20 July 2010
Australia survived the global economic crises relatively unscathed but be wary, it might not be over yet as our economy is still susceptible to international conditions. We're predicted to grow at a comparably healthy 3.25% but that assumes that conditions remain reasonably consistent.
Not all that long ago a change in economic conditions in smaller European countries did not have a big impact on the international markets. However, economic conditions are fragile to the point where the defeat of an austerity plan in Portugal and Portugal's subsequent ratings downgrade had an immediate and significant impact on international markets (even though Portugal only represents around 1.89% of the Euro Zone economy). Of course the impact of Portugal followed Dubai's announcement in November 2009 that it was unable to pay its debts, followed by Greece's inability to pay its Euro 110b loan, then Spain. Dubai has friends willing to fund them but the same cannot necessarily be said for many of the European nations and they are not in a position to trade themselves out of debt with production in many countries seriously affected by the crisis. The fear is that there is no cash left (or anyone willing to lend to them) to get some countries out of debt so the slightest 'speed hump' in their recovery has a ripple effