Index Session 1: Slide 2 Session 2: Slide 62 Session 3: Slide 81 Sounding Board Checklist: Slide 104 Session 4: Slide 125 Session 5: Slide 149 Additional: 199 02/06/2020 1 Plan Small Business Finance, Cert IV Small
Business Management Introduction What we cover Use of Excel The Holmesglen Small Business Financial Model
Personal Budget Business Cashflow Business finance Gross Margin Break Even Administration: mainly GST & BAS 02/06/2020 3 What you will learn Basic to intermediate Excel The key financial reports: what they are for
Financial concepts for business (such as cashflow, break-even, contribution margin) How financial models help you develop new ideas for your business If time permits, well look at business valuation Sounding Board 2 Checklist just before Session 5 there are a number of slides to help you check your work for the sounding board financial review 02/06/2020
5 The best aspects of NEIS for most people were the book-keeping/cash flow management component and the motivational aspects. A Study to Better Assess the Outcomes in the New Enterprise Incentive Scheme , Kelly, Lewis et al, University of Western Australia 02/06/2020 6
Link to latest version of the spreadsheet http://goo.gl/MvjYC https://www.dropbox.com/s/ s6f0xzvda1nqig6/ HolmesglenSmallBusinessFinance_reset_v8 r2.xlsm 02/06/2020 7 What you need to bring... Ideas about your customers and what you
will sell Ideas about your major expenses and project costs Your homework USB stick House rules Dont disturb my ability to teach properly (phone, coming late) Morning session starts at 9:00am. First break is around 10:30am. This course will be at most 50% theory. A lot of the time will be free for us to work together doing hands-on work on your
spreadsheets. But you will still need to do work outside of class. What financials are for? Tell you how to make money Tell you the difference between cash and profit Help you raise money by increasing the credibility of the business & business plan Let you experiment with different ideas about the business before committing Business Plan notes There are places in the business plan
document which refer to financials 1.8 Financial summary Business Goals. Include 1 or 2 financial objectives per year. For year 1&2 make sure they are the same as the spreadsheet numbers. Year 1 is much more important than year 2 Sales mix (4.4): Tab 7A & 7B 4.8 / 4.9 Marketing Action Plan Business plan notes (cont) The spreadsheet appendices at the end of the business plan: print from Excel. Ignore/delete those pages in the MS Word document (possibly no longer included)
The MAP is spreadsheet number 2. Excel basics 02/06/2020 13 Now, Excel (1) Some basic excel skills How to enter data and move around cells and tabs What a formula is How to refer to other cells
Filling ranges Copy and Paste Formatting Excel: selecting stuff If you click on a cell, you select it. To edit whats in the cell, click on the formula bar. Try editing in the formula bar, and then use the ESC key You can select more than one cell by clicking and using the Shift key After you select a cell, you can pick it up by carefully clicking and dragging on the box around the cell. Youll also notice a small black box
bottom right, which we come back to. 02/06/2020 15 Copying and moving cells The safest way to move cells is to copy and paste. Then delete the original (use the Delete key). Cut and paste creates problems with formulas. Dragging and dropping is cut and paste, so dont do it.
Dont Cut. Dont drag and 02/06/2020 16 Basic Excel Formulas To make the cell C1 a live copy of A1, put this formula in C1 =A1 Whatever happens in A1 is shown in C1 1+2x10 = 21 but if you do that in most calculators, you get the wrong answer: 30 Excel knows the rules. If you mean
(1+2)x10, you have to use parentheses (). = (1+2) * 10 02/06/2020 17 Excel and percentages 10% is really 0.1 If you write 10% in Excel, it uses the % sign to treat the number as 0.1 A cell which has a percentage usually becomes precent formatted, so it automatically treats numbers as
percentages. If you enter 10 in a percentage cell, Excel treats it as 10% even without you typing % 02/06/2020 18 Basic Excel Formulas In Arithmetic: use a formula like =1 + 2*5
Make cell C5 a live copy of A1: cell C5, enter the formula: =A1 Add up cells A1, A2, A3 and put the answer in C1: In C1 use the formula =sum(A1:A3) To lock references before copy and paste use $: E.g.: =$A$1 02/06/2020 19 Excel: useful formulas To calculate 15% growth on top of whats in
cell A1 =A1 + A1*15% or a bit shorter: =A1(1+15%) Gross Margin = sales variable costs Gross Margin % = (sales variable costs)/sales If sales is in A1 and variable costs in A2, then gross margin = A1 A2 And gross margin % = (A1 A2)/A1 02/06/2020 20
Excel: Rounding Enter three values of $1.55 and use a Sum formula to total them. Now, select all four cells and display only whole numbers 02/06/2020 21 Develop a sheet showing how many days left to live
Ex 2: develop a simple sales calculator Auto fill month headings (12 months) Define a product price row Define a unit sold row Define sales Color data entry cells to make them stand out Whats in the booklet Review the financials booklet A first look at the spreadsheet
Use my spreadsheet How to set GST or no GST How the most important sheets fit together (use the overview diagram) Its a big spreadsheet. How to move around the tabs. Tabs are sorted Y1 first then Year 2, not by number. Spreadsheet: Getting started Options tab: Your name Business name
Commencement Date GST choice 02/06/2020 26 Saving and backups Save the spreadsheet with a name like this: TimsHairdressing.xlsm Backups: Save often: ctrl-S / command-S Keep a copy somewhere other than your USB stick (email it to yourself if you use Gmail, swap with a fellow student, dropbox)
Be organised: dont open the wrong file. When using OpenOffice, always save the file as .xlsx 02/06/2020 27 What happens ... When you lose your USB stick? You are happy that you have a backup. 02/06/2020
28 02/06/2020 29 Warning The spreadsheet uses many linked formulas. It is locked. You get the password at the end. Some students may learn the password.
Always relock sheets after editing them unlocked. hours to fix Broken spreadsheets can take and I dont support you if you do this. If there is a problem with the spreadsheet, its mostly likely your fault (I will fix genuine problems quickly) 02/06/2020
30 Warning! 95% of participants do not have the Excel skills and experience to safely work with an unlocked Financials spreadsheet. And the other
users ... 02/06/2020 5%, the experienced 31 They know enough to keep it locked. The wisdom of experience, yours free, just for reading this slide. 02/06/2020
32 Hands-on section Your personal budget: HH Budget How it works Spend some time filling in what is known now. Be clear about homework expectations for this. You can quickly categorise last twelve or six months with yodlee.com MoneyCenter (free)
Expenses shared between business and household We follow ATO rules (at a high level) Splitting expenses doesnt change the cash needed to run your car (for example) but it changes your business profit. Example: compare car 100% household vs. 50/50 02/06/2020 34 Shared Motor Vehicle
Expenses Alex (sole trader) Alex's electrical business is based at his home. He has to transport bulky tools and equipment. Alex has had his van specially fitted out with shelving, tool boxes and roof racks. His private use of the van is very limited. Because of the special fit-out and very limited private use, Alex can claim a deduction for 100% of his van's running costs. He does not have to make an adjustment to his claim to account for his private use of the van. 02/06/2020
35 Shared Motor Vehicle Expenses Log Book Method Barbara completed a log book to keep track of her business travel for 12 weeks. The log book showed that she used her vehicle 40% for business use and 60% for private purposes. Barbara uses this log book percentage to claim 40% of her total expenses for that car. 02/06/2020
36 Motor-vehicle: cents per km Estimate business use e.g. around 3,600km that is: 80km per week visiting clients 10km per week for other business use 40 weeks in the year.
multiplies the business kilometres by the ATO cents-per-km rate published each year. Capped at max 5000km per year. Rates on website 02/06/2020 37 Shared Motor Vehicle Expenses Pam (company) Pam does most of her work in her home office but visits her clients' offices about
twice a week. Pam's company owns the car and the company can claim 100% of the expenses it incurs to run the car. As Pam uses the car for private purposes too, the company will have to pay fringe benefits tax. 02/06/2020 38 Home office expenses (but not working from home) See Home office expenses calculator on ATO website
Lighting & heating and depreciation on office equipment are claimable, based on m^2. For this course, use up to 10%. Rent/mortgage interest not claimable. Its not just the m^2 but the proportion of time the room is used. 02/06/2020 39 Working from home If home is the principal place of business AND
You have a room exclusively set aside for the business, unsuitable for domestic purposes. Then you can claim rent/mortgage interest deduction and higher heating & lighting. For this course, if you have an exclusive area set aside, claim 20% of rent, heating, lighting. 02/06/2020 40 Sales and Variable costs The sales tab
How to make sensible approximations for your sales and your costs Defining 3 to 5 representative products Sketching the most important costs Class exercise: Each participant to think to 3 to 5 products Variable costs, Fixed costs Variable vs. fixed costs Variable costs are costs you incur directly because you sell something Fixed costs are what you have committed to pay before regardless of what you sell The Sales tab contains your variable costs per
product Very small variable costs are ignored (such as the electricity cost to make a coffee) Services businesses have low variable costs (depending on where labor comes from) Pricing approaches Different types of pricing strategy
Mark-up Market Leads to market-minus costing Cash contribution basis E.g.: you have an idle crew. Bundling Definition of mark-up and gross margin Item cost $10 to buy Item sells for $25 The gross margin is $25 - $10 = $15 The gross margin % is gross margin/sales = $15/$25 = 60%
The mark-up is $15/$10 = 150% 02/06/2020 44 Mark-up and gross margin formulas Selling Price = cost price * (1 + Mark-up%) Selling Price = Cost Price / (1-GM%) A 40% gross margin is a 67% mark up. Cost: $6. With 40% GM, Selling Price = $10. 02/06/2020
45 What should your gross margin be? Use the ATO Small Business benchmarks Note that instead of Gross Margin, the ATO mentions cost of sales Sales = Gross Margin + Cost of Sales. So a caf has a Cost of Sales of 40%. Gross Margin is therefore 100% - 40% = 60% 02/06/2020
46 Wholesale/retail margins (1) You are selling a cake-kit to retailers. Start with target retail pricing Factor in the retail margin: assume its 40% You think consumers will pay $30 (ignore GST) What price do you need to sell it at? Solution on next page 02/06/2020
47 Wholesale/retail margins (2) So, retail is $30. We ignore GST. Retailer must make margin of 40% 40% of $30 is $12 So the price the retailer must pay is $30 $12 = $18 (retail price retail price * GM %) If you want to make 30% GM, what is your target cost price? 02/06/2020 48
Answer 30% of $18 is $5.40 So the target cost price is $18 - $5.40 = $12.60 02/06/2020 49 Pricing mistakes a) Too expensive b) Too cheap Which is the most common mistake for new businesses?
02/06/2020 50 More advanced pricing minitopic 02/06/2020 51 More advanced pricing Different people will pay different amounts If you sell at only one price you have two
problems Your price is too low: some customers would happily pay more Your price is too high: you lose business 02/06/2020 52 Value People pay according to the value they get or perceive This can work in different ways Cinemas charge more if you buy tickets
online (although it saves them money) Some people pay a lot more for fair-trade coffee 02/06/2020 53 The Value Ladder Shop one sells light bulbs at $2 each. Shop two sells three light-bulbs: a home-brand bulb in basic packaging: $1.50 the same lamp, but in a famous brand
(say, Osram): $2.50 An innovative, energy saving version: $3.50 Shop two makes more money. 02/06/2020 54 The value ladder cont. In shop 2, price sensitive shoppers pay $1.50 and based on the prices of the other two lamps, they feel good about their choice.
