Welcome to the second edition of The Blueprint.
Happy New Financial Year! It's that time of year when we reflect on what we achieved for the past twelve months and look forward to the next twelve.
It's also the time when tax law changes commence and this year is no different.
In this edition we reflect on preparing a budget and give some ideas how to make yours as effective as possible.
We also reflect on changes in the super guarantee laws and how they will affect most employers.
Also thank you to those people that submitted ideas for articles in upcoming editions.
Keep the ideas coming in and we will address them for you.
Regards
David Carpenter
Partner
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| Late breaking news! |
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The Australian Fair Pay Commission (AFPC) handed down its decision on the review of minimum wages on 8th July 2008.
The AFPC decision applies to all employers in the federal system and increases all existing pay scale rates by 57 cents/hour (or $21.66 per week for employees with a 38 hour ordinary week).
These increases do not come into effect until the first pay period on or after 1 October 2008.
| Changes in the way the super guarantee is calculated | ||
The calculation of the superannuation guarantee liability changed from 1 July 2008.
The calculation of compulsory superannuation is an important process that employers need to factor into their payroll process. It is essential that employers are aware of the changes and get these calculations right to:
- avoid exposing their businesses to penalties (due to underpayment or late payment); and
- ensure that the correct wage on-costs are included in their pricing structure; and
- consider how to accommodate any increases in the context of annual pay reviews or your workplace bargaining strategy.
The current minimum level of superannuation to be paid is 9% of an employees relevant "notional earnings base".
Prior to 30 June 2008
Historically the notional earnings base could be earnings bases specified in an industrial award, workplace agreement, relevant superannuation fund trust deed, or a law of the Commonwealth, state or territory.
From 1 July 2008
Going forward from 1 July 2008, all employers must calculate their superannuation guarantee liability against an employee's ordinary time earnings as defined by section 6 of the Superannuation Guarantee (Administrations) Act 1992 (Cth).
What are ordinary time earnings?
Ordinary time earnings are generally what your employees earn for their ordinary hours of work, including:
- over-award payments
- commissions
- allowances, and
- paid leave.
Ordinary time earnings do not include overtime (subject to certain exceptions).
For guidance on what you need to include as ordinary time earnings and further information in relation to changes, click on the link below.
Calculating the superannuation guarantee
| Budgets - the time is now! | ||
You would never start work on a construction project without a blueprint. However, when it comes to running a business, many of us don't have a financial plan or budget to guide us. Budgeting is about planning. And planning is crucial to produce a desired result.
A budget is a fundamental and effective management tool and can be applied to various different areas such as:
- Financial trading performance
- Capital expenditure
- Cash flow
- Employee performance and accountability
- Staffing levels
Why use budgets?
The majority of us are time poor. A common question is, why should we spend valuable time to prepare budgets? Where is the benefit to me?
Without setting a budget you risk that your business or employees are underperforming without you knowing it.
Budgets highlight areas where you have underperformed. A simple process of comparing actual to budgeted results can significantly result in profit and cash flow improvements.
Type of budgets
Budgets come in varying degress of complexity and size and can be applied on a macro and micro level within your business.
There is no set rule as to how far you should go with your budget. A simple budget will provide a degree of appraisal that is better than no appraisal at all.
Generally budgets are prepared for a single financial year or on a monthly basis.
The next step is to consider extending the forecast for a further 4 years to make it a 5 year annual budget. The 5 year budget is used as a tool to plan your future and would be considered when valuing your business.
Timing of your budget
Generally budgets align with your financial reporting period which is July to June in most cases.
Ideally the budget would be completed prior to 30 June or in early July.
Static or live budget
A static budget is typically set in July (or the start of the financial year) and is not changed for the rest of the year.
A live budget is a budget which is updated progressively during the year to reflect material changes in circumstances (tenders won or lost, price changes, wage increases etc).
Application of budgets
Let's look at examples of how budgets can be applied within your business.
- Overall trading performance (net profit)
Entry level budget which compares key totals such as turnover, gross profit, overheads and net profit. Further analysis is performed of each area (turnover, COGS, overheads) when targets are not met. - Cost of goods sold (COGS)
A detailed budget for each component of COGS. Used to determine which expenses are running over budget, require further investigations and/or control procedures to be put in place.
For example, an investigation into wages costs being over budget could show additional overtime hours which is due to poor staff management and scheduling.
- Turn over
A detailed budget for each separate income stream. Used to determine which income streams are performing and which are not. This may trigger further investigations and highlight the underperformance of the sales or production teams.
