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!

In this series on the elements of your financial statements we’ve looked at the income, cost of sales and gross profit, all parts of the selling aspect of your business. Today, we’re going to look at the operational side – the costs associated with the infrastructure that enables you to sell your product.

In the olden days, the travelling salesman’s operating costs consisted of his mode of transport and his suitcase full of products. Nowadays, the costs of running a business are much greater, and grow as your business grows, to support the increased sales volume. Operating costs can fall into one of the following categories:

• Physical infrastructure – costs relating to the office, the warehouse or the shop, costs relating to vehicles and other assets, as well as the costs associated with running the machines and equipment used to produce your product or service
• Human infrastructure – the people costs, not just salaries, but welfare and development as well
• Protection of the infrastructure and assets – such as insurance, security, data storage, liability cover
• Compliance requirements – the cost of complying with accounting requirements, labour laws and SARS legislation, as well as governance rules
• General running costs – the cost of items consumed by the process of running the business, such as telephone, data, stationery, food, amongst a host of others
• Growth activities – costs associated with plans to grow sales and the business could include marketing, consulting, and anything else that the strategy requires

Operating costs are the first area to come under the microscope when the business profits need improvement. While there are sometimes a number of areas that can be reduced, there are also some critical elements. It is short-sighted to skimp on the maintenance of the equipment to save on costs when replacing the equipment is a much higher cost, for example.

Do you know what it really costs you to run your business? Do you know what the monthly operating costs are that need to be covered without fail? If you’d like a better insight into your business give us a call to walk you through the information available.

Profit is a fond topic for most business owners, but do you know the difference between gross profit and net profit? Gross profit is the net result of your sales and your cost of sales, in other words, the profit on the sale of your product. Net profit, is the larger gross profit less all other operating and financing costs, usually a fraction of your gross profit!

Gross profit can be calculated for various elements that make up the total sales of your business, such as the gross profit per product or product category. The total gross profit in your financial statements depends on the number of products you sell but doesn’t show you the amount of profit you are making per item sold. Most accounting packages have this information in one of the stock/item reports. It is very helpful to analyse the gross profit per stock item, as you can see which products make you the most money, and therefore what you should focus your sales effort on.

The same principle can be applied to business divisions. By calculating the gross profit per area you are able to see who is pulling their weight and who is not contributing enough towards the running costs of the company. For service businesses, it is also possible to calculate the gross profit per service by including the salaries of the staff, and other costs, into the calculation. Typically service businesses keep some form of timekeeping, where it is possible to see how much of a person’s time (and therefore cost) can be allocated to the various services they perform, even better if individual staff members can be allocated to a specific service. Accounting packages are not set up for this level of analysis, so a spreadsheet is often necessary.

It may be easier to understand the gross profit as a percentage of sales rather than a rand value. Knowing that a product makes an R5 gross profit doesn’t have as much meaning as knowing that the gross profit is 75% of the sales price. Using percentages, you are also able to compare products and the value that they add to the operations of the business.

It may be necessary to dig a little into the accounting information to get a real picture of the gross profit of the business. Should you need a spade or a little help digging, let us know.

 GP – service GP, per product, overall, per division – % vs rand

Last week we looked at income and the various types of income as part of our mini-series on the elements of your financial statements. Today we’re looking at a very misunderstood area – the cost of sales.

Many people think that cost of sales is the cost of the goods you have bought (or made) to sell to customers. It is not – the cost of sales is the cost of each product that has actually been sold. This means that if you have paid a supplier for stock, that is not yet sold, the cost won’t be included in the cost of sales.

This is important because of where the cost of sales is reflected in the financial statements. Cost of sales is an expense which reduces your profit, and therefore your tax. Thus it should not be overstated, by reflecting all the purchases during the year. The cost should match the sales, in other words, if you sold 10 items, the sales price for those items shows as income, and the cost of those 10 items shows as an expense. The cost of any unsold items sits on the balance sheet as stock on hand.

What if you don’t sell stock, what if you offer a service? Then according to the accounting definition, you DO NOT have any cost of sales. However, this is where pure accounting and the needs of management differ.

The real cost of making the sale may include any number of expenses depending on your business. For example; a service business may consider their technical staff to be a cost of making sales. What about travel and entertainment? Management reporting could include all of these expenses as the cost of sales to help understand how the business makes money and how well it is doing that. No-one said that the management reports needed to be in the same format as the annual financial statements. The accountants can re-classify the expenses for compliance purposes, as long as management has the necessary information to make decisions.