Meanwhile, people who trust brands feel that paying a bit for an Osram or Philips lamps is worth it. The use the price of the bottom-shelf as a reference. The innovative product can be priced at a premium. 02/06/2020 55 How to use for your business? Most of the time, buyers will use the triggers you provide about price vs value, if you
provide them. So always have a range of price points in your menu of products or services. Increased complexity and customisation of your menu makes it harder for buyers to compare to your competition. 02/06/2020 56 Bundling Bundling offers a chance to offer variable pricing without appearing to
Example: Microsoft Word: a variable cost price of $25 Microsoft Excel: a variable cost price of $25 02/06/2020 57 Bundling (a) Day 1: Microsoft Excel and Word sell individually for $200 One customer thinks Excel is good value for her, but would only pay $100 for Word. She buys only Excel
The second customer likes Word, but thinks Excel is worth only $100. He buys only Word Total sales and gross margin: exercise 02/06/2020 58 Bundling (b) So now we offer a new product: a bundle for $300, as well as the individual products This time, both customers buy the bundle. Customer A is happy to be getting Word an effective price of ?
Customer B is happy to be getting Excel at an effective price of ? Total sales and margin now: ? 02/06/2020 59 Pricing for custom projects (e.g. a consultant) For both pricing and costing, ask yourself: Fixed price or price per hour? Many clients prefer fixed price work You should consider not your costs, but the value you provide
For example, what is the value to the client of a website that earns $100K new sales at 30% GM? Would you charge $2000 for that? 02/06/2020 60 Hands On: Sales tab Conclusion for Session 1 Homework
Personal budget and sales tab Next session: Business costs First cut of your cash flow and P&L Relationship between the business and your personal budget
More advanced Excel Session 2 02/06/2020 63 Session 2 Agenda: Excel skills Breakeven introduction Household Expenses: review homework Sales tab
Business cashflow tab Marketing Action Plan tab 02/06/2020 64 Spreadsheet warm-up Make the AFL Ladder calculator 02/06/2020 65
Ex 3: develop an AFL ladder calculator (day 2 revision) Just use six or seven teams. Should have a column showing number of games won, number lost and number drawn. From this, use formulas to calculate total games played and points (4 for a win, 2 for a draw) Sort the final table based on points Recap A business has fixed costs and variable costs Put your variable costs in your Sales
appendix, where they are called direct costs. They then go into your Gross Margin on the cashflow tab. In actual fact, your Gross Margin is really contribution margin, which is good. Class Activity: Break-even calculator See next slide Basic break-even calculator Well make a spreadsheet that calculates weekly breakeven coffee sales. Ignore GST
& Tax. Inputs are Retail price. (start at $3.50) Coffee beans per cup (start at $0.40) Franchise fee: (8% of retail price) Rent: $10000/4 (to make it weekly( Wages: $5000/4 02/06/2020 69 Ex 4: Calculate a 10% increase in sales Calculate gross margin
02/06/2020 70 Household expenses Review of homework Do not spread per month these costs: 1) utility bills 2) car service, insurance and rego costs (Insurance may be monthly, depends on your policy) 3) holiday, education costs
Household expenses: Carbon tax/ETS 1) Increase you current spending on utilities by 15% 2) Increase tax-free threshold to $18200 3) Increase tax percentage to 19% 02/06/2020 72 Review of how the spreadsheet tab fit together
02/06/2020 73 Sales Spreadsheet Review definition of 3 to 5 key items What should we review next: Pricing or Costs
(this is fundamentally a question about whether the market is more important, or whether our costs and added value is more important) Spreadsheet Review Review GST Decision per student 02/06/2020 75 Business Plan notes There are places in the business plan document which refer to financials
1.8 Financial summary Business Goals. Include 1 or 2 financial objectives per year. For year 1&2 make sure they are the same as the spreadsheet numbers. 4.3 Pricing same figures as app. 7A 4.9 Marketing Action Plan The Business Cashflow Sales and Margin come from the Sales tab Required drawings come from household budget What are the business expenses?
Work through Impacts of working capital in the spreadsheet Credit terms given to customers Credit terms taken from suppliers Cashflow spreadsheet The role of capital input Zero out business loan MAP row is linked
02/06/2020 79 MAP Review These are tabs at the end of the Financials spreadsheet Working time Now: 1) Review household budgets and make sure drawings and initial cash injections are reasonable 2) Check & modify sales tab
3) Check & modify MAP 4) Check & modify business cashflow sheet 02/06/2020 81 Session 3 Agenda Fixed and variable costs, and business risk Difference between cash flow and profit Depreciation and other timing corrections Review of your spreadsheet
02/06/2020 83 Key accounting concepts Business engineering: fixed and variable costs How a business can change its risk profile by adjusting fixed and variable costs 02/06/2020 84
Imagine 2 tax return businesses The selling price of a tax return processing is $100 for both businesses. Rent is $1000 a month for both businesses. Business 1 employs subcontractors & pays per return. Business 2 employs full time staff regardless of load. Which is the better business? What is the break-even for both businesses? See spreadsheet for day 3 activity 02/06/2020
85 Variable costs and risk A business with a higher gross margin probably has more fixed costs. It is a riskier business. Getting more benefit from upturn, but more detriment from low sales You can change the risk profile of a business by moving costs from fixed to variable (or the other way) 02/06/2020
86 Product Costing Target costing Costing in advance of price decreases Costing a product including fixed costs The importance of variable costs (again) Cross subsidies
02/06/2020 87 Business Cases & Decision Making 02/06/2020 88 Case study: investing in a marketing program
This business case uses variable costs. Fixed costs: rent $1000 a month, wages $1000 a month Variable costs: for every $4 milkshake, there are $1 of costs (milk, take away cups). Sales are $6000 a month You get a proposal for a marketing program: Spend $5000 to increase your sales by 25%, which lasts for the next four months. Is this a good deal? 02/06/2020 89
Answer skeleton What choice do we face? What are the relevant cash outs if we decide yes What are the relevant cash ins if we decide yes 02/06/2020 90 Case study: relevant costs yesterday, you spend $500 on 250 new light bulbs which last one year. These are oldfashioned, high energy light bulbs.
