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Will you run the gauntlet with the IRD?

Bill English announced in his recent Budget that he was giving the IRD an extra $78.4m over the next four years to fund increased audit activity.  This is likely to have disastrous consequences for those small business owners who keep poor accounting records and have prayed they have stayed “under-the-radar”.

The IRD has begun to flex its muscles and in a recent case, an Auckland tax payer was sentenced to 22 months’ imprisonment after he pleaded guilty to charges of tax evasion of approximately $170.0k.

Chandar Prakash admitted deliberately evading tax assessments and avoiding paying tax over a 5 year period during 2001 to 2006.  He was declared bankrupt in 2009 and fled the country to Fiji – 4 weeks before his court appearance. He returned 2 years later.

Graham Tubb, IRD’s Acting Group Manager of Assurance, advised that Prakash’s non-appearance resulted in significant additional expenses to the Department.  ”This is a case of very serious, deliberate and repeat offending. Prakash de-registered for GST in 1996 while working as a courier driver but did not re-register when he started working as an architectural draftsman in April 2001. He ceased filing Income Tax returns in 2000 and did not return any GST owed to Inland Revenue even though he charged GST when invoicing clients of his architectural practice.”

Graham Tubb went on to say that Prakash’s dishonesty was clearly evident after he borrowed funds to buy 2 houses in 2006 which were both valued at more than $430.0k.  He also bought a vehicle costing $80.0k in the following year.

The cost to New Zealand tax payers exceeded $1.0 million as a result of the IRD writing off tax assessments, penalties, interest and student loans.

“New Zealand’s tax system is based on voluntary compliance and it works well because the majority of people understand the importance of doing the right thing.  Prakash has over ten years of business experience and is fully aware of his tax filing and record keeping obligations. Inland Revenue has attempted to assist with his tax affairs, yet he continued to be non-compliant and refused to provide documentation with the intention of not paying tax.  As a result of his actions, Prakash has ended up in court, and this sentence shows that Inland Revenue and the courts view his offending seriously”. Mr Tubb added.

Budget 2012 will make it even more challenging for many small businesses.  Owners who tempt fate by keeping poor accounting records may look to expert advice as being essential and no longer a “nice-to-have”.  Many will seek the help of a chartered accountant for regular monthly accounting services as a precaution rather than living in fear of the tax man banging on the door.

Would you risk it?

Are you funding your customers’ cash flow?

No business can afford to ignore its cash flow.  And it’s a sad fact that many business owners with profitable enterprises – even those with healthy sales & good record keeping – watch in horror as their bank balances plummet.  In these hard economic times, this can mean the difference between a business surviving or not.

So, what causes poor cash flow?

There are several reasons behind why a business might suffer poor cash flow.  Often, it’s as simple as a business’ expenses exceeding its sales revenue.  But during tough times, many customers delay paying on time and this is becoming a more common event.  When you have your own bills to settle, these delays may cause you some serious cash flows issues, which left unmanaged, can spiral out of control.

Help is at hand

Many businesses are turning to debt-factoring or invoice factoring companies for help.  These companies advance a percentage of an invoice’s value (quite often up to 90.0%) and pay the remainder when a customer settles their invoice.

They make their money by charging administration fees for their services.  For many small business owners, this is becoming an increasingly attractive option.  Sales are turned into cash much sooner than normal and help take away some of the stress and worry that cash shortages impose.

Another solution to maximise cash flow is to take full advantage of the credit terms offered by suppliers and service providers.  Keep cash in the bank as long as possible by not paying any sooner than is necessary.  But be careful not to become a later payer yourself.

Often an immediate cash injection may be required to overcome short-term liquidity issues or to purchase essential supplies or services.  In times like these, you should not be afraid to approach your bank or investors or even source finance from other sources.  But this should be seen as short-term only and only when repaying the loan repayments will not make matters worse.

Prevention is better than the cure

Robust and careful financial planning is an essential ingredient to any business’ survival.  Cash flow problems can often be avoided by forecasting receipts and payments.  By preparing forecasts, you’ll be much more able to predict the peaks and troughs and make plans to address them.

Understandably, many business owners hate the thought of upsetting customers – especially in tough times.  But, unless you’re a charity, you must study your customers’ payment profiles and encourage them to adhere to your payment terms.  By continuing to supply slow or poor paying customers or accepting their barrage of excuses, you’re creating a potential headache for yourself.  You’re not a bank and their payment delays may have a disastrous effect on your ability to run your company.

