Accounting, Bookkeeping, Forecasting, Managing Your Team, Tips and Tricks, True Accounts Accounting, Xero

My Annual Leave Hell

My clients love their employees.  Their employees love working for them so much, they hardly ever take holidays…

So when it’s time for those employees to leave the company, my clients have to pay out their entitlements, including unused holiday leave.  And that figure can be huge.

Disney-World

Some of my clients have employees who have years of leave owing to them.

Think of the hit your bank account will take if you have to pay out all that leave at once:(

Tip 1: have a company policy around Holiday Leave

It doesn’t have to be too rigid or authoritarian, but encourage your employees to take regular holidays.  That will keep your Annual Leave liability under control.

I know it’s painful for many small businesses when a key employee goes away on holidays, but maybe less painful than paying out thousands of dollars when they leave your employ.

Tip 2: get your accountant to calculate the Annual Leave Liability

A good accountant can do this for you every year.  You can then be mindful of the amount of cash you could potentially have to fork out when a long-serving employee leaves.

happy holiday

 

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ArthurBrownFire
Accounting, Business Development, Forecasting, Startups

How is that Cash Burn Rate of yours?

Investopedia defines the Cash Burn Rate as “The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flows from operations.  In other words, it is a measure of negative cash flow.”

But established businesses who are planning change should look at their Cash Burn Rate too.  Even profitable companies can have negative cash flow.  You don’t want your cash flow to get dangerously low, however, as then a slight breeze could tip you into receivership.

Formula for the Cash Burn Rate:

Total cash position change/specified time period

For example, say you had $200,000 in the bank on January 1, and $120,000 in the bank on 31st December.  That means you are burning up $80,000 a year or $219 per day.

What is your Runway?

The Runway is also referred to as “Days to Zero Cash”.  I prefer this term, because, being a bit more dramatic, it might inspire corrective action.

Startupdefinition.com defines the runway as “The amount of time until your startup goes out of business, assuming current income and expenses stay constant.”

Here’s the formula for “Days to Zero Cash”

Cash Reserves (i.e. cash available)/Burn Rate

So taking our previous example which resulted in a burn rate of $219 per day and now you have a bank balance of $30,000, you can only keep your doors open for another 137 days or 4.5 months.

 These formulas are a load of rubbish!

There are so many problems with these two measures, Cash Burn Rate and Days to Zero Cash, I don’t know where to start.  Sure, if you are an investor, sometimes all you have is published data, such as the Balance Sheet, Profit and Loss and Cash Flow Statement on which to do the calculation.  But I would never calculate Cash Burn Rate or Days to Zero Cash for a business client using these formulas.

The main problem is that the calculations are based on historical information and averages and not specific future plans.  Let me put it another way: If I told you you could only trade for another six months before going under, would you take me seriously and do something about it?

Solution: forecasting software + thought + investment in time

In my experience with established businesses and using solid cash flow forecasting software:

  1. feed in about 18 months of solid historical data so that you can identify trends and clearly see causes and effects of past actions;
  2. feed in what your plans are for the future;
  3. feed in all the assumptions and variables you can think of with regards to the economic environment, both within the company and external.

Try to build in ‘interconnections’ in your model, both financial and non-financial.  For example, if you want to invest in a piece of machinery next July, you will need to put in your model:

  1. the cost of the machinery and its installation;
  2. the finance for the machinery including expected interest rate and timing of the repayments;
  3. allocation training of staff for the new machinery;
  4. amount and cost of disruption to production during the installation;
  5. etc.

Then, press the button and see what is most likely to happen to your cash flow.ActualsForecastRealityFantasy

The forecasting software should calculate your Cash Burn Rate automatically – then the real fun (work) begins!

  • Get into that playpen and do some scenario planning to see what effects it has on cash flow;
  • Get regular ‘Budget/Actual’ reports to see how well you did at crystal-ball gazing;
  • Re-visit your forecast at least every quarter and adjust.