Today, someone says you can put in new light bulbs, energy saving. They cost $900 but save $300 a year on energy. They last ten years. Should you change light bulbs? When? 02/06/2020 91 Key Accounting Concepts Income Expenses Assets
Liabilities Equity 02/06/2020 92 Key accounting concepts: Timing, and the difference between profit and cash flow Imagine two cafes (whiteboard this) Identical in all respects except that one business rents its coffee machine, the
other buys it outright. Look at the cashflows. Based purely on cash in year 1, which is better? Bus 1: In year 2, sales could fall yet the cash result still looks a lot better than year 1 02/06/2020 93 Depreciation Depreciation is the correction to make financial performance more comparable from year to year. It relates to things you
buy outright which have long term benefits. Depreciation is an example of accrual accounting: adjusting pure cashflows to make more meaningful numbers about profit. 02/06/2020 94 Depreciation and tax The ATO wont let you write off expensive assets immediately, because that reduces your tax bill too much.
Usually, you are forced to depreciate the asset purely to slow down the negative impact on the tax the ATO collects To do this, the ATO has its own complicated rules about depreciation. Small Businesses get special favourable treatment. Tax accountants know all about this. 02/06/2020 95 Other common accruals: credit When you sell on credit, your customer pays
later. The customer is a debtor and the money owed is a receivable. Under accrual accounting, we report the sale when we deliver the product (goods or service). Under cash accounting, we dont count the sale until the cash comes in. Large companies use accrual accounting. 02/06/2020 96 Summary: difference
between cashflow and profit Cashflow is a cold hard fact But it is very short term, so sometimes it gives the wrong idea about business performance Particularly when comparing one year to the next or when comparing one business to another The Profit and Loss makes adjustments to get a better long term view of the business These adjustments are mostly called accruals (timing adjustments) 02/06/2020
97 Profit and Loss Statements A first look at the profit and loss statement after the sales and MAP have been done The elements of a P&L Differences between profit and cash flow The timing or matching principle Example: investment in a machine with a ten year
life cycle The uses of a P&L: comparison, banks, buyer Why we tend to ignore tax: because tax is very individual Warning: tax estimate The estimated tax included in these spreadsheets is crude It only applies a basic personal tax table. It ignores levies and offsets although these probably wont have a big impact Non-business income such as part-time work? If you have a part-time job and you declare the tax free threshold on it, then the spreadsheet will
understate your tax because it assumes the tax free threshold applies to your business 02/06/2020 99 Balance Sheet First Look at the Balance Sheet Key difference between P&L and balance sheet
The balance sheet is a snapshot Assets and Liabilities are here (Income and expenses are on P&L) What balances on the balance sheet Assets Liabilities = Equity The way people look at balance sheets
Matching short term assets and liabilities Cashflow Income Bank Account Profit and Loss Assets (future benefits) Liabilities (future payments) 02/06/2020
Expenses (incurred to generate income) Balance Sheet 101 Profit and Loss recap Group task: Day 3 activity (1) The Cafe (the activity spreadsheet for day 3 has
solutions) 02/06/2020 102 Profit & Loss Basic Format Sales variable costs: Gross Margin (is sales less variable costs) Fixed Costs: Rent Wages Profit before tax: (is gross margin less fixed
costs) 02/06/2020 103 Activity 1 for day 3. Exploring profit and loss, cashflow and depreciation. A. Making a profit and loss statement. Use paper or Excel. 1. The company CafeCo has these transactions, all in the first year. 2. The business starts the year with $20000. 3. It enters a lease to rent a shop, $1000 a month, in advance. The lease is for five years. 4. It also pays three months rent as bond. We assume the bond is returned at the end of the tenancy.
5. The cafe gets sales of $30000 in the first year 6. Coffee beans are the only variable costs. They cost $3000 over the year. Nothing is owed to the supplier at the end of the year. 7. Wages were $10000 for the year. 8. Rental of the espresso machine was $250 a month. Q1 Work out how much cash is left at year end. Q2 Work out what the profit is (before tax). Do this by making a basic P&L statement for the full year. 02/06/2020 104 B. Next door, CopyCatCoffee opens on the same day. Over the first year, everything is the same except for one
thing. CopyCatCoffee buys a coffee machine for $10,000 (paid in cash). This means they don't pay rent for the espresso machine. The machine should last ten years. Work out how much cash is left. Work out what the profit is. C. What are the advantages and disadvantages of buying the espresso machine in advance? 02/06/2020 105 Sounding Board 2 Preparation
02/06/2020 106 Sounding Board 2 Prep: Business Plan Spreadsheets The breakeven tab. Check Y1 profits. Year 2: use formulas to save time Check alignment with business plan sections Summary Goals Marketing Action Plan
02/06/2020 107 Financial Summary 1.8 Review text in the Preparation of Business Plan Sample text. Modify to suit your plan (for example, dont mention GST if you are not GST registered. Dont mention loans if you dont use loans. Dont mention accounts receivable if you dont sell on credit. 1.8 Financial Summary Sales for year one (including GST) is $39875. Growth into year 2 is 32%, resulting in turnover of $52,465. [Get from Dashboard sheet] The net profit after tax for year 1 is forecast to be $12,709 ($13892 before tax). The cash position at the end of the year is $9617. [Get
from Balance Sheet Money In Bank] The cashflow assumes a capital injection of $10K at the beginning of the business (from personal funds) and it assumes there is an accounts receivable position of $4730 at the end of the year (due to credit terms). No loans are required. At the end of year 1, business assets will be worth $16,422 (of which $2075 are non-current assets), and liabilities are $1614, all current For year 2, profit after tax is $43,686. The net asset position is forecast to be $17,995. 02/06/2020 108
Business Plan notes There are places in the business plan document which refer to financials 1.8 Financial summary Business Goals. Include 1 or 2 financial objectives per year. For year 1&2 make sure they are the same as the spreadsheet numbers. Year 1 is much more important than year 2 Sales mix (4.4): Tab 7A & 7B 4.8 / 4.9 Marketing Action Plan Checklist: Options tab Make sure the GST rate is 0% if youre not using GST. 10% if you are.
02/06/2020 110 Spreadsheet Checklist: Assets & Liabilities Check names and commencement date. Check that the default entries are no longer there. Business Assets & Liabilities brought into the business affect the financial spreadsheets. The data about your personal situation does not link anywhere.