Ignore your cash flow at your peril.  Running out of cash is the number one killer for small business.  Don’t become a statistic – operate tight financial control on your debtors and watch your bank balance grow.

Contact one of our business advisory services team to see how a cash flow forecast could help transform your business.

Terminal Tax Due Dates

We receive a number of queries at this time of year from people trying to understand the due date for their terminal tax.

The majority of income tax payers in New Zealand have a standard balance date of 31 March, which means that their terminal tax is due by:

*  February 7 2012 if their return wasn’t prepared by us or other tax agent with an extension of time agreed with the IRD;

*  April 7 2012 if their return was prepared by us and we have an extension of time agreed with the IRD to file their return.

If the total of your provisional tax payments made during the year are more than the tax owed at the end of the year, you have overpaid your income tax.  The IRD will refund the excess balance unless you choose to transfer it to another year or tax liability or they transfer the balance to other debts you have with the department.

On the other hand, if your provisional tax payments were insufficient to cover your tax liability, the difference is called “terminal tax” and you have to pay the difference by the terminal tax due date.

The date that you need to pay terminal tax is therefore determined by:

*  Your balance date; and

*  Whether you use a tax agent who has an agreed extension of time arrangement with the IRD.

Your goal should be to match your provisional tax payments to ensure that you are not faced with any unpleasant surprises when it comes to paying your final income tax liability.  The IRD will charge penalties and interest on underpayments.

I’m not keen on tax payers paying penalties and interest to the IRD so please feel free to contact us to discuss your options.

Tax planning – 31 March 2012 Checklist

As the end of the 2011/2012 income tax year draws closer and the due date for paying terminal tax also fast approaching, there’s likely to be a list of issues for you to consider. Taking action now and ensuring your accounts are tidy and up-to-date before 31 March 2012 may help you reduce your tax liability. It’s often too late to offer the best advice after the year has ended.

Provisional Tax

If you know that your income is or will be much higher than 2010/2011, you may need to review your final provisional tax instalment, which will be due on May 7 2012. If you’re concerned, please call us and we’ll carry out a quick review of your position.

Trading Stock

If you carry more than $10,000 in stock, you must undertake a physical stocktake on March 31 to confirm the value of it. Your stock should be valued at the lower of its cost or realisable value and you should identify obsolete stock. If you carry less than $10,000 stock you can decide to value it your opening stock value and will not need to carry out a stocktake.

Business Expenses Paid From Personal Funds
It’s very easy to overlook business expenses that you’ve paid from your own funds. Now is a good time to identify these and ensure that you’ve reimbursed yourself or have recorded them.

Bad Debts

Review your accounts receivables (“debtors”) as you’ll only be entitled to claim a bad debt write-off if you have actually written it off in your books BEFORE 31 March 2012. Further, you must retain suitable evidence that you’re carried out reasonable steps to recover the debt before you write it off.

Employee remuneration

Amounts owing to your employees as at 31 March 2012 (which may include holiday pay, bonuses, etc) may be claimed as deductible in the 2012 income tax year. But you must pay them within 63 days of March 31, which will be June 2 2012.

Review your balances now as delays in paying these balances beyond June 2 could have a surprisingly dramatic impact on your 2011/2012 income tax liability.

Shareholders’ salaries and bonuses must be paid by 31 March to be deductible. PAYE on these payments must be included in your March 2012 payroll schedules and paid to IRD by April 20 2012.

Fixed Assets

Review your fixed assets schedule to ensure they are up to date and accurate, ensuring all purchases, disposals & scrapped assets are included.

You do not need to include purchases you’ve made for less than $500 plus GST in your schedule. They can be treated as a “low value asset” and treated as an expense.

You can write off any assets that aren’t used in your business anymore; and you do not intend to use it in the future; and the cost to dispose the asset exceeds its disposal value.

Repairs & Maintenance

If you have any repairs or maintenance work that you’ve been contemplating, consider getting it started before 31 March 2012 so you can claim the deduction in the 2012 tax year.

Shareholder Current Accounts

If you operate as a company, check to see if your shareholder current accounts have overdrawn balances as they could cause FBT issues. Although we usually look at this when we prepare your statements and tax returns, if you’ve taken substantial drawings from the business, please contact us know so we can advise you on how to deal with them before 31 March.

Donations & Childcare Expenses

Start collating your donation & childcare receipts for the 2011/2012 income tax year as you’ll be able to claim for approved donations over $5.00 if you have a receipt. You can also claim a deduction for some childcare costs.

