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cash flow vs profitability

Cash flow vs profitability

Cash flow vs profitability.

We all know that understanding cash flow is vital to the success of your business.

And having cash reserves is important to make sure you are never left short at crucial times, such as when wages are due, and when tax and loan repayments needs to be paid. Or, as 2020 has shown us, if the unexpected occurs.

That’s why it’s important to be able to forecast your business’ cashflow.

An accurate cash flow forecast should take into account your business’ current performance across revenue, operating costs, payment habits of both, financing commitments etc.

It should also include what you know about future trends and seasonality.

Cash flow vs Profitability - What’s the difference?

Having positive cash flow is different to being profitable.

Positive cash flow means your revenue comes in on time to pay your expenses and keep you from running out of cash.

Profitability means your revenue is greater than all the expenses required to keep your business generating that revenue.

Basically, timing is the difference between the two.

An example

If you sell $1,000 of goods every month and spend $500 in a month, you will make +$500 profit.

But if you’ve paid your suppliers for the $500 expenditure within the month and fail to collect the cash from the sale of goods within the month you would have -$500 in negative cash flow.

Why it's important to understand the difference between cash flow and profitability

Unfortunately, many businesses fail due to poor customer payment collections, and not understanding the difference between profitability and positive cash flow. 

It’s important not to rely on a profit showing in the Profit and Loss statement, as it is more reflective of positive cash flow than actual profit.

When relying on your bank balance and the P&L to indicate your business performance, you are at huge risk of forgetting all of the items you are responsible for “below the fold” on the Balance Sheet.

Often, the biggest, lumpiest cash out flows that you are responsible for appear there: GST, payroll taxes, loan repayments etc.

This is why it’s important to implement forecasting in your business. A great option to implement forecasting is Futrli. 

Talk to us about how we can help you forecast your business cashflow and profitability.

Setting Sales Targets

Setting Sales Targets

Setting Sales Targets

Setting sales targets for your business is standard practice for any aspirational, growing company. If you’re going to stretch the sales and marketing teams, it’s important to have clear, unambiguous targets for them to aim for.

Setting sales targets in uncertain times

In uncertain times it’s more than likely that your established sales targets will effectively become unrealistic and impractical for your teams to use.

So, how do you set sales targets when the world has changed? 

And how can you ensure these targets are meaningful, accurate and workable for your business goals?

Understanding your strategy and sales numbers

Knowledge is power, especially when it comes to defining your business strategy during uncertain times. The better you understand your position, the easier it will be to agree on the right strategy and to set sales targets that support these aims.

With a plan in place and targets to meet, everyone knows what they need to achieve. A list of key tasks to do at each point along the sales journey adds real value. Even if you don't end up gaining new business, you’ve made every effort to solve the customer's needs.

Important steps for setting sales targets:

Understand your turnover and profit goals.

Do you know how many sales to make if you’re going to break even, or want to actually make money? 

Understanding your gross margin, your break-even point and your desired profit margin helps you calculate how many sales will be needed to achieve this profit goal.

Bear in mind, of course, that your sales will, most likely, be down during uncertain times. And work this into your figures and targets.

Make your targets SMART

If you set sales targets then these numbers have to be Smart (Specific, Measurable, Achievable, Realistic, Timely).

Break them down into achievable goals, such as weekly or monthly targets, and track your actual sales over time. That way you can see how you’re performing against your sales target. 

Look at regular performance reports and make these part of your regular management meetings. Discuss how you’re tracking and what action you can take if you’re not hitting your desired targets.

Track other sales elements

It’s also worth considering what other elements of the sales process you can measure, to get a handle on how you’re doing as a business. Track things like calls/enquiries, visits to your home page, trials, bookings or customer demos.

Analyse what drove these enquiries or visits, so you understand where things worked well and can do more of the same.

Run forecasts and scenarios

Use your tracking data to project your sales position forward in time. Base your projections on the historic information you have available and the other drivers you’ve identified. 

Run different scenarios. For example, 75% sales based on prior year numbers, 50% sales and 25% sales. And see how you’d need to tweak your sales targets to account for these drops in sales activity.

Fill the information gaps

Are there any gaps you could fill to get a better understanding of the market and your customers?

A proactive effort to make more follow-up calls with existing customers can be incredibly informative.

Running a customer feedback survey can also help to gauge where the sales process works well, where you could do better and what their future buying intentions might be over the coming months of the crisis.

Talk to us about your sales targeting process.

contractor or employee

Contractor or Employee

Contractor or Employee 

What You Need to Know

Should your staff be contractors or employees?

There are many factors to assess and, as a business owner, it’s your responsibility to get it right.

So, what is the difference between a contractor and an employee?

An employee

  • works in the business and is integral to that business
  • has rights and entitlements under the Fair Work Act 2009
  • has a reasonable expectation of ongoing work, agreed hours and duties
  • is covered by the employer’s workers compensation insurance
  • is paid superannuation guarantee.