Final tip: the Cash Flow Forecasting software should rely on both Balance Sheet and Profit and Loss items to calculate the cash flow.

It sounds like a lot of work, and it is, but very worthwhile because you end up with better control over your Cash Burn Rate.  And more control means you sleep better at night!

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Supervising your bookkeeper
Accounting, Bookkeeping, Business Development, Forecasting, Managing Your Team, Tips and Tricks, True Accounts Accounting, Xero

How to get extra value from your Bookkeeper – Checking the Superannuation Payable account

A little terminology first…

A Balance Sheet (also known as Statement of Financial Position), comprises Assets (what you own), less Liabilities (what you owe) to give a Net Assets figure.  The Net Assets represent Owners Equity, or what’s left over for the owners of the company at a point in time.

The Income and Expense report is also referred to as the ‘Statement of Financial Performance’; ‘Income Statement’; ‘Profit and Loss’; or ‘P&L’.  It is the Income less Expenses and equals a profit or a loss over a period of time.

The tyranny of the BAS: “What doesn’t kill you makes you stronger” (or some such nonsense)

In Australia, we business owners have the delightful Business Activity Statement (BAS), which must be submitted to the Australian Taxation Office (ATO) monthly or quarterly.  It is a mechanism to collect a range of taxes.

The introduction of the BAS in 2010 meant that business owners who might have previously only tackled their P&L report annually before visiting their tax accountant, had to prepare their P&L at least quarterly.

That’s great that the BAS creates a good habit around the P&L, but where does that leave the Balance Sheet?  In a mess, I contend!  I would go further and say that, in my experience, most Balance Sheets are not worth looking at because they are riddled with errors and omissions.

The only bit that might be OK are the bank accounts in the Current Assets section and credit cards in the Current Liabilities section because the bookkeeper usually reconciles these as part of the BAS preparation.

Why bother?

So why bother with the Balance Sheet?  Why even care about it? Answer: because you want to be ready to pounce on opportunities like:

  • using it as a tool to better control your finances;
  • attracting investors to your business;
  • impressing bankers when applying for loans;
  • valuing the business;
  • reporting to stakeholders.

And if you have the pleasure of being audited every year, the auditors will be all over the Balance Sheet like a dog with a bone, probing and asking questions.  Also, Cash Flow Forecasts depend on the accuracy of both the P&L and Balance Sheet.

A Current Liability is money that’s supposed to be paid out within the next 12 months.  The Current Liability called Superannuation Payable  is special because of the laws around superannuation.  You can’t just write off amounts if you find an error – that will bring you all kinds of grief.

How does the Superannuation Payable account work?

Every time an employee is paid, the Superannuation Expense increases on the P&L, and the obligation to pay that money to the employee’s super fund goes up by the same amount over on the Balance Sheet in the Super Payable account.  The amount of the Superannuation liability piles up over time until it is paid to the employee’s super fund.

It’s all about dirt…

Imagine you’re digging a hole and piling up the dirt.  Each spadeful is a payrun and the pile of dirt (super liability) mounts up.  When you start a new period (usually monthly or quarterly), start a new pile of dirt.

After the end of period, the truck comes and collects the dirt and takes it away to the super fund.  It should take the right pile of dirt and it should take the whole pile of dirt, no more, no less.  When you make the payment to the super fund, the bank account goes down, and the Superannuation Payable  goes down by the same amount.

