Get to know your profit and loss statement

How often do you look at the Profit and Loss (P&L) statement for your business? Only once a year? It could be more useful to monitor it more often.
Your P&L statement gives you a great way to keep an eye on how your business is doing. Like the name suggests, it shows profit and loss for a given period. That might be monthly, quarterly or annually, as often as you like.

Your P&L statement charts revenue and expenses – incomings and outgoings – so that it can help you see what’s actually happening with your cashflow. This is why it’s also sometimes called an income and expenditure account or a statement of financial performance.

The basics

When you look over your P&L statement, look for a few basics:

This year/last year? How do this year’s numbers compare with last year’s?

What’s the margin? What’s the margin between revenue and expenses? After you’ve taken away all your expenses, the remainder is your profit. This will give you an idea of how much you can take out of the business and how much you are likely to need for your normal business costs. Is there room to factor in a buffer amount for unexpected costs? Do the numbers fit with what you know you need for upcoming tax payments? Should you be reinvesting in the business?

What are the trends? Do revenues or costs rise or fall in a regular pattern from month to month? Can you see why the patterns occur?

What bucks the trend? Can you see any incomings or outgoings that don’t fit with the pattern? With windfall revenues, is there anything you could do to extend them so they become the norm rather than the exception? With sudden unpredictable spikes in your costs, are these easily explained or are they symptoms of emerging business risk?

Take action

Regularly checking in with your P&L is a great risk management strategy. And if you’re trying new marketing techniques or running new product lines, it’s a good way to track whether they’re performing well.

You know we love this stuff. We would be happy to talk you through how to gain more meaningful data from your P&L.

Debtors and cashflow

Business is good. Customers love your products. You provide a superb service. So why is your cashflow trickling not gushing? You have analysed the numbers. Your overheads are reasonable and there’s no wastage. But what about your debtors?

If your business isn’t strictly ‘cash over the counter’ you probably already understand the work - and the pain - of chasing money from overdue payments.

Good debtor management can make a real difference to cashflow in your business. Poor debtor management can be a major roadblock. You can have a lot of money tied up in debtors that you could use better elsewhere to keep driving the business forward. Think about it this way: the money you have tied up in debtors is your (reluctant) investment in your customers’ business. Wouldn’t you rather invest in your own business?

A cloud of negativity sits over debtors. People don’t like to deal with and so it usually just gets worse. It sucks up time as you try to unravel the paper trail in invoices, statements and call logs. It can be a nightmare to figure out with not much to show for it. 

The key to managing debtors is not to let it get away from you. Call us if you want to talk through your debtor numbers and put together a better system to manage debtors in your business.

‘Remember that credit is money’ Benjamin Franklin

KEYS TO MANAGING DEBTORS

Be upfront with your trading terms. Let your customers know as early as possible about your terms of trade and bill promptly after product delivery or work completed. This makes it easier to contact clients to follow up on unpaid bills.

Manage credit risk. Wherever possible, if it’s appropriate for your industry, run a credit check before you offer credit. Or ask customers to complete a credit control application.

Stay on top of your debtor ledger. Review it frequently and sound the alert on overdue payments.

Do the numbers. Work out how much money you have currently tied up in payments pending and then, on average, how long it takes you to collect debt in your business. These are the numbers you continuously want to reduce. Let your team know that these are achievable goals.

Have a system. Delegate the task and give your debt manager the tools to make it work. Too often debt collection ends up back with the business owner simply because they are the one most passionate about their business and most closely concerned with cashflow. Their customers know them so a phone call from a business owner carries weight that a call from the office assistant just doesn’t have.

However, while tempting, it is not best use of your time to chase bad debts. Much better for you to be out there, growing the business, pulling in new customers. And separation is essential between your relationship with your customers - which you want to be as good as possible - and the ‘dripping tap’ approach which a good debt manager should have.

Train your debt manager to be systematic. Scripts for regular follow up calls and templates for emails and letters work well. Whoever takes on the task might well hate making the calls just as much as you do. Turn this around. Go over the script and prep your debt manager with all the payment options your business offers.

Make it easy to pay. Customers are your favourite people. You want them to feel great about your business. You don’t always know what’s happening for them but you want to make it as easy as possible for them to pay you and continue to enjoy your awesome products and services. Offer payment plans. Set them up with payment options such as feeSmart.