- Divisional or Job budget
A budget which is specific to a specific to a job or division within your business. Divisional or job budgets can be separate to or combine into overall budgets. - Staff milestones
A budget used to inspire, motivate staff and evaluate staff performance. These can be tailored to specific milestones such as:
- Hours worked
- Productive hours
- Quality control reviews
- Sick leave taken
- Debt collection
Make staff accountable for the collection of unpaid invoices by comparing actual to budgeted debtor days outstanding. You may find that this aids their motivation! - Cash flow
A cashflow forecast lets you see in advance where you will have excess/deficient cash levels so you can be proactive in management of your cash levels.
Are your cash reserves or overdraft facility large enough to handle all situations during the year?
For example:- paying the December BAS in February when cash flow is historically poor?
- replacement of machinery or other capital expenditure.
The review process
A budget is only as effective as the review process put in place. If you prepare a budget but take no consideration of actual budgeted results, you will get little benefit from your time and money invested in compiling the budget.
Reviewing actual to budgeted results should be part of your periodical (monthly/quarterly) review of your management accounts. Areas which have underperformed compared to budget should be investigated further.
" What-if " scenario's
Having the ability to use variables in the budget calculations are known as " what-if " scenarios.
For example:
- what impact would your suppliers price rise or your price rise have on your profitability and cashflow?
- what impact will overtime shifts have on your profitability and cashflow?
- what is the cash flow impact of changing debtor & creditor collection and payment terms?
The ability to use " what-if " scenarios should be considered when choosing your software package. It is a valuable tool which can aid your decision making process.
Thought for the day
When was the last time you increased your prices?
Who thinks they could increase prices by just 2%?
What effect would a 2% increase in prices have on your profit margin?
You may be surprised by the results!
Please contact us if you wish to learn more about the use of budgets or would like assistance in putting budgets into place within your business.
| Budgeting with financial systems |
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One of the most remarkably under utilised features within any accounting system is the budgeting function.
In the past a common complaint was that budgets take to long to create and for that reason, are never made a priority. However, with the enhancement of accounting software, even entry level software such as MYOB and Quickbooks QBi 08/09 include budgeting functions.
There are usually various limitations based around what can and can not be reported by budget. For example, looking at the entry level software:
- MYOB is unable to set budgets by category (division) and thus cannot report budget vs actual by division.
To achieve category budgets in MYOB you require a third party solution product such as Money Manager which adds significant budget functionality to MYOB by extracting the data from MYOB and applying it to budgets built within Money Manager.
- QuickBooks QBi 08/09 allows you to create budgets based on Class (division), job and overall, however, its limitation is that it will not build the business budget based on each job budget.
Most accounting systems have various shortcut features to make preparing a budget a quick and efficient process. They also provide more advanced options for those operators who want to take the time. For example:
- Export your budget categories from your accounting system, manipulate in Excel and import back into your accounting system through field mapping.
- Use options to set last year results as the budget and then manipulate these figures within the program.
- Use budget shortcuts that allow you to apply figures to account categories by year, month, week or other frequency.
Here are a few tips to consider when creating your budget:
- If using MS Excel, always base your budget on your existing chart of accounts from your accounting system. Don't start from scratch in MS Excel.
- If using MS Excel, make sure you enter your budget into your accounting system. Accounting software is the most efficient way of producing budget vs actual reports. Look for ways to import your budget to reduce the need to rekey into your accounting system.
- Consider enhancing budget reporting through the use if an Open Data Base Connectivity (ODBC) driver to connect your financial system to a report writing tool such as MS Excel or Crystal reports.
Your accounting system may not come standard with budgeting functions, or it may not meet your needs.
Our accredited specialist will most likely already have a report written that can be adapted to your system, or develop a tailored report to meet your needs.
If you require any further information on any of the topics we have touched on, please contact Cutcher & Neale to discuss your needs and how we can work with you to meet these challenges.
Meet David Carpenter
David Carpenter is a Partner with Cutcher & Neale and is part of our Business Services division. David's qualifications include Bachelor of Commerce from The University of Newcastle, a Fellow of the Institute of Chartered Accountants in Australia (ICAA), a Fellow of the Taxation Institute of Australia and Member of the Australian Institute of Management. He also has extensive experience assisting SME’s in the industrial sector in dealing with their accounting, taxation and business advisory needs.
David is a keen sportsman enjoying all forms of sport. He is a keen golfer. David is married with two children.
David’s expertise is in the following areas:
- Taxation Advice and Planning
- Business Structure Consultancy
- Business Planning, Reconstruction and Valuation
- Management Consultancy
- Franchise Consultancy
- Goods & Services Tax
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