02/06/2020 111 4. Depreciation Make sure all assets have a depreciation rate. 02/06/2020 112 5. Source of funds
If you dont need any loans, make sure the value in Estimated Loan is zero. Note that the spreadsheet starts with a default value entered. Dont reset any other fields. Just zero the amount. 02/06/2020 113 6. Household Budget Y1 1. 2.
3. 4. 5. 02/06/2020 Check your payments. Do drawings last. Make sure the timing of payments looks realistic. Be careful simply spreading amounts monthly. It looks careless and lazy. Be realistic; you will spend more than $50 a month on food. Car rego and most utility bills are not paid per month. Your entertainment spending will be higher in summer.
You can spread motor-vehicle and phone expenses between your business, but dont spread rent, lighting etc. Enter sufficient drawings to balance your budget. You can have one or two months with a net cash decrease, but not more. You can never have <$0 in the bank. Correct with higher drawings or more money in B44 Bank Open. 114 7A Sales Y1 Make sure that your Cost qty (such as cell D34, F7 etc.) are linked to the right cell in the sales section, so that if you change the qty sold, the cost qty changes automatically. Check your GM% in row 54. Does it make sense?
Make sure C28+C29+C30 adds up to 100% Reality: sales should start low and grow slowly in the first three to six months. Watch out for quiet periods (e.g. January for many businesses). Lower sales. 02/06/2020 115 8A Cashflow If you need to put your own cash into the business, do it as capital input in C7. Not in C58 Enter expenses including GST.
Shared expenses (such as car) are found in two places: Cashflow and HH Budget. The actual total spend is the sum of both amounts. So a $600 car rego split 1/3 business and 2/3 personal has $200 on the Cashflow and $400 on HH Budget. Dont split rent and utilities. Dont manually key in Advertising and Promotion. This row should be linked to the MAP spreadsheet, so you should see formulas in this row. Make sure your bank balance is never <$0 02/06/2020 116
9a Financials Almost no data entry here. Your after tax income min $12,500 If its too high, lower sales and increase marketing and advertising spend If its too low, you need more sales or lower costs. Rounding difference in R76 should be zero. Tell me if not. 02/06/2020 117 11A Breakeven
This is a information-only sheet. Nothing to do. 02/06/2020 118 12A Budget Notes Add notes to explain anything out of the ordinary. 02/06/2020 119
6B HH Budget Y2 Increase costs by inflation (assume 3%) So use formulas that look like: ='6A. HH Bud Y1'!B15*1.03 (this formula would be in B15, and it means that the rent cost is 3% higher than in Y1) Of course, manually override if necessary. Govt Payments in Y2: No more NEIS. 02/06/2020 120
7B Sales Y2 This is your second year, so the slow start seen in the first months of Y1 does not apply. Likely that the first year of Y2 will be about the same as the last month of Y1. It will be much higher than the first month of Y1. If you plan price increases and cost increases, adjust. If desired add new products, although this creates work for yourself. 02/06/2020 121
8B Cash flow Y2 Costs will be higher than in Y1, since youre busier. Plus allow for inflation. Link advertising and promotion to the MAP for Y2 02/06/2020 122 9b Financials Y2 Profit before tax min $22,000
02/06/2020 123 11B Breakeven Y2 For information only. 02/06/2020 124 12B Budget notes Add any comments necessary to explain rows.
02/06/2020 125 Printing the spreadsheet Using print preview to check 02/06/2020 126 Session 4
Business Plan one-on-ones Now we have business plan one-on-ones 02/06/2020 128 Session 5 BAS and GST Agenda In-class activity Final review of spreadsheets
GST & BAS Payroll, subcontractors Using Business Advisors to improve your business Some more business terms: credit terms Credit terms indicate when you pay for something. EOM means End of Month. A common term in Australia is EOM + 30, means the end of next month (i.e., 30 days after the end of this month). Suppliers will prefer Net 30 which means
30 days after the date of the invoice 02/06/2020 131 Credit terms: tips Few suppliers can argue that you should pay 30 days after you receive the goods or service, not from whatever date they put on their invoice. EOM 30 gives you two months credit if you have goods delivered at the start of the month
02/06/2020 132 Practical tips: if you cant pay a supplier You can probably get a week or two weeks late payment without too much notice If you really struggle, make a payment plan. Honest RELIABLE promises are highly appreciated. 02/06/2020
133 Getting Credit Ask for credit initially. They will say no. But ask under what terms credit will be offered (usually a certain period of trading). After three months of trading on cash terms, and then every three months after that. Take a small credit limit if offered, and then try to grow it. When you get a small limit and you want to grow it, be a reliable, never-late payer. Use the first credit limit as leverage. Credit limits will build reputation.
OfficeWorks gives credit easily (net 30 days) 02/06/2020 134 Accounting concepts: working capital Working capital means the cash you need to have tied-up day-to-day in your business What are some examples? 02/06/2020
135 Accounting concepts: working capital Working capital means the cash you need to have tied-up day-to-day in your business Cash in the till Stock on the shelves Credit you give to customers (Receivables) Offset by: Credit from suppliers (Payables) Short-term loans (overdrafts)
02/06/2020 136 Working capital Business growth requires more working capital You need more stock You get more customers and sell more to them, so receivables increases Bad working capital management kills businesses What should you watch? How can working
capital be reduced? 02/06/2020 137 Working capital Working capital: Manage debtors (i.e., receivables). Offer prompt-payment discounts (put prices up first, so the discount makes you no worse off; easier to do at the beginning)
Get better terms from suppliers Dont order too much stock. Try consignment arrangements. Watch the aging of stock to look for slow-moving items. 02/06/2020 138 About business reporting
02/06/2020 139 Bank reconciliations What is a bank reconciliation? How often should they be done? Who should do them? Bank Reconciliations Most accounting frauds are detected by bank reconciliations Bank reconciliations simply mean that your accounting record of the cash in your bank
balance matches whats really in your bank balance. But they can get complicated, particularly if dates are entered wrongly. I recommend you understand what a bank rec is and get your book-keeper to walk through a bank rec once a quarter. 02/06/2020 141 What parts of your monthly reporting should you watch?