Have a plan B. Set a time limit for when you turn debts over to a collection agency. If all else fails, know when to write off a bad debt and record this clearly for your year-end figures. But before that, systemise your debtor management so you know that you have done all possible to unlock the funds you have tied up in debtors.

We can manage your debtors for you and focus on getting you paid correctly and on time. That's both billing on time and receiving on time.

As for chasing debt, it is a perennial time-waster. Are you sick of chasing clients on overdue accounts? Or do you not even chase them and just hope that eventually they pay you? 

We can manage all of your debtors from creating and sending out your invoices, sending out statements to following up your clients (emails and phone calls) when they have not paid on time. We even work with debt collection agencies when necessary.  

We can provide our services at your office, or remotely at ours, or a mixture of both and your dedicated account manager is available to you Monday to Friday. We fit in with what works best for you.

Stress – Beating it to the punch

Stress is a sneaky wee thing. It can creep up on you completely unaware, knocking you down when you least expect it. If you’re busy it’s easy to forget to look after yourself. It is all too easy to let things get on top of you. However, looking after number one doesn’t have to be difficult. The idea is to prevent stress, before it presents itself.

Get Moving. We’re not saying you have to take up boot camp or run a marathon, but simply get your body moving. Take a long walk in the weekend, try swimming a few laps in a pool or simply park further away from the office, and take the stairs rather than the lift, where possible. Exercise has been proven to clear the mind and boost energy levels.

Make a list and write down what you have to do and in what order. Work your way through the list one task at a time, from the most pressing to the least important. You’ll be amazed at the way a list can clear your mind about the day or week ahead, not to mention how motivating it is to cross each task off!

Step outside for some fresh air and vitamin D, both of which are hugely underrated. It’s likely that in this day and age, your office is fairly mobile. If you can, take your phone calls outside or reply to a few emails on your smartphone. If you don’t get a chance to take your work outside, make sure you take a five-minute break or a walk before or after lunch.

Book a ticket and flee. That’s right, take a break. Reserve a seat and go. It may only be for a weekend or you may choose to take some of that well-deserved leave. Either way, by stepping away and shutting off for a time, you’re bound to return refreshed and revived with more energy. Ward off that burn out!

Be aware of what it is that usually makes you stressed in the first place. Think back to previous situations when you’ve felt like things are getting a bit much. What is the trigger? By shining a light on what instigates your stress, you may be able to see it coming and deal with it more promptly in future.

Stress can still break its way through, despite your efforts to stay on top of it. Remember to take a deep breath and, if need be, take a step back. Things will only get worse if you’re not around, so remember to take care of yourself first.

Leading the charge

here is a saying that your biggest market is the one you currently have – most of your sales are likely to be repeat business from existing clients. The reason these clients keep coming back may be partly about what you sell, but chances are that customer service plays a big part. The people you employ can greatly affect the business you do.

You can guide your team to greatness. Here are a few simple steps:

Teach adaptability. Every client is different and this means being flexible. Instil in your team a desire to learn, listen and roll with the punches. Not only is each customer different but so too is every employee. The same adaptability can prove beneficial in the workplace and encourage good relationships amongst co-workers.

Promote work ethic. When no job is too big or too small for your staff, it reflects in their customer service. Clients will appreciate the effort put in to each transaction. Good work ethic in a team is a huge positive – if all cogs in the machine are keen to turn together, you create a great team culture.

Encourage knowledge. Knowledge is power. It’s also persuasive when customers see that your team know about your products and services and can explain how they can meet client needs. They should expect nothing less and it’s also a great way to build trust, growing the relationship between your business and your clients.

Walk the talk. At the end of the day, you guide your team. Make sure that your team understand what’s going on at all times. Demonstrate friendly, professional customer service and clear communication. Show your team how you want them to interact with you, with each other and with your customers.

Legacy Lite has offices in Whakatane and Tauranga.

Targeting the cash economy

Inland Revenue’s crackdown on ‘cashies’ continues, with their focus on undeclared cash in the construction and hospitality sectors. Last year, the Auckland region saw the most activity. Inland Revenue is now widening their reach. They’ve been trying to change attitudes among tradies and subcontracting businesses and their efforts seem to be getting results.

Inland Revenue acknowledge people trying to cheat on tax are in the minority but stress that they’re a very expensive minority. The so-called ‘hidden economy’ is a cost to all New Zealand taxpayers, who carry more than their fair share because of it. There’s another hidden cost too, as business owners who are meeting their tax obligations find it hard to compete with operators who can undercut on quotes because they don’t pay tax.

