a separate bank account to stop yourself accidentally spending the cash. Get your accounts done regularly by a qualified bookkeeper, so you can stay on top of how much GST you owe. Get the bookkeeper to show you how to run a balance sheet from your accounting software – the GST owing or owed at any point in time should be fairly simple to see. If not, get them to set you up correctly so that it is.
Dealing with missed superannuation payment
If you’ve fallen a bit behind in your employees’ superannuation payments, then the first step is to contact your advisor, who will deal with the ATO on your behalf. Since the introduction of Single Touch Payroll, the ATO has regular data on how much PAYG should have been withheld and how much superannuation should have been paid and to which fund. This data is matched against data provided by the superannuation funds and a “please explain” letter will be sent if it’s not correctly matching.
For missed superannuation payments, the ATO requires the business to pay the Superannuation Guarantee Charge. The charge consists of:
- The superannuation shortfall – the amount of super you haven’t paid;
- An administrative fee of $20; and
- Interest on the superannuation shortfall (currently 10%).
You report the missing payments to the ATO by lodging of the Superannuation Guarantee Charge statement. There is a short form is completed for each period missed, including details of each employee and how much was missed. You then make payment to the ATO, who passes the amounts on to the employee’s super fund. The interest portion is also paid across to the employees super fund.
The ATO prioritise the collection of super and can enforce collection of unpaid balances a number of different ways. For example, the ATO can recover missing payments by issuing ·penalty notices to the directors of a company, requiring the directors to personally pay the amount owed. They could issue garnishee notices requiring other parties such a trade debtors or your bank, who have to withhold amounts from you and remit it directly to the ATO. Or they could use your merchant card facilities to withdraw funds from your account.
Entering into a tax payment arrangement
If you get too far behind and can’t meet your tax obligations, you can enter into a payment arrangement with the ATO. Essentially this involves coming to an agreement with the ATO about making regular payments to catch up on missing taxes. This may also include payment of interest and penalties for missed payments. Once you’ve entered into a payment arrangement, you are required to keep up to date with your compliance obligations. This includes lodging all your tax returns and making the agreed payments on time.
Speak to your advisor about your options to deal with missed tax payments.
A cash forecast can help with seasonal variations
Managing cash flow is a vital part of running a successful business. Some business owners think managing cash flow simply means keeping track of how much money enters and leaves their business, but there’s actually more that goes into it.
Cash flow forecasting, for example, is an incredibly valuable tool that helps you anticipate cash flow issues, plan for days when your cash flow is limited, and show the bank that you are prepared.
It’s an important process that you shouldn’t ignore. Here are some ways cash flow forecasts help entrepreneurs.
They help identify cash flow issues before they happen
Most businesses go through slow periods. Sometimes, those periods are obvious. A seasonal business, for example, will have decreased income during the off-season than during the on-season. There can be less obvious peaks and valleys in your income, though, that you have to prepare for.
Your cash flow forecast can help you monitor your day-to-day cash flow and anticipate when times will be slow before they hit. By anticipating when cash coming into your business might be light? or when you might have to spend more than you’re accustomed to?you can avoid a cash crisis.
By examining your cash flow over the previous years and forecasting your future cash flow, you can better anticipate financial cycles and how they affect your bottom line.
They help plan for tougher times
It’s tempting to spend money when you have a lot coming in. Your business may need new equipment or maybe you want to give all your employees a raise or a bonus.
That’s a great thing to do, but it’s only helpful if it doesn’t put your business in jeopardy financially.
Cash flow forecasting is a great reminder about how your bank accounts will look during tougher times, so you can make important decisions about when to spend your money and when to save it.
If you know a slow period is coming up, it might be better to save your money for now and give out smaller bonuses. If you can anticipate your slow period, you can plan major purchases and bill payments around it, to stretch your cash further.
At least by conducting cash flow forecasts you’re less likely to be surprised by a sudden cash flow crisis.
Cash flow forecasts show banks you can plan ahead
Banks prefer to give their money to entrepreneurs who show they are capable of planning ahead. Financial institutions prefer business owners who are realistic with their financial projections and show they have a means of addressing cash flow issues.
Forecasting your cash flow gives you a clearer picture overall about your business and how the money moves into and out of it. It provides important insight into your company’s financial health.
Final thoughts
If you haven’t conducted cash flow forecasting so far, it’s a good idea to get started now so you have a better understanding of your company’s finances and so you can prepare for the future. Want help to improve your cashflow? Contact us today.
Everyone likes making money, especially small business owners. Invoicing however, is typically one of the tasks that small business owners like the least. Chores like creating and sending invoices get set aside for other duties that are seen as more enjoyable or even more urgent.
