THE IMPORTANCE OF CASHFLOW FORECASTS

 With many economists predicting a slowing economy, planning your business’s cash flow is more critical than ever. Studies suggest that the failure to plan cash flow is one of the leading causes of small business failure. To this end, a cashflow Forecast is a crucial cash management tool for operating your business effectively.

Specifically, a cash flow forecast tracks the sources and amounts of cash coming into and out of your business over a given period. It enables you to foresee peaks and troughs of cash amounts your business holds and whether you have sufficient cash to cover your debts at a particular time.

Moreover, it alerts you when you may need to take action – by discounting stock or getting an overdraft, for example – to ensure your business has sufficient cash to meet its needs. On the other hand, it also allows you to see when you have significant cash surpluses, which may indicate that you have borrowed too much or have money to invest.

Cashflow forecasts can also:

• make your business less vulnerable to external events in the economy, such as interest rate rises
• reduce your reliance on external funding
• improve your credit rating
• assist in the planning and re-allocation of resources, and
• help you to recognise the factors that have a significant impact on profitability.

A distinction should be drawn between budgets and cash flow forecasts. While budgets are designed to predict how viable a business will be over a given period, unlike cash flow forecasts, they include non-cash items, such as depreciation and outstanding creditors. By contrast, a cash flow forecast focus on the cash position of a business at a given period, and Non-cash items do not feature. In short, budgets can give you the profit position; cashflow forecasts can give you the cash position.

Cashflow forecasting can be used by, and be of great assistance to, the following entities especially:

• business owners
• start-up business
• financiers

Cashflow forecasts are usually prepared for the coming quarter or year. Whether you divide the forecast into weekly or monthly segments depends on when most of your fixed costs arise (such as salaries, for example). When you are making forecasts, it is important to use realistic estimates. This will usually involve looking at last year’s results and combining them with economic growth and other factors unique to your line of business.

When accounting for overheads, usually a forecast lists:

• receipts
• payments
• excess receipts over payments (with negative figures displayed in brackets)
• opening balance
• closing bank balance.

CRYSTALISING LOSSES

 It’s been a tough 12 months for investors.

On the superannuation front, two major reports assess how super accounts fared in 2022. Super­Ratings issued its average balanced return recently and found it was minus 4.8%. Late last year, ChantWest did a similar exercise – reporting a figure of minus 4.6%. We have had four negative years since 2000. In 2002, we had an identical return of minus 4.8%, and in the horror GFC year of 2008, the average super fund fell 20%.

Regarding property, CoreLogic’s capital city index declined 8.8% from its May 2022 peak to December, down 7.1% in calendar year terms and the worst calendar year result in 42 years.

It’s important, however, to be mindful that these losses are merely paper losses. That is, these losses are only realised and locked in if:

• in the case of property or shares, you sell the asset, or
• in the case of superannuation, selling assets or withdrawing super when investment balances are down.

If you retain the asset, you can ride things out, and hopefully, the market will bounce back. For example, the average return for the average balanced fund since 2000 is 6.1% (a period that considers the aforementioned 20% downturn during the GFC) – that’s $30,500 a year for every $500,000 you can get into super. Things should improve!

If you determine that an asset has little potential for future growth and decide to sell and happen to make a capital loss, there is a silver lining from a tax standpoint! You can deduct capital losses from your capital gains to reduce your capital gains tax (CGT). Capital losses must be used at the first opportunity. If you have any capital losses in the current year, or unused capital losses from previous years, you must use these losses to reduce any capital gains in the current year and use the earliest losses first.

Of course, tax is not the only consideration when weighing up whether to retain or dispose of a capital asset. You can talk to your advisors before selling.

NEW WORK-FROM-HOME RECORD-KEEPING REQUIREMENTS

Are you one of the five million Australians who claim work-from-home deductions? If so, stricter record-keeping requirements now apply.