Prepaid expenditure

You may have already paid for some expenses in this income tax year, even though a portion of the expense relates to the 2012/2013 income tax year. IRD allows some types to be claimed in full in the year that it was incurred, even though the goods or services won’t be used in that year. Examples include: Stationery; insurance, etc. Therefore you may want to consider prepaying some of your expenses before March 31. If you’re GST registered and on a cash-based system, you’ll also be able to reclaim the GST sooner.

We recommend that you collate your accounting records promptly after 31 March 2012, whilst it’s fresh in your mind. Ensure that you reconcile your bank accounts with your cash book if you’ve kept one; list your debtors, creditors, work in progress and stock at 31 March 2012; file your GST returns & working papers and record any home office expense details. Finally, ensure that your documentation such as bank & credit card statements, sales invoices & creditors’ invoices are filed methodically.

Disclaimer: This article is of a general nature only and covers only a few of the items needed to consider in year-end tax planning. You should not rely on it as specific tax advice or as a comprehensive guide and it should not be relied upon for that purpose.

There are many issues to consider before March 31.  Please contact one of our business advisory services team before then.

You And Your Business Idea

One age-old question has puzzled many entrepreneurs to this very day – “what does it take for my business to succeed?”

Many budding entrepreneurs, with aspirations of succeeding, dive headfirst into their new business venture. Some triumph; others fail.  With so much uncertainty in the current economy, many hopeful entrepreneurs may have to toil hard just to keep their business viable, let alone make it thrive.

3 fundamental factors to succeed in business

There are myriad factors to consider when starting a small business.  Many will agree that three critical factors will help facilitate success. They are:  Having a viable idea; relevant skills & attributes; and adequate capital to invest in the business to sustain it until it generates income on its own. 

How viable is your business?

It may seem obvious, but one critical aspect is to test your business’ viability before your start.  Having a good idea is not always enough.  You must have a market and customer base that want your products or services and will pay your asking price. 

To begin, do some research to determine if there is a specific market need that is not being satisfied by others and then form a market niche using your results.  This will provide a solid platform for your business with opportunities for it to grow into a viable enterprise.  Solicit feedback from potential customers to determine if there is a market for your products or services and what price they’d expect to pay.  This feedback is an essential part of building your business.

Acquire a good measure of the competition you’ll face, since it will give you a clearer understanding about what demand exists for your products & services.  If you can’t use the information you gather to gain an “upper hand” against your competitors, you’ll find it much harder to turn your business idea into a viable one.  Your data gathering will enable you to create your business plan – tailored to you and your customers’ needs.  You might make minor adjustments, major changes or even abandon your business idea altogether.  But the exercise will be worth it and will set you on a path to achieving success.
Consider your skills & attributes

It’s essential that you have “what it takes” to turn your business idea into a sustainable business.  Your knowledge & experience, as well as your personality, skills, attitude & commitment to your business will add great weight behind your quest for success.

But if you are lacking in some areas, don’t panic.  Admittedly, having natural ability will be a huge advantage for many aspiring entrepreneurs.  But that doesn’t mean you have to start off with all of these attributes.  You can acquire experience & knowledge as you go, and seek advice, support and resources from others.  Many will argue that other qualities such as; ambition, passion, drive, resilience, commitment, self-confidence, belief & discipline are just as vital and separate the losers from the winners.

Can you afford to start your own business?

To earn money, you may need, at first, to invest or spend money.  Having adequate funds at the outset is likely to be essential to pay for your business’ overheads and your own living costs until your business produces a livable wage for you.  A few achieve success almost instantly – but most do not. 

Use the 3 tips in this article to give yourself a “head-start” and make your business the success you dream of.

Ask and you will find – some great questions to ask yourself

I’ve been scribbling notes in note-books, backs of beer mats, etc for many years now.  My notes are typically about quotes that motivate me, ideas that spring to mind & books to buy or get from the library.

Do you take notes?

Great questions can generate great ideas & insights, provide much needed clarity and help stay focused.

Here’s a quick summary of some questions that you could ask yourself:

What have I been putting off (procrastinating) recently that I could/should begin today?

>>  By asking yourself this, you’ll be taking a giant step towards something better.

What’s the BEST use of my time right now?

>>  Delegate those tasks that you can get someone else to do more cost effectively & focus on the important tasks that’ll propel your business forward.

What tasks or jobs could I eliminate or do much less of, so that I can achieve MORE in my week?