On the P&L (class discussion) On the balance sheet (class discussion) What parts of your monthly reporting should you watch? On the P&L Sales. Gross Margin. Wages. On the balance sheet Cash. Debtors. Stock. Ratios: Stock in terms of months of sales. Debtors in terms of months of sales.
Whats happening? P&L, Sept YTD Sales: $90,000 Expense: $60,000 Profit: $30,000 Bal Sheet, Sept 30 Cash: $50,000 Debtors: $30,000 Creditors: $15,000 P&L, Dec YTD Sales: $180,000 Expense: $120,000
Profit: $60,000 Bal Sheet, Dec 31 Cash: $25,000 Debtors: $60,000 Creditors: $15,000 P&L, March YTD Sales: $270,000 Expense: $180,000 Profit: $90,000 Bal Sheet, March 31 Cash: $5,000
Debtors: $90,000 Creditors: $30,000 02/06/2020 144 Sales are not being collected in Q2. Gets worse on Q3. Cash runs out and creditors grows as we fail to pay suppliers. The P&L is not giving a good picture of the business on its own. P&L, Sept YTD (Q1) Sales: $90,000 Expense: $60,000
Profit: $30,000 Bal Sheet, Sept 30 Cash: $50,000 Debtors: $30,000 Creditors: $15,000 P&L, Dec YTD (Q2) Sales: $180,000 Expense: $120,000 Profit: $60,000 Bal Sheet, Dec 31 Cash: $25,000
Debtors: $60,000 Creditors: $15,000 P&L, March YTD (Q3) Sales: $270,000 Expense: $180,000 Profit: $90,000 Bal Sheet, March 31 Cash: $5,000 Debtors: $90,000 Creditors: $30,000 02/06/2020
145 Class activity for session 4 (p1) I will review spreadsheets one-on-one while you work on this Activity for Day 4 Plan Small Business Finance (Referring to the Business Plan spreadsheet will be helpful) Q1. Name the three main financial reports Q2. Which report tells you how much cash you have in the bank on the last day of the financial year? Q3. What is the accounting name for the value of the business according to the balance sheet?
Q4. On the balance sheet, what actually balances? Q5. What is debtors? How does debtors get on your balance sheet? Q6. What is the reason for depreciation? Q7. What does the credit term EOM30 mean? 02/06/2020 146 Class activity for session 4 (p2) Q8. You have a supplier who invoices you 30 days net (NET30). Each month you spend $10000. The supplier offers you a 3% early payment discount if you pay immediately. Bank interest is 1% per month. Should you take the early
payment discount? Ignore tax. Q9. If you have a supplier who offers EOM30 terms and you need to order once a month, does it matter what time of the month you order? What would you recommend? Q10. What is working capital and on the balance sheet, where do you find it? Q11. Is it better to have more working capital or less working capital? Q12. Name two ways that your working capital would increase Q13. Name three ways to reduce working capital, and refer to suppliers in one of your answers. 02/06/2020 147
Class activity for session 4 (p3) Q14. On your balance sheet you have a fixed asset which cost $50,000 and has a life time of five years. How much value does it have on the balance sheet at the end of the third year? Is this the real value of the machine? Q15 Your business needs to buy a replacement machine next year. The new machine will cost $50,000. When you are making your financial forecasts for next year, how would you include the need to buy a new machine? Q16. How do you decide to buy or lease equipment for your business (list some key points to consider)?
02/06/2020 148 How does a small business die from poor cashflow Discussion GST GST
How its calculated How its audited Who it applies to How you register: www.abr.gov.au How the ATO helps: Free seminars Great brochures and booklets Website: Go to ato.gov.au and search GST Essentials Session 5
02/06/2020 151 GST Calculation Small Businesses (<$2m turnover) can use the cash basis 02/06/2020 152 BAS
What its for The BAS process (and options) Quarterly Monthly You can
do it yourself Get a non-tax agent book-keeper to fill it in & sign yourself Get a registered tax agent or BAS agent to do it BAS: If youre late Fined for being late (if repeat offender) Charged high interest on monies you owe GST: If you lie Money you owe is charged interest & used as the basis of the penalty. The GST is a great tax. Its simple and fair.
Its also easy to audit and check. GST Added-value tax: You collect tax on services But the tax you pay to suppliers is offset The net effect you customer pays 10% of your margin GST is a new tax and still quite separate in
the ATO. The GST people are friendlier. And GST is much simpler than income and other tax. BAS BAS is the form which records A) Your GST result B) You PAYG tax result c) possibly company income tax D) but not payroll tax: thats a state tax. Unlikely to affect you. So its more than just GST Other taxes: Payroll tax,
stamp duty These are State Govt taxes (sro.vic.gov.au) They are not subject to GST. You dont pay to the ATO. Payroll is based on a monthly threshold $45K Some basic points about PAYG Every Australian-resident wage-earner has a tax-free threshold The ATO automatically applies this to ONE of the employees jobs. New employees need to declare this. Employees can opt to pay more PAYG (or
even apply to pay less PAYG) People who dont provide TFN pay max rates. Payroll Payroll is complicated, and getting it wrong is not well regarded. Recommended: Use a wise book-keeper GST you can do your self if you want, its easy. Its also cheap to get someone to prepare it for you. Unless your book-keeper/accountant is a registered tax agent, they cant sign or submit a BAS on your behalf.