For this financial year, there are now only two methods to calculate your work-from-home claim:

1. Revised fixed rate method (with new rules applying)
2. Actual costs method.

The actual costs method has never been popular because, under that method, you need to keep records of every expense incurred or depreciating asset purchased and evidence to show the work-related use of the expenses or depreciating asset. By way of example, to claim electricity expenses, the ATO suggests that you need to find out the cost per unit of power used, the average amount of units used per hour (power consumption per kilowatt hour for each appliance) and the number of hours the appliance used for work-related purposes to calculate their claim.

For this reason, the fixed rate method has been preferred (or, in recent years, the COVID shortcut method where you could claim 80 cents for each hour worked from home). This COVID method is no longer available).

The fixed-rate method has now been revised. The revised fixed-rate method increases the claim from 52 cents to 67 cents per hour. However, this rate now includes internet, phone, stationery and computer consumables.  Therefore, you can’t claim them separately from your home office fixed-rate deduction. Cleaning and depreciation on office furniture are no longer included; therefore, you can now claim these expenses separately.

The record-keeping requirements are now more onerous, and you now need to keep a record of actual hours worked from home. The ATO will accept a record in any form, but they suggest either: timesheets, rosters, logs of time spent accessing systems, time-tracking apps, or a diary. The ATO will no longer accept estimates or a four-week representative diary. This new strict record-keeping requirement applies from 1 March 2023. For the period before it (1 July 2022 to 28 February 2023), the ATO will accept a four-week representative diary).

Under the revised fixed rate method, you must provide at least one document for each type of expense to demonstrate that you incurred the expense. For example, if you receive electricity bills quarterly, you must keep one of those as a record to represent that year’s electricity expenses.

 

FIVE KEY DECISIONS WHEN STARTING OUT BUSINESS

Research indicates that the majority of small businesses that fail do so in the first couple of years. Following are some critical pillars for those starting out. Much of the following information will also be helpful for those already in business.

1. Funding and equity decisions

There are many ways to fund a new business:

• bootstrap (essentially, building a business from personal finances or the operating revenues of the new business)
• family and friends
• personal loans
• business loans
• asset loans
• debtor financing
• angel capita
• venture capital, and

Your circumstances typically dictate what’s possible, but do your homework and take advice.

Another way of obtaining funding is to take on a business partner. This leads us to a discussion of the very tricky issue of equity. Taking on a business partner or granting equity to another person in your business is not a decision to be taken lightly. Equity can be forever. Once a person has equity, you will forever share profits and/or ownership with them and report and be accountable to them. You should think long and hard about who can offer your business genuine, long-term strategic value and who is merely undertaking a task or filling a role. If it’s the latter, they should not be a candidate for equity. The key here is to reward value, not time.

There are no ‘hard and fasts’, but here are some questions that should be asked when considering whether someone is deserving of equity in a business:

• Will they deliver long-term value and be instrumental to the business’s success?
• Will they take the business to heights it couldn’t otherwise get to?
• Will they solve a crisis that threatens the business’ livelihood?
• Will they cause greater damage by doing their own thing?

Having decided that someone deserves equity, the style of equity they should receive is a separate consideration. There are several options which include: full equity; dividend (profit) participation but not capital participation; phantom equity (in other words, a bonus scheme of sorts); vesting equity (i.e., equity that vests gradually over time-based on targets being met).

2. Choice of trading structure

Sole trader, partnership, trust or company? Every circumstance is different, and the right answer will sometimes be a combination of more than one entity. Utilising the wrong structure and needing to rectify it later can lead to significant disruption and transaction costs, including capital gains tax and stamp duty. It pays to seek professional advice to develop a structure that suits your circumstances and is scalable and effective.

Among the considerations when choosing a trading structure or considering changing it are:

• income Tax effectiveness
• capital gains tax-friendliness in the event of a future sale
• asset protection (both personal and for the business)
• liability
• estate and succession planning
• costs (establishment and ongoing)
• complexity
• ownership requirements.

3. Understanding your statutory obligations

When starting in business, the excitement and frenetic pace can sometimes mean that the more mundane tasks can be neglected.

It is crucial to understand which government identifiers you will need. These may include: Tax File Number (TFN); Australian Business Number (ABN); GST & PAYG-W registrations; business name registrations.

Similarly, try to develop an awareness of your reporting obligations and their timings. This refers to financial statements; monthly or quarterly Activity Statements; annual Income Tax Returns; ASIC filings (companies only).

And then, of course, there is arguably the trickiest area of all – employing staff. This spawns a myriad of issues on which you should seek expert advice, including distinguishing employees from contractors; determining the status of employees, i.e. casual vs part-time vs full-time; ascertaining rates of pay (including Awards); understanding leave entitlements; obtaining TFN Declarations and Choice of super forms; making quarterly superannuation payments.

4. Embrace cloud accounting

Cloud accounting, sometimes called ‘online accounting’, serves the same function as accounting software that you would install on your computer, except it runs on hosted servers, and you access it using a web browser or app. Your data is thus stored and processed “in the cloud”.

Cloud accounting can benefit business owners, stakeholders and advisors, including real-time; reduced data entry; intelligent software; no more filing; automatic back-ups; one version; mobility and flexibility.

5. Surround yourself with good advisors

Being new to business is not for the faint-hearted; it can be a lonely and incredibly daunting space. You need to pick a good team, and that includes professional advisors who understand your mission and passion and want to take the journey with you.

Regardless of the space that they operate in – whether it be accounting, legal, financial services or any other – the aim should be to choose advisors who are as much your partners in business as they are your supplier of services.

EARLY ACCESS TO SUPER

The federal government is moving to legislate the objective of superannuation as follows:

The objective of superannuation is to preserve savings to deliver income for a dignified retirement alongside government support equitably and sustainably.

This purpose is to encourage current and future governments to assess any policy changes to the superannuation regime through this prism. That is, does a change to the law align with the above objective? If not, then perhaps it should not be pursued.

Despite this, the government has not indicated that it will repeal existing legislation that allows individuals to access their superannuation before retirement. There are many ways you can qualify to access your superannuation, including:

1. You were reaching preservation age (between 55 and 60, depending on when you were born) and retiring.
2. You are reaching preservation age and commencing a transition to the retirement income stream. You can draw on this superannuation pension stream while you’re still working. It can be a way to scale back your working hours yet retain your financial quality of life.
3. Reach 60 and cease an employment arrangement. If you later return to work, this is ok, provided you had originally not intended to return when the prior employment arrangement ceased.
4. Reach 65. This is irrespective of whether you are still working.
5. When someone passes away, their dependents or nominated beneficiaries will be entitled to receive what’s left of your super.

6. Compassionate grounds

• pay for your medical treatment or transport (or for the treatment or transport of one of your dependents, such as a spouse or child)
• make a mortgage or council rates payment to prevent you from losing your home
• pay expenses to accommodate yourself or a dependent with a severe disability
• pay for the palliative care of yourself or a dependent
• pay for the death, funeral or burial expenses of a dependent.

7. Severe financial hardship. It would help if you met strict eligibility criteria, including receiving government welfare payments from the Department of                      Human Services for at least 26 consecutive weeks.

8. Terminal medical condition. Two medical practitioners must certify that you have an illness or injury that will result in your death within 24 months of the date of the certificate.

9. Temporary incapacity. It would help if you were unable to work at all or unable to work the hours you normally would through mental or physical ill-health.

10. Permanent incapacity.

11. First home-saver super scheme. The First Home Super Saver Scheme (FHSSS) is a recently introduced government scheme that encourages people to save money for a deposit on their first home in the lightly taxed super environment. Super contributions and fund earnings are taxed at the concessional rate of 15%.