You tell yourself you’ll get around to it tomorrow, but tomorrow becomes next week, next week becomes next month, and suddenly you realise your client hasn’t paid you in a while and your bank account is lower than expected.
The issue, of course, is that clients can’t pay you until you’ve invoiced them. You need an invoicing system that makes the process less painful or even takes it out of your hands entirely.
Hire a bookkeeper
Bookkeepers handle your company’s day-to-day financial transactions and records. That includes invoicing and following up when invoices aren’t paid.
A bookkeeper creates the invoices and ensures they’re sent out on time. They record all payments that come in and follow up on unpaid invoices. By having a full view of your company’s financials they’ll even be able to tell you if you’re charging enough for your services.
Think about how much easier it would be to get paid if someone else was responsible for ensuring that happened.
Use invoicing programs
Cloud-based invoicing programs make creating, sending, and collecting on invoices much easier. You set up an invoice template and for each client or project fill in the necessary information. The invoice is sent out, either as an attachment or as a link to the invoice online.
With some systems you can see when the invoice was sent and when the client viewed it. You can set up different deadlines for each client and you can often accept payment through the system. Not only will invoicing itself be faster, but it’ll be easier for clients to pay you.
Make sure your invoices are going to the right person – sending invoices to the wrong department can create massive delays in getting paid. A cloud-based system can also keep track of when your invoices are overdue and send out reminders without you thinking about it.
Set up a payment schedule
If you have regular clients who require the same amount of work from you over a set time such as a month or two months – set up a regular payment schedule with them.
This is easier if done along with a cloud-based system, which can automatically be set up to send out recurring invoices. You set up how frequently the invoices go out and your client gets used to expecting those invoices and paying them quickly.
Final thoughts
The only way for your business to bring in money is to invoice your clients.
Finding ways to make that process easier for you and your clients means you’ll be paid more quickly. Isn’t that every business owner’s dream?
Cashflow is the lifeblood of your business. If it stops flowing, your business dies. Successful cashflow management means balancing the needs to your investors, customers, staff and suppliers. This article sets out three steps to making your businesses cashflow more secure.
Step 1 – Set up your cashflow map
If you don’t know where you’re going, you’ll get lost – Prepare a cashflow budget
A cashflow budget is your roadmap. It helps you know where you might be going. Do you have one? If not, now is the time to pull one together. Even if its rudimentary. Start with a spreadsheet ? it doesn?t need to be fancy. We have a free sample spreadsheet that you can use or you can build your own.
Start by writing down your cash inflows. How much comes in each month? Not in terms of sales as measured by your accountant, but in terms of cash. If you receive up front deposits, for example, you have the cash. If there is a delay between your sales and the time you receive the cash, ensure that this is considered. For example, if your sale occurs in Month 1 but you don?t get paid for 30 days, ensure that the cash flow is included in Month 2.
Next, what cash outflows do you have? Materials, salary and wages, rent ? these are usually some of the biggest costs. What about other annual lumpy costs such as insurance? Put these in too.
Use your cashflow forecast to map where business is heading
Include all your tax payments, including GST, PAYG, income tax and payroll. These can be large, lumpy and depending on the size of your business, may come around infrequently. Don’t be surprised by a large tax bill.
The different between the cash in and the cash out is your net cashflow. If its negative in any give month, it means you have more cash out than in.
Step 2 – What cashflow resources do you have?
Every heard the expression “Asset rich / Cash poor”? You can’t (normally) use assets to pay for things. For that you need cash. The next step is to determine what assets you have to pay your bills. These are called your “liquid assets”. Things that are cash or nearly cash.
Write down the all liquid assets you have. This includes cash in the bank, borrowings available (including credit cards), other assets that could be quickly turned to cash. 100 shares of BHP can usually be sold and turned into cash pretty quickly. Include these. A piece of plant or equipment can’t be, so exclude these.
What other assets are there available outside the business that could be drawn on if needed? For a private business, include these as well. In times of strife, you could always lend the business money to help it through.
These are the financial resources you have to manage your cashflow, also known as your working capital. Its the amount of lifeblood you have in your business.
Step 3 – Bring it together
Take a look at the bottom line of your cashflow forecast. If every month is showing more cash in than cash out, that?s fantastic. Question is what to do with the surplus? Do you reinvest it back in the business to grow more? Pay a dividend or increase the owners salary? Nice problem to have!
If cashflow is sometimes positive, sometimes negative, then we need to look at ways of improving your working capital flow. Look at the month with the biggest negative balance. Add a buffer of 30% and this will be how much working capital your business needs. For example, if the biggest negative month is negative $10,000 cashflow flow, then you need to hold at least $13,000 in working capital.