What does this have to do with you, you may ask? Because we’re sure you’re up to date with your tax obligations – in which case, sweet.

However, if you are in the situation of having under-reported – or unreported – income, now is a great time to straighten it all out. We want to help you make sure your returns are accurate and timely and, as far as possible, help you avoid penalties and use of money interest on any tax owing.

If you think you might have got yourself into a mess with your tax, declaring it early and taking action to correct it goes a long way towards setting you apart from deliberate tax evaders. You may have made a mistake or filed an incorrect tax return, left out some income from your return or incorrectly claimed expenses. We can help you make a voluntary disclosure which may reduce shortfall penalties by up to 100% and protect you from prosecution.

Legacy Lite has offices in Whakatane and Tauranga.

KPIs – keys to success

When you look at your numbers, do you see how you’re doing? Do you see how close or how far away the business is from realising your goals? What are you measuring that will tell you whether you’re racing or just revving the engine?

What are your key performance indicators? And how many of them are there?

Key performance indicators (KPIs) are the measures your business uses to track progress against your business goals. Your KPIs relate closely to your goals and, if you are going to track performance against goals, you need to be able to measure them. 

KPIs need to mean something to you and your team so that the strategic planning session doesn’t just fizzle out under a blanket of corporate-speak. You know the terms: efficient, effective, community engagement, sustainability, productivity, blah blah blah. 

They all meant something when they started out in life but unless they mean something to you and your team right now, you may as well watch your team slip gently into a deep sleep. What about the conversion rate from quotations to sales? The average sale to new customers? The number of stock outages or complaint rate?
Not every business is the same and not every business owner wants the same things. So each business’ KPIs may look different.

Work on KPIs with your team

When you develop your strategic plan with your team and you work out your goals for the next year, what are the factors that will indicate most clearly how well the business is progressing towards meeting those goals? Try and keep it to six or fewer for the business overall. 

It may turn out when the team starts to talk about it that different parts of the business measure their success in different ways. If you find this, work out KPIs for each department (not too many) and make sure it’s clear how they feed into the KPIs for the business overall.

If you know what your goals are but it’s not clear how you will measure whether you’re achieving them, why not talk to us about working out KPIs to suit your business.

Legacy Lite has offices in Whakatane and Tauranga.

How do you pay yourself from your business?

Do you take regular cash drawings from your business profits to meet personal living costs?

You need to be aware of how your personal drawings sit with your tax position.

Sole Traders

Sole traders complete an IR3 tax return at the end of the year. Include all business income and expenses in your tax return. The profits at the end of the year does not take into account any drawings taken from the profits. Any drawings are not a deductible business expense. It’s much easier to track this if the cash drawings are taken as a regular amount say weekly, fortnightly or monthly.

Record your drawings for personal use in a cash book or with accounting software. Make sure you do your forward planning so there is enough money in the business to cover the bills after you take your drawings.

You can not pay yourself a PAYE salary if you are a sole trader.

Partnerships

Partnerships are largely in the same position as sole traders: you can take regular drawings from the business profits. These are not deductible so don’t include them as a deductible expense in the end-of-year partnership return.

The split of profits to the partners at the end of the year does not take into account any drawings taken from the profits.

There is the option for a partner to be paid a salary or wage if there is a written contract of service and this might suit you and the business better. PAYE would be deducted from your salary or wage like a regular employee. You could then claim this salary or wage as a deductible expense in the partnership’s end-of-year return.

Companies

If your business entity is a company, you have more options. Shareholder-employees can:

• draw money from the company periodically throughout the year. These drawings are recorded in the shareholder current account as a loan. At the end of the tax year, the company calculates a ‘paper’ salary for the shareholders from the company profits. This is applied to the current account against drawings. You must pay income tax on the shareholders salary , declared on your IR3 Individual income tax return.

• be paid a regular salary, whether monthly, fortnightly or weekly. PAYE is deducted as for a regular employee provided you have an individual employment contract with the company. The company can claim this salary as a deductible expense in its end-of-year return

• receive dividends from the company profits, after the tax on those profits has been paid

Whatever the business entity, as with other business records, you must keep records of all drawings, salary or wages for at least seven years.

Legacy Lite has offices in Whakatane and Tauranga.