How to check the Super liability figure

Ask your bookkeeper/accountant (or yourself), to run a report which produces a list of what is due to be paid to each of the super funds and add it up.  The total should match the Superannuation Payable line on the Balance Sheet, dated the corresponding period.  It should look like this:

Comparing the Super Accrual Fund report to the Balance Sheet

Find and correct errors

  1. If there is a difference between these two figures, the error is probably caused by the truck, i.e. there’s an error in one of the payments to the super fund.
  2. Your bookkeeper will have to find the last time the account matched the payment, then work forward to find the error.  It’s quicker to go back to the start of your financial year.  If that doesn’t match, go back to the year before that until it is found.
  3. Once you have a starting point, it will be relatively easy to find the error.  And the error will be an under- or over-payment to one of the super funds.
  4. Once the amount of the error and which employee and super fund it belongs to is ascertained, include that manual adjustment in the next payment.  That will ensure that the liability account is once more correct.
  5. A helpful report is the General Ledger Detail report (MYOB) or the Account Transactions report (Xero), customised for the Superannuation Payable account.  It shows the Opening Balance, the Closing Balance, and all the movements in between.

How to stop this happening again

  1. Ask the responsible Team Member to present you with reports that will demonstrate that the payment will match the liability, before you sign off on the payment.  I usually use a Super Accrual by Fund Summary and compare the total to the Super liability account on the Balance Sheet, as in Illustration 1 above.
  2. Automation of super payments helps a lot, because the postings to the General Ledger are automatically calculated.  For example, MYOB’s M-Powered Super, or Xero’s AutoSuper.
  3. Even with all the automation in the world, it still doesn’t hurt to do a quick manual check.

Shovel

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DSC00409
Accounting, Bookkeeping, Business Development, True Accounts Accounting, Xero

The big, bigger, biggest story: accounting software that grows with you – painlessly

Hooray!! The new breed of accounting software is affordable, secure and in the cloud, giving you access to your financials in real-time.

It  boasts automated bank feeds, online invoicing and mobile access.  This is all fantastic stuff, don’t get me wrong.  But I see it’s “friction-free scalability as the break-through benefit for business owners.

What do I mean?  What I really mean is that your business systems should grow as your business grows – and the systems should up-scale smoothly, in terms of dollar and time investment, implementation, features, capacity and pain reduction!

Once upon a time…

So a typical story of accounting in the dark ages might look like this:

The Beginning:  Business starts in the garage of a suburban home.  Accounting system?  A shoebox full of receipts and a docket book for sales.  It’s a large shoebox, so no capacity problems!

1st Step Up:  Owner needs to know income and expenditure.  Accounting system? Excel spreadsheet.  Hours spent building templates, then sorting and entering data from the shoebox into the new system.  Excel can store over one million rows of data, so no capacity problems!Business non-alignment

Accounting in the Dark Ages – out of step with business growth

2nd Step Up:  Owner discovers errors in spreadsheet so goes to the store and buys a cardboard box with a couple of CDs in it.  Accounting system? The old MYOB or Quickbooks, for example.  Hours spent installing, learning, importing the data from Excel.  Owner doesn’t use the Purchases Module, so there’s excess capacity.  Owner backs up the financial data, once in a while…

3rd Step Up:  Owner starts employing people, so buys the payroll add-on or upgrade, takes it home and installs it.  Time spent installing, learning new system, plus mandatory annual rollovers and upgrades.

4th Step Up:  Well, I’m sure you get the picture.  And with every step, there’s disruption: dollars spent, training, teething troubles, etc.

Fast-forward to today…

The Beginning:  Business starts in the garage of a suburban home.  Accounting system? Owner jumps online and gets Xero Starter or Saasu Extra Small, for example.  Gets the first month free.

…and they all lived happily ever-after.

Because features such as Purchases, multi currency and payroll are just a mouse-click away.  No more installing, backing up, rolling over, under- or over-capacity.  Upgrades are done behind the scenes and are pain-free.  In short, no disruption.Aligment of system with growthWe can put the Dark Ages of accounting software (i.e. about 18 months ago) well-and-truly behind us.  The new breed of accounting software allows for alignment of systems with the development of the business.

So, as pathetic as it sounds, I’m pretty excited about the new breed of cloud accounting software and what it means for small business.

The End.

cropped-logo_wotext150x150.jpg    Anne Plummer, True Accounts

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