Have a look at the financial resources you wrote down above. Do you have enough to cover that amount? If not, let’s Rev up your working capital for ways to improve it.
Rev up your working capital
Your working capital is the lifeblood of your business. It’s the cash you receive from customers and clients and is what you use to pay bills, suppliers and staff. How do you improve your working capital? You make sure the cash flows into your business but does not flow out too fast.
Chase your debtors
The first step is to ensure you turn your sales into cash as quickly as possible. If your business doesn’t collect cash upfront (such as a retailer) then you will usually get paid once the job is complete. This means you spend cash prior to collecting it.
- Make sure you are billing and collecting your debtors promptly and on time. If a job is complete, get the invoice out the door. The longer you leave the billing, the more it costs your business.
- Shorten your credit terms. If you give customers 14 days to pay, have a think about shortening that to 7 days. Perhaps offer a discount for early payment.
- Ask for an upfront deposit or partial payment. For longer term projects, put in place progress billing or milestones and make sure you bill at the relevant time.
All these steps will help the cash inflow into your business.
Stretch your creditors
Your suppliers and staff are some of your most important stakeholders. They make the magic that is your business happen. But they also expect to be paid. How do you balance between their need to be paid and your need to retain cash in the business?
- Make sure you pay on time, but not early. No one likes getting paid late ? why upset your suppliers
- Spread out lumpy, annual cashflows. Some expenses, such as insurance or software subscriptions, usually occur once a year. Some companies offer the ability to pay quarterly or monthly. If you receive regular cash inflows, it might make more sense to spread your cash outflows as well.
- Use supplier discounts. Sometimes supplies offer discounts for paying on time. If cashflow is ok, then take the discount and save cash. If cashflow is tight, perhaps wait.
- Taxation ? the biggest blackhole most businesses fall into is not paying their GST, PAYG and income tax on time. Make sure you set aside enough not to get caught short.
Want an easy tip on paying making your tax payments easier? Try our two bucket strategy.
Review your costs
Cutting costs is both a way to save money, but it can also inhibit business growth. Remember the old adage, you’ve got to spend money to make money? Its true mostly. But not all costs are the same. Here are a few quick things to check.
Automatic charges
Have a quick look at all the automatic charges going against your credit card. Do you use all the services to their full extent? Is there a free option? I was using Salesforce to drive my business, but found that HubSpot has a very similar product, with a few less features, for free. It more than suited my business needs, saving me $60 per month.
Advertising
Google and Facebook Ads is another area where spending can easily get out of control. If its not part of a properly coordinated campaign, you might be wasting your money.
Cash flow management; it is the single biggest reason for small business failure. It’s not product, sales or service. It’s a lack of cashflow.
And what is the biggest single cashflow killer? Its not paying your taxes. Whether its GST, PAYG income tax or superannuation, they’re easy to miss. Miss your quarterly PAYG and the ATO isn’t going to ring you and threaten to cut you off. You won’t have staff walk out cause you missed three months GST payments in a row.
But, the ATO will eventually catch up. And when they do, they will pursue you harder and with more law behind them than any creditor ever has.
So, what to do? There is a simple solution I call the two bucket strategy.
The two bucket strategy
Think of cashflow like water. It flows into your business when customers and clients pay you and it flow out when you pay yourself, your employees, suppliers and taxes. If the amount flowing in the top is greater than the amount flowing out the bottom, then you’re building the cash (and value) in your business.
The two bucket strategy is a pretty simple strategy to implement. It starts with setting up two bank accounts, preferably at two different banks. One I called the operating account and the other is the tax account. I use a NAB business account, which is fee free, as the operating account and a savings account at a Neo-bank, which has a higher rate of interest, as the tax account.
All the cash that comes into your business flows into my NAB account. All my expenses, invoices and payroll are also paid out of this account. Then on a regular basis (I do mine every week), transfer any cash that relates to GST or PAYG from the operating account to your savings account. Then transfer a little extra to cover any income tax on profits you’re making.
Be religious about it. Make a transfer every week, fortnight or month. But make sure you do it.
Then, when it comes time to make your tax payment, simply uses the accumulated funds in the tax account to make the payment.
A simple strategy, yet one that will save you significant stress when to comes to paying your taxes.
Cash flow a problem in your business, but don’t know why? Sometimes a 20 minute chat can help you get unstuck. At other times, you might need something more substantial. Feel free to fill out the contact form or give me a call directly on +61 404 530 563.
JD Scott + Co is one of Sydney’s leading Chartered Accounting firms, we aim to help build your business and wealth, empowering you to reach your goals.