>>  Many business owners become obsessed with looking busy (I call this busyness).  But being busy can be akin to laziness – taking the easy route and not the hard one!

What MUST be done in my business?

>>  George Bernard Shaw wrote “Doing what needs to be done may not make you happy, but it will make you great”

What can I do right now to create more value in my business?

>>  Rather than complaining about falling income, demanding customers, etc, ask yourself this searching, but powerful, question to help you produce some great ideas.

I believe that the quality of the question generally dictates the quality of the answer & many great things are achieved by asking a question.  Ask any 4 year old with a thirst for knowledge!

IRD tax filing dates

It’s that time of year when the nights are colder, and the IRD want their pound of flesh from taxpayers.
For the majority of Kiwi tax payers, the last day for filing their 31 March 2011 income tax returns is this Thursday, July 7 2011, unless their returns are prepared by an IRD approved Tax Agent. 
Tax Agents have a unique arrangement with the IRD which allows them to file clients’ tax returns over a 12 month period.  This “extension of time” (EOT) arrangement means that many tax payers have longer to file their returns, without fear of late filing penalties.  There’s also an added benefit in that tax payers generally receive an extra 2 months before their terminal tax is due.  Payment due dates for clients with a Tax Agent is extended from February 7 2012 to April 7 2012.
So, if you’ve just started a new business venture, bought an existing business, or invested in a rental property & haven’t signed up with a Tax Agent yet, now is the perfect time to do so.  But be aware.  Not all Tax Agents are qualified.  Choose a Tax Agent who belongs to a professional body and is subjected to strict professional rules by their supervising body. 
You don’t need to submit your records to a Tax Agent immediately but you must be linked to their Agency by July 7 to qualify for the EOT arrangement.
Business Advisory Accounting & Tax Services is an approved Tax Agent with the IRD, and by becoming our client you qualify for the same EOT arrangement as all of our other clients.  You will also receive ongoing business, tax & and investment property advice as we focus on delivering cost effective small business accounting & tax services that not only save our clients money, but leaves them to focus on developing their businesses. 
To get started with us, please download our “Authority to Act” form in our resources section and return it to us so we can legally act for you.

How good are you at customer retention?

Retaining customers has never been more important than it is today. 

A lot of businesses take pride in being excellent at customer acquisition.  Some business owners even use this as a primary measure of their success.   It’s probably a good time to ask yourself how much time and effort you actually spend in acquiring new customers, formulating marketing strategies, regulating lead generation expenses, finding lead distribution channels, and controlling conversion rates.
There’s no doubt that prospect generation is essential in running a business.  But if you think about it, having your best people running around winning new customers does not necessarily differentiate you from your next competitor. They are most likely doing the same things as you – devising new strategies to acquire more customers and converting your existing customers as their own.
You have to be wary of just chasing the next best customer.
Ask yourself the following:
*  Do the people in my company truly understand that their job is to keep existing customers?  Standard customer service isn’t always enough – You have to be certain that your team is dedicated in retaining your existing customers, to help ensure that they continue to do business with you. 
If you answered yes, there should be a direct connection between your team’s compensation and the positive or negative outcome of retaining customers – How will they feel the loss if one of your customers cancels their business with you? 

*  Do you have clear-cut retention goals incorporated into your business plan? Have you made these retention goals clear to all your team and how these goals may affect your business if they are not achieved?

*  Do you have a reporting process to determine if your company’s performance meets its goals? Are your managers regularly updated about the company’s performance against the current business plan?
Every dollar spent on customer retention generally exceeds the benefits and returns of money spent on acquiring new customers.  This is especially true in today’s challenging economic environment.  However, that’s not to say that you should not invest in customer acquisition as well. 
Finally, you need to distinguish the difference between retaining customers and providing customer service.  Customer service is the process of providing your customers’ needs with high levels of competency, efficiency, and customer satisfaction. There is an emphasis on customer satisfaction, which underscores the pleasure to serve rather than being a chore.
On the one hand, customer retention is about valuing customer relationships; finding ways to serve them better; or offering something more to ensure their loyalty and satisfaction.
How can you enhance the service you’re currently providing your customers?  Do your customers have needs which they haven’t realised they needed? 

If you don’t ask yourself these questions now, you may find your competitors enticing your customers away by fulfilling their needs!

4 tips to survive a weak economy

Like the Auckland weather, it’s often just as difficult to predict the economic climate accurately.  During a recession or economic downturn, disaster can quickly strike small business entrepreneurs who are not prepared to weather the storm.