A contractor

  • is actively running and advertising their own business
  • is responsible for their own insurance, equipment, licenses and tax
  • has a high level of independence, discretion and control as to how and when the work is performed
  • is able to delegate work
  • is liable to fix mistakes at their own cost
  • may or may not be paid super depending on the nature of the work engagement.

It is the business owner’s legal responsibility to determine the nature of the work and the correct basis of engagement. We can help you get it right.

Multi Factor Test

There are many factors involved in deciding whether a worker is an employee or contractor. And the guidelines must be applied individually to each working relationship.

There is no single overriding factor, rather, the totality of the working relationship and nature of the work being done is taken into consideration.

Sole Trader as a Contractor May Not be Right

When sole traders are engaged as contractors, the business owner needs to check whether they really meet the criteria for being engaged as a contractor. Many sole traders engaged as contractors are not actively carrying on a business, and do not have the level of independence that a contractor should have. This is even if they have their own ABN. 

Sole traders are often engaged for their own services and labour. However they are not free to delegate the work to someone else and must work under the direction of the employing business. In this case, they should be engaged as an employee and not a contractor.

Factors to Consider

This is not an exhaustive list but some of the main factors to assess.

  • Is the worker engaged to achieve a specific result or are they engaged for their labour?
  • Are they able to delegate their contract to another worker within their own business?
  • How much choice do they have in where, when and how the work is performed?
  • Is the service integral to the business?
  • Do they advertise services and accept work from other businesses?
  • Who is liable to fix damages or mistakes?

Contractor or Casual Employee?

If you are not sure whether a worker is an employee or a contractor, check the ATO Employee or Contractor information first.

It’s okay to engage a worker as a contractor initially and to reassess the engagement three to six months later if the situation is unclear.

However, at that point, if the worker does not meet the contractor definition and you don’t need a permanent employee, put them on as a casual employee. This is often the best solution for both parties.  It means the employer is compliant with tax, super and employment laws. Plus the worker retains some flexibility while being paid super and having tax taken care of.

The ATO and the Fair Work Ombudsman are particularly concerned with the validity of sole traders treated as contractors. This is because they are the workers most frequently disadvantaged by being classified incorrectly as a contractor when they in fact meet the test for being an employee.

Get it Right to Avoid Penalties

A business that should have engaged a worker as an employee will be liable for back-payment of entitlements (such as leave, overtime and allowances), and superannuation.

Some situations are straightforward to work out. But many contractor or employee decisions are not so easy with so many factors to consider.

Let us help you get it right and sort out the tax and superannuation obligations for all your workers whether contractors or employees.

benefits of forecasting

What are the benefits of forecasting?


What are the benefits of forecasting?

There are many benefits to forecasting for your business.

First and foremost is that you’re more likely to maximise your profits if you are able to accurately project your revenues and expenses.

Additionally, accurate forecasting helps you to identify potential opportunities and manage your cashflow. And when you have this information you are able to make educated decisions at the right time for your business.

Here are some examples of questions that an accurate forecast of your cash flow could help you answer:

  • Can i start creating a new product/service?
  • Can I open a new office/location or start selling in a different area/country?
  • Can I afford another member of staff or outsourced assets?
  • Can I take more money out of my business?
  • Am I at risk of running out of cash?

How do you create a forecast?

The short answer is you don’t have to do it manually anymore.

Forecasting Apps, such as Futrli, mean that the complex, manual time-consuming forecasting is a thing of the past. Forecasting is now possible with the click of a button.

An added benefit of using Futrli to forecast, is that you can test out your decisions before you make them.

Using automated predictions means you have a second brain on your business 24/7.

Futrli

  • Creates separate predictions for invoices, cash transactions and journal entries
  • Works out how many days it takes for invoices to be paid for every account
  • Considers ‘what we thought the month will look like’ compared to current month actuals and adjusts accordingly
  • Reads account names and looks for account-specific patterns
  • Creates staff payroll predictions just like your payroll software does

And the information is presented in chart format, making it easy to understand.

How far into the future should I forecast?

Forecasts are most beneficial for looking at the next year. They should be used in the short term for immediate planning and decision making and medium to long term to assess and extrapolate current trends.

It’s important to remember that the further you look into the future, the less accurate your cash flow forecast will be as there are too many unknowns yet to pass.

Talk to us about forecasting and how Futrli can benefit your business. 

Coming out stronger

Coming out stronger

Coming Out Stronger

What does the future look like?

2020 and the COVID-19 pandemic has brought significant challenges for many people, including business owners.

While we are starting to see an easing of restrictions and a return to (Covid) normal the impact of these challenges cannot be underestimated.