Payroll & contractors A contractor doesnt cause the employer superannuation, WorkSave, annual leave etc. But a contractor must be genuine. Common tests are The 80% rule Rectification of mistakes BYO Tools of trade 02/06/2020 161
The 80% rule A contractor who earns more than 80% of their earnings over a three month period is likely to be an employee, not a contractor 02/06/2020 162 Rectification of mistakes Genuine subcontractors fix mistakes at their cost Employees get paid while they fix mistakes (so in a contract with a subcontractor, there
will be clauses about how to handle mistakes, and extra work caused by changes in requirements) 02/06/2020 163 Tools of trade Genuine subcontractors are likely to own their own tools of trade Genuine subcontractors are likely to provide their own education and training
02/06/2020 164 A final word on subcontractor tests There are at least three organisations that apply subcontractor tests The ATO The State Government Revenue people (payroll tax) WorkSafe The tests are similar but different. Get legal advice. Mistakes are expensive.
02/06/2020 165 Income Tax (vs GST for example) Income Tax is the tax on earnings (for sole traders and individuals) and profit (for companies). The tax is basically a tax on money coming in, but certain expenses can be used to lower taxable income. These are called deductions. Only expenses strongly related to earning
money are deductions, and even then, there are many rules. (you cant claim travel costs to work usually, for example) 02/06/2020 166 Income tax and losses If you pay more GST than you collect, the ATO refunds you. But if you make a loss, you dont get a refund on your income tax (except companies can if they are established and
have made profits in the past). 02/06/2020 167 Tax concessions for small business Businesses with turnover < $2m are small businesses according to the ATO. Simplified tax rules apply. Ex, GST on a cash basis. Immediate write-off of assets up to $5000. GST can be paid quarterly rather than
monthly. 02/06/2020 176 Differences between individual and company tax Individuals pay different rates of tax depending on their income. For example, below the tax-free threshold, the rate is 0%. Above $180,000 the rate is 45% Companies pay a flat rate of 30%.
02/06/2020 177 Fringe benefits Fringe benefits apply to employees who receive something from the company which has a value. Includes cars, paid car parking, discounted lunch etc. It is taxable: the employer pays. The intention is to remove tax-avoidance. FBT is reported separately.
02/06/2020 178 When do you pay tax? GST: quarterly or monthly Income tax for employees: quarterly or monthly (The ATO will decide) Company tax: after the first tax return, the ATO will mandate a set quarterly payment. But during the first year, there is no interim payment. So look out! Make sure you can pay the tax on the first year of profit soon after you do you the tax return.
The ATO will inform companies about when their tax return is due. Individuals are due Oct 31 unless using a tax agent. 02/06/2020 179 Business Advisors to improve your business These are the business advisors you can come across in the financial area Bookkeepers Business Coaches & Mentors Public Accountants CFO / Management Accountants
Sales and Marketing Consultants incl SEO 02/06/2020 180 Bookkeepers There is a wide range of competence since the area is not historically well regulated (almost anyone could call themselves a bookkeeper) But changing. To offer BAS services, the bookkeeper must be a registered BAS tax agent (via the Tax
Practitioners Board) Look for Cert IV qualifications from a good TAFE. 02/06/2020 181 What to expect from a bookkeeper Well maintained financial records and accurate BAS submissions Payroll Advice and support on basic business controls (avoiding double payment of
invoices, control over late-paying customers, making sure you know how much cash you need to pay GST and key suppliers) Highly efficient work, saves you a lot of time 02/06/2020 182 Independent bookkeepers Bookkeepers can work for themselves or be employed by an accountant. It doesnt matter. Many of the best bookkeepers are independent, but also ask how they get professional support for tax and
other issues they come across. Bookkeepers: a key helper for small businesses. 02/06/2020 183 Public Accountants Tax specialists, and often good are arranging bank loans, self-managed super funds, registering companies and business structures. Their business advice is nearly always limited to the above
They usually dont know much about how your business really works; they are usually very generic in their approach. They have many clients. Professional membership (CPA, ICA, NTAA) They are registered Tax Agents A key advisor for your business 02/06/2020 184 Business Coaches A hard term to pin down. No certification, qualification or professional membership required Usually focused on personal effectiveness, getting
an owner to set objectives, asking the right questions. Often active members of referral networks. Often encourage clients to meet with one another (networking) Typical engagement may be one hour a week meeting. Expensive and often hard to quantify the contribution made as they focus on soft areas. 185 02/06/2020 CFO/Profit Engineers The CFO is an accountant who has worked for businesses rather than in public practice.
Most often a CPA, although can be a CA Profit engineers: a focus on improving margins, managing cashflow, understanding profitability per customer and product A focus on making the more profitable decisions This is what I do. Typically project-based or close relationships with a small number of clients This advisor needs to be focused on the specifics of your business. 02/06/2020 186
Sales and Marketing Consultants First generation of business coaches fell into this area Advice on promotions and sales techniques Can range from genuine experts with an amazing contribution to flashy, generic promises that harm profit Look for an ongoing, project-based relationship with a consultant supporting only a few clients. This advice needs to be tailored to your business, not generic. 02/06/2020
187 Summary Generic advisors who are experts in their field (many clients) Bookkeepers, Public Accountants. Advisors who are effective only when they engage closely with your specific business (fewer clients) CFO/Profit Engineers, Sales and Marketing, Business Coaches 02/06/2020 188
New topic: Business Performance management Disadvantages of traditional financial reporting: The P&L Its always behind the facts Not very effective at helping focus on whats important Its a generic report which doesnt clearly show what drives the business profitability It doesnt say much about the future It is not very helpful for opportunity-based decision making 02/06/2020
189 Making the P&L better Use genuine contribution margin reporting (see next slide) The question to be answered is how much profit do we make if we double sales 02/06/2020 190 Two P&Ls for an online business:
how much profit from doubling sales? Sales $10,000 Cost of trading stock Gross Margin GM % $10,000 $4,000
Cost of trading stock $4,000 $6,000 Outbound postage $2000 60%
Gross Margin Overheads Rent $1000 Outbound postage $2000 Total overhead
Profit 02/06/2020 Sales GM % $4,000 40% Overheads Rent
$1000 $3000 Total overhead $1000 $3000 Profit $3000
191 Doubling sales The trick is that in an online business, doubles sales means doubled outbound postage costs. These costs should be in the gross margin for it to be accurate Traditionally, only costs actually associated with products are in the gross margin. Other variable costs are treated as overheads. 02/06/2020
192 The approach which puts all variable costs in the margin is better Sales $10,000 Cost of trading stock $4,000
Outbound postage $2000 Gross Margin GM % $4,000 40% Overheads Rent
$1000 Total overhead $1000 Profit $3000 02/06/2020 This is better P&L.