Next week we’ll look at the net result of sales and cost of sales, gross profit.

If you’re not getting the information you need from your management reports, perhaps they read too much like an accountants report, give us a call to help you re-format them into something useful

Over the next few weeks, we’ll be looking at the various pieces of the puzzle that are the financial statements, so that you understand where to look for something, where information should go, and what you can get out of the information presented. Today we’ll look at INCOME, which is at the top of the income statement, usually the place people start.

Not all receipts (into the bank account) are income. This is important to understand, especially if you are managing your business from your bank account. Some receipts are the payment from your customers for your product/service, but receipts may also be of interest earned, repayments of a loan you’ve given, or reimbursement of expenses you’ve paid. The last two should be set off against the original payment and not recorded as income in your financial statements.

In accounting terminology, there are 3 main categories of income:

• Sales of your product or service (which is obviously the most important for most businesses)
• Passive income generated on your assets, this includes interest on your bank accounts, interest charged on loans given to others, dividends on investments, charges for using your equipment or vehicles, amongst others
• Other income, this is income that is not generated by the business, such as grants or donations or profit on disposal of assets

In your annual financial statements, there will be a line for each of these, if relevant. However, from a management point of view, you may want to break them down further and reflect a number of lines for sales in your management statements. You may have separate product lines, divisions, or locations. It can be useful to see the sales at this level to understand what is working in your business. Many accounting packages allow you to print a report showing the sales per product/service, which can be very helpful to review regularly.

Although income will be summarised in your annual financial statements, management should be engaging with the income at a more detailed level on a regular basis to assist in making business decisions.

Next week, we’ll look at cost of sales and the meaning of gross profit.

‘Cash is king’, says everyone to a small business owner. It’s not a platitude, it is true. It doesn’t matter what your sales are if your customers haven’t paid you.

As a business owner, you have it down to a fine art the ability to pay your creditors at the last minute, while chasing your debtors furiously. You’ve mastered the art of putting people off just a few more days so you can pray earnestly that enough money comes in, just in time. You are the King/Queen of last minute and stretching the last cent.

Imagine, it’s one of THOSE months, and you get a call from your accountant reminding you that your provisional tax is due in 2 weeks’ time. After you’ve sat down, had a zanex or a cup of coffee, you scroll through your contacts list to see who you can call, what plan you can make, how you can scrape to get the cash ready in time. As you know, SARS are the worst creditors, they really make you pay if you are late!

Is this your reality? It shouldn’t be. You know exactly what you need to have in the bank to make it through the month, but do you know what the annual (once a year) costs are, and when to expect them? Things like subscriptions, licence fees, membership fees, provisional and income tax, annual financial statements, etc. The annual costs should be included in your diary at least a month in advance to avoid any surprises.

It is also important to plan for these large amounts. Seldom do you have the spare cash lying around just when you need it? It is important to set aside a contribution towards the cost each month. If you provide for it now, regularly and without fail, the money will be there when you need it. And put the provision in a separate bank account so you’re not tempted to use it!

Give us a call if you need some assistance establishing what costs you need to keep track of and how much you should set aside for them.

How do you define performance in a business; more specifically how do you define financial performance? Good performance is very easy to recognise for sports people or athletes. There is a target that they are working to beat; say their last marathon time, or their personal best, or the world record, or even just their rival’s score. It is obvious when they have performed well and when they have underperformed. It’s also obvious from the celebration – the fist pump in the air or the lap with the flag.

What can we learn from the world of sports when it comes to the financial performance of our companies? The most under-rated lesson is to CELEBRATE good performance or even just better performance. We are motivated to achieve more, to do better, when we recognise the work that has already gone into our performance and identify the things that have gone right or are working well. Celebrating also gives us a moment to stop and reflect on what we have changed/improved that has made all the difference, and imagine how to do more of that thing.

Another lesson from the world of sports is how to tell if performance is good or bad. There is always a TARGET that the person is trying to reach. In business we often consider performance to be the profit of the company. In fact, the income statement (showing the profit) is now called the Statement of Financial Performance. Setting a target for the profit of the company is a good idea. However, it is also important to look at the variables/elements that generate that profit, as they all need to work together to reach the target you have set. Consider setting realistic targets for your costs, for your turnover, for specific products. What about the management teams, sales people and internal processes that are necessary to achieve your goal performance?

Set up a meeting with our financial management team and we will help you to identify the cause and effect relationships in your financial flow, to establish where you should set targets for improved financial performance.