While we cannot be sure of what’s ahead, it’s important to be looking forward and planning for your future.
If you're a small business owner, you can become more resilient and in control by applying these few strategies.

Coming Out Stronger Strategies

  • If you have been receiving JobKeeper 1.0, forecast your eligibility for JobKeeper 2.0 and 3.0
  • Prepare and maintain a cashflow forecast with and without JobKeeper
  • Know the key dates where Government support changes, reduces, or ceases
  • Prepare a breakeven analysis for various scenarios
  • Regain perspective by booking a meeting with your bookkeeper 
  • Set a regular review meeting to review and interpret your monthly numbers and key indicators
  • Do a check of your first quarter profits and do a forecast of your future profits to work out if any 2021 tax needs to be set aside
  • Document your future plans for your business - immediate exit, gradual exit, continuation, diversifying
  • If you haven’t already done it, get your 2020 Income tax done or scheduled for completion as soon as possible
  • Review your systems and processes to see where improved efficiencies can be made, especially through the introduction of apps that can reduce paperwork (and the time involved) considerably

If you are seeking advice on business Apps, we specialise in understanding the different options for different industries and businesses. We provide you with insights and guidance on what Apps would best suit your business.

Or, if you're interested in any of these measures contact us to discuss how we can help you become more strategic, resilient, and in control.

demystifying your balance sheet

Demystifying your balance sheet

What story does your Balance Sheet tell?

Do you understand the story your Balance Sheet tells about your business? 

It’s important you understand the components of your Balance Sheet and the key ratios that measure the health of your business.

1. It measures the net worth of your business.

Your Balance Sheet is made up of all of your assets and liabilities; your net worth is your total assets less total liabilities.

Current assets are assets which are expected to be converted into cash within 12 months; current liabilities are expected to be paid within 12 months

Non-current assets aren’t expected to be converted into cash in the short-term; non-current liabilities are long-term liabilities which aren’t expected to be paid within 12 months

Your net worth is the owners’ interest in the business. In other words, if your business was to be wound up this is how much you’d be left with as the owner of the business.

2. It tells you if your business is solvent.

Solvency is the acid test for survival. If your business is insolvent, without immediate action to remedy this, it’s unlikely to survive for long. There are two components to solvency:

Current ratio greater than 1 (current assets / current liabilities)

Positive net assets (total assets - total liabilities)

If your business is insolvent, you’ll struggle to pay bills on time and you may be personally at risk. It’s imperative you seek help immediately if your business is insolvent.

3. It allows you track the strength of your business.

By comparing your Balance Sheet to previous periods, you can track whether your net worth is increasing or decreasing.

The stronger your Balance Sheet, the easier it will be for your business to survive a downturn.

For example, if your retained earnings are diminishing over time, it’s clear that you need to take action to strengthen your Balance Sheet to ensure you’ll receive value upon the wind up or sale of your business.

4. You can calculate key ratios.

Key ratios not only allow you to compare your results year on year or to industry benchmarks, they also highlight areas for improvement.

For example, calculating your debtor days may show that it takes on average 35 days for customers to pay you. If your payment terms are within 7 days of invoice, it’s clear that your debtor processes need to be strengthened.

Perhaps you calculate how long it takes inventory to sell and see it’s taking twice as long to sell this year than it did last year. Or, maybe a specific product is taking a lot longer to sell than others, which may indicate you should discontinue it. Key ratios calculated using your Balance Sheet can tell a us a multitude of things.

As a business owner you should be able to read your Balance Sheet and understand what it's telling you. 

If you need help demystifying your Balance Sheet and identifying key areas for improvement, get in touch now!

social distancing

Social distancing: Running effective online meetings

Social distancing: Running effective online meetings

In unprecedented times, businesses must adapt to remain productive. If face-to-face meetings are a key part of your daily business operation, here are some tips to take your meetings online with minimal disruption.

Find the best system for you

There's a range of free or low-cost platforms, including GoToMeeting, ezTalks, Join.me, Zoom, Google Hangouts, and TeamViewer.

Before you choose one, consider:

  • How many people generally attend your meetings?
  • Do you require screen share functionality?
  • How many meetings do you run? (If it’s a lot, a small monthly subscription may pay off due to better functionality)

Schedule your meeting

Depending on your chosen system, consider how you schedule your online meetings. It may be that you include a link generated by your system into an email calendar invitation. However you do it, make it easy for your meeting attendees to be reminded of the meeting and access the meeting at the time.

Check your tech

Do you need a webcam (usually built into laptops) or an audio headset? These are a must for any online meeting. Communicate the need for this technology to your meeting attendees, and if required consider completing a quick online tech-check before the first meeting.

Set a clear agenda

Like any face-to-face meeting, you’ll need a well-structured agenda to follow. You’ll also need to specify the time a length of the meeting, and respect this. Decide who will take minutes, define the next steps, and if appropriate - BAMFAM (Book a meeting, from a meeting).