Fortunately, all is not lost.  You can stay strong in lean times and help is often at hand to help you keep your small business operating during tough times.  Here are 4 tips that I have put together for you to survive a downturn:

Reduce overheads

Cash flow is the number one killer for small businesses and the last few years has seen record numbers of bankruptcies and liquidations.  It’s crucial to manage your cash flows, at all times.

Reducing overheads means finding ways to keep more hard earned cash in your bank account.  Look to trim off some of your administration overheads – can you email quotes, invoices, etc, rather than pay for postage?  Look for opportunities to produce your product or deliver your service more cheaply – do you need to produce as much?  Review your rental and loan agreements – could you renegotiate better terms?

Staying solvent is crucial and trimming the fat on some discretionary overheads will help.  Use your time effectively. 

Maintain good lines of credit

I recently wrote about maintaining good business relationships with your Bank Manager.  Banks also have to adapt to market conditions and regularly change strategies to survive.  One way they do this is by reviewing their lending policies and tightening their belts. 

Don’t give them any reason to terminate your loan.  Make your repayments on time.  If you have a good track record with your bank, you’ll probably be an ideal customer for them, so you should still be able to open lines of credit with them if you need a “helping-hand”.  Lines of credit can give you a financial buffer to ease cash flow.

Revise your marketing

I’m not suggesting that you slash your marketing budget.  But you should look to make sure that your marketing budget is used wisely and that you’re not wasting money on advertising that doesn’t work for you.

What is your target market?  Sit down and review your current marketing strategies.  Look to tailor your marketing efforts so that your money and effort is allocated towards your preferred customers.  Consider using the internet more – with the correct approach you’ll be able to focus on targeting the right customers for your business.

Seek out an Online Publishing & Media Distribution firm who specialise in designing highly focused, marketing campaigns.  

Seek help

Government departments know that small business entrepreneurs are finding it tough at the moment.  They understand that small businesses contribute significantly to the economy and want to do whatever they can to help. 

If you’re finding it difficult to honour your tax and payroll commitments, don’t be afraid to discuss repayment options with them.  Or better still, ask your accountant to liaise with them – you’ll find that a good chartered accountant or business advisory services specialist will have skills and experience to negotiate on your behalf.

Many small business entrepreneurs do survive economic downturns.  The successful ones take responsibility and seize the opportunity to analyse their situation and then act appropriately. Keep your Bank Manager happy, stay in touch with chartered accountant and use a small business advisory services specialist when necessary.

Your bank manager – friend or foe?

Maintaining a good businesses relationship with a financial institution (such as a bank, credit card company, etc) has always been important.  This is becoming more prevalent as many lenders are consolidating, borrowing becomes harder and options become scarcer.    

In the past, we may have regarded this relationship as a partnership, where each party stood to gain something – a classic win/win situation.  Sadly, as the credit crunch continues, this is becoming less so as banks are tightening their belts.  But for many business owners, especially ones who are feeling the pinch, or seek funds to help grow their businesses, this relationship is important.  It needs to be fostered.  If your bank has lent you money for your business, it’s important you create the right environment so they continue to lend to you.    

Lenders hate surprises.  Keep communicating with your bank even if you are irritated by its approach.  Ensure that your correspondence and communication remains cordial – remember that honey and sugar catches more flies than salt and vinegar.  Inform them of any major plans you may have for the future and don’t be afraid to ask your bank manager for advice and help.

Most banks want to be confident that:

*  You will be able to meet loan repayments from your business’ operating activities (or net profit before interest and tax)

*  You have adequate security – banks are continuing to decrease their loan to value ratios (LVRs) regularly and will regularly adjust asset values, which continue to decrease.  Banks will rarely value your assets at book value or open market value and will take a very defensive stance by valuing them at “fire sale” values.

*  Your business will remain solvent and continue to trade, profitably.  Build some “margin” into your financial projections as most lenders will adjust your financial assumptions as a precaution

It’s important that your bank manager knows your business.  Do you rely on sales at peak times of the year?  Do you understand the market you’re in?  Bank managers are likely to have dozens of lenders to look after and can’t be expected to understand each customer’s markets thoroughly.  But look to ensure that they know yours, as you’ll find it much easier when you need their help.

Remember that maintaining a healthy business relationship with your bank may be the difference between success and failure.  They are a business too – don’t give them a reason to seek an alternative for your custom.