In this case, the gross margin is properly called the contribution margin. 193 Business drivers The full P&L has one row for each item: big or small. So Office Stationery gets one line, and so does Wages. One may be 100 times
bigger. To focus on what matters, understand your business drivers. 02/06/2020 194 Business drivers (cont.) Business drivers are often non-accounting numbers. For example, an online store is driven by the number of unique visitors, repeat visitors, time spent on the site, conversion rate and
shopping basket completion. None of these key indicators is in the P&L. Yet the budget and performance should be built on them. 02/06/2020 195 Business drivers (cont.) For a cafe, what are the business drivers? For your business, what are the business drivers? Good business drivers are easy to explain to your mum and dad (and your staff).
02/06/2020 196 Building a budget based on business drivers (simple example) Driver Jan Feb
Adwords spending $1000 $1500 Unique visitors 8000 12000 Conversion rate
1% 2% (site redesign) Avg shopping basket $40 $40 Sales =8000*1%*$40
=12000*2%*40% 02/06/2020 197 Market share and business drivers Be cautious using market share as a business driver It easily leads to large sales Market share is hard to measure Saying youll reach 1% market share doesnt say how you will do it. It is the how
which is the real business driver. 02/06/2020 198 Leading indicators Leading indicators are drivers of future performance. They can include customer satisfaction, the net promoter score (Google it), the number of new products in your pipeline, your plans for expansion.
02/06/2020 199 The Balanced Scorecard A balanced view of your business performance combines Historical performance (e.g. P&L) Business drivers Leading indicators And it should fit on one page (less than 20 rows in total). Each measurement with its own target 02/06/2020
200 Additional material if time permits Book-keeping tips Use a dedicated business bank account A dedicated EFTPOS, credit or debit card is very handy Keep things, and file them or even stack them in some order. A good bookkeeper can be more valuable than a good accountant for small businesses
02/06/2020 202 Additional Material Bookkeeping solutions Business valuation Raising funds NEIS Reporting 02/06/2020 203
Book-keeping solutions and ways of working Cash-book In this approach, you simply classify cash in and out. Can be done manually, in a spreadsheet or with simple software. You track your bank accounts, and cash
spending. Double-entry book-keeping QuickBooks (PC), MYOB (PC/MAC) Xero (online), MYOB LiveAccounts (online) Do cashbook yourself, pass records on to 02/06/2020 bookkeeper
204 Cashbook software Free! Yodlee.com or anz money manager Automatically pulls in your bank account transactions (and also paypal) Its good at classifying what you spend. Its not designed to be a business tool. Xero.com has a personal finance cashbook for about $30 a year. 02/06/2020 205
Bookkeeping approaches Can buy MYOB ($500 to $2000). Can give all paper records to a Bookkeeper Cloud: Xero ($50 a month) MYOB LiveAccounts ($30 a month) Online solutions lower bookkeeping costs: no travel time! 02/06/2020 206
Business Valuation (1) Business get a real value when they are sold The sale can be 100%, or partial (if its a company, can sell xx%) Small businesses are usually bought & sold via business brokers 02/06/2020 207 Business Valuation (2) There are some rough guidelines to value a small business
For small businesses they are often based on a multiple of a profit figure The profit figure is adjusted to be easily compared. It is before tax. Also, salary paid to the owner is usually put back into the profit (ask why?) Then the multiple is applied. 02/06/2020 208 Business Valuation (3) For small businesses, multiples are around 1 to 3 usually. Businesses of the same type
determine the multiple. So video rental businesses have a very low multiple, for example. So if the business has an adjusted profit of $150K, the value is around $300 to $450 K There are lots of things which can affect this rough & ready valuation, such as assets owned by the business, how fast its growing, IP owned by the business etc. 02/06/2020 209
Business Valuation (4) As businesses grow, valuation becomes more scientific, and is based on a history of cash flow rather than profit. Multiples for large businesses can be in the range 8 to 15, much higher than for small businesses. 02/06/2020 210 Raising funds to expand: borrowing
Its hard for small businesses to raise money. Usually, its a loan secured by an asset. Trade finance is good for importers. The bank lends short term money against the value of the container: means you can pay the supplier. You can also sell your debtors (factoring) 02/06/2020 211 Raising funds: equity If a small business can show real customers and proof of
growth potential (takes 2 to 3 years usually), investors may become interested. They buy a share of the company. If an investor pays $100,000 for 20%, then the company is worth $500,000 (of which founders now have 80%). Selling shares is closely regulated. Seek professional advice. The earlier investors come in, the bigger the share they get and the lower the founders share. In Australia, it is hard to raise equity finance if no one has heard of you. 02/06/2020 212
NEIS Reporting The quarterly NEIS reports are based on cashflow You need to report per quarter: The planned cash IN The planned cash OUT Your planned stock at the end of the quarter Your planned debtors and creditors 02/06/2020 213
NEIS Reporting (2) Cash In: On sheet 8A Cash Flow Y1 Row 10 Total Cash Receipts Add the three figures for the quarter you are reporting (e.g. Jan + Feb + March) Cash out is in Row 61 Total Cash Out. Also add three months. It includes all cash out, including to buy assets. 02/06/2020 214 NEIS reporting (3)
Stock: If you have stock, it is also on sheet 8A Cashflow, near the bottom in the row Closing Stock. You do not add three figures. You take only the value matching the last month of the quarter ( March, or June, or September or December) 02/06/2020 215 NEIS Reporting (4) Debtors (customer who have not paid)
Look on Sheet 7a Sales Y1 at the bottom in the row Debtors. You need only one value, the one for the last month of the quarter you are reporting (just like stock). Creditors (suppliers you owe money to ) The financial plan does not include creditors, so there is no creditors position. It is $0. 02/06/2020 216