Does it need a meeting?

These unfortunate times act as a friendly reminder that some meetings can be emails. Consider using free tools such as Loom to document a longer and more engaging message in a video to send via email. The recipient can view the video multiple times before responding, resulting in a more considered reply.

Online meetings have been a great tool for global businesses for some time; maybe it’s time for your business to adopt online meetings as part of social distancing. They also create capacity for you to do other, more productive, things through reduced time spent travelling to face-to-face meetings.

We can help you.

Talk to us about which apps will best suit your team.

Gift cards

Gift cards and vouchers now have three year expiry

Gift cards and vouchers now have three year expiry

Gift vouchers can be a great way to attract customers, maximise marketing campaigns and increase sales - so long as you don’t get caught out by the new rules.

Does your business offer gift cards or vouchers? If so, new laws came into effect on 1 November 2019, which you'll need to adopt. Gift cards and vouchers issued on or after 1 November 2019 must meet the new requirements of the Australian Consumer Law (ACL).

New Gift Card Laws

  • Mandatory minimum expiry period of three years from the date of issue.
  • The actual expiry date must be listed on the card; alternatively, the supply date and expiry period, for example, “Valid for 3 years from 11/02/2020”.
  • Post-purchase fees are no longer allowed. Payment processing fees may be allowed, however activation, top-up, account keeping or balance enquiry fees are not.

There are some situations in which the new requirements don’t apply, for example if the card can be topped up, if it is part of a temporary marketing promotion or if it is donated free of charge for promotions. Visit ACL New Gift Card Laws webpage for full details.

If you have not met the new requirements on vouchers issued since 1 November, the new laws will still apply even if the actual voucher does not. Customers will be able to redeem the voucher within the three-year expiry regardless of what is stated on the voucher. Gift cards and vouchers issued before 1 November 2019 have the same expiry period and conditions of purchase as at the time of purchase.

What Next?

  1. Review your gift voucher terms and conditions.
  2. Update your printed and online vouchers and related marketing material.
  3. Check the information published on your website and social media.
  4. Make sure your internal processes and point-of-sale systems are brought up to date and remember to tell your staff of the changes.

We can help you.

​Talk to us about how the changes affect your business operations and cashflow, or how to implement gift cards in your business.

Modern award annualised salary changes

Modern award annualised salary changes

Recent changes made by the Fair Work Commission mean that you need to review employment agreements to ensure they are compliant with the award requirements.

The Fair Work Commission (FWC) late last year has varied a number of modern awards that include annualised salary provisions. The decision has also introduced the provision for annualised salaries into some other awards for the first time.

Whilst the actual specifics of the annualised salary provisions vary per award, there are some significant changes that affect all award terms in relation to annualised salaries. - We can help with the red tape.

What is an Annualised Salary?

Some awards permit employees to be paid an annual salary that covers all payments such as allowances, penalty rates and overtime. For many employers and employees, this has been a flexible and practical solution to avoid the need for timesheets and extra payroll administration.

The important changes

The changes may affect the ease and efficiency of your current payroll administration, as there are now extra records required for all employees paid an annual salary under an award provision. Note: this does not affect employees with a common law employment contract.

  • The agreement or arrangement must document the specific provisions of the award that are addressed.
  • The agreement must include reference to overtime or other penalty rates the employee would otherwise be paid, specified as an ‘outer limit’, or maximum number of such hours to be worked in each pay period. Outer limits must be specified separately for overtime and hours that would be subject to a penalty or loading.
  • Records of hours worked (and unpaid breaks) must be kept for each pay period and signed by the employee.
  • The employee must be paid for any extra hours that exceed the ‘outer limits’ as defined in the annual salary agreement.
  • Check the relevant award to see if an employment agreement is required. In some awards the employer can implement an annual salary arrangement without an employee agreement.
  • Document the calculation of the annual salary according to the requirements of the award. It is vital that the calculation shows that the employee is receiving at least as much as if they were paid according to the award hourly rates, including all wages, allowances, penalties, overtime and loadings. This will require breaking down the salary into its separate components.
  • Employer and employee must complete an annual salary review on the anniversary of the agreement or arrangement.

What you need to do now

  1. Make sure you are aware of the applicable modern award and check the annualised salary provisions.
  2. Check that the current annualised salary arrangements meet the new requirements of the award.
  3. Document the calculation as per the award conditions.
  4. Update existing agreements or implement new ones as needed.

The new provisions came into effect on 1 March 2020. Employers need to review all existing agreements for annualised salaries as soon as possible.

You will also need to consider the impact of the new requirements on your payroll administration and software.

There are many payroll software add-ons that can help to make administration easier if your current software does not have the required record-keeping tools built in.

We can help you.

Contact us to arrange a time for a payroll compliance review.

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