During this last week, we were asked to put together a report for a client, comparing the actual expenditure to date against the agreed budget. We pulled the actual information from the accounting package and sent the report to the client. After he looked at it he sent us a number of questions, checking where certain payments, which he was expecting to see, were allocated and clarifying some of the amounts. It made me realise that everyone has a picture in their heads of how they expect their financial reports to look, based on the payments you have made and remember.

Most bookkeepers use logic and a certain amount of guesswork to allocated payments and income to account categories. However, there are times where our logic and the client’s expectation don’t match up. That is why it is so important to check where the transactions are allocated within your financial reports. You want the reports to portray the picture you intended, so you need to control where entries end up. All accounting packages have some kind of transaction listing that shows what transactions make up the total for a category on the financial report. It is your responsibility to check that everything is in the correct place.

Bookkeepers are a bit like artificial intelligence, they learn as they engage. So effective communication regarding where transactions should be allocated will improve the accuracy of the allocations in the future. However, many people only look at the details once a year, if that, so there is no opportunity for growth and learning, and an improved accuracy. Incorrect allocations can have an effect on your profitability and your tax, so don’t brush them off as inconsequential, rather take the time to get it right the first time.

If you’d like someone to walk you through your financial reports and transaction list, and help you to know what to look for, give us a call and set up an appointment.

Income tax is the bane of our business and personal existence, but as upright citizens, we have to pay it. And the time of payment creeps up on us unexpectedly at least twice a year. Provisional tax is paid in Aug and Feb of every year. But those payments are not the actual tax expense that is reflected in our accounting records. Only at the end of the financial year, once all the accounting activities have completed and we have a set of annual financial statements, can we say exactly what profit (or loss) has been made, and therefore exactly what tax is due. Thus, your annual income tax return is a reflection of the final picture for the year.

Against this final financial picture is laid the provisional tax that you have paid during the year to see if you have over/underpaid. Typically the provisional tax is shown as an expense in the financial year until the final accounting entries to calculate the total tax for the year. Then the over/underpayment of tax is added/subtracted to make the tax expense account tie-up with the tax return. Any overpayment (where you paid too much provisional tax) is then shown on the balance sheet as a receivable, but if you owe SARS a bit extra in tax, this will reflect as payable in the accounting records.

It sounds like you only have to think about income tax a few times a year, but if you don’t plan for it, you can end up without enough money to pay it. We suggest putting an estimated amount aside in a separate account every month, to make sure you have enough money to pay SARS. To know what to estimate, you need a good and accurate idea of your monthly profit.

To help you stay on top of your estimated tax bill, give us a ring.

In the profit and loss statement, there is a category of costs we haven’t yet discussed. These are the financing costs. They are a separate section of costs as they are not generated by the operations of the business, or the production of your product or service. The financing costs related to how you fund the ‘vehicle’ that is the business and are usually made up of interest paid to the provider of the funds. Interest is normally paid on the following types of funding:

• overdraft on business accounts
• short-term loans from the bank or other lending agencies
• higher purchase agreements for vehicles, equipment and other assets
• loans from members, directors or shareholders and their families

Finance costs do not increase in relation to sales or business growth, but rather are linked to the size of the funding received, the repayment period and the national interest rate. Financing of some kind is often necessary at some point in a business’s life; overdraft being the most common. When the cost of that additional inflow of cash is separated out and highlighted in the financial statements, how much is actually costs can be a surprise.

Deciding to access funding, in whatever form, should be a careful consideration, as the monthly commitment to repayments can be a challenge, and the cost can be crippling. The need for a continual inflow from an outside source means that the business is not generating enough cash to sustain itself and that something in the business operations needs to change. Rather than increasing costs through additional financing, a business owner should always look at ways to increase access to the cash available within the business first.

Should you wish for some outside insight into maximising available cash within your business, please make an appointment with one of our consultants.

In the last blog, we looked at the operating costs of the business. We understood that these are the fixed costs of running the business that needs to be covered every month by the sales. In your budget, you’ll have put the sales revenue needed to make a profit, as your monthly or annual target. However, do you know how many products or days of service you need to sell to make that target? That number, the number of units sold to pay the operating costs, is called the Breakeven Point. How many sales are required for your income to equal your costs?

For this calculation, you’ll need one of the numbers previously discussed in this series – the gross profit per item. Since the cost price of your product is paid out of the sales income, only the profit on that item is available to contribute to covering the operating costs. To calculate the breakeven point you will need to divide your operating costs by the average gross profit. This will give you the number of products necessary to be sold in order to cover your costs.

What if you are a service business? Do you know how many staff you need to break even? Generally service business employs staff when the workload is too great for the current complement. However, it is important to calculate the optimal number of staff to cover costs and generate a profit.

First you have to calculate the gross profit on sales by deducting the average hourly cost for the employees from the average hourly charge out rate. It may be useful to do this per service type or employee group, if the rates differ vastly. Then you are able to divide the operating costs (net of the employee’s remuneration costs) by the average profit per hour to calculate the total number of chargeable hours to be worked to breakeven.

It can be helpful to then work that back into the number of full-time staff necessary to work those hours. To calculate the available chargeable hours, start with the calendar year, less weekends and public holidays, leave and staff development days, staff meeting time and general unproductive time. Typically it works out to less than 200 days of chargeable time per person. Divide the breakeven hours into days and divide by the number of available days for 1 person to calculate how many staff members you need. You might be surprised at how many staff members you require!

There are a lot of numbers in these calculations, and since we find numbers to be fun, give us a call if you need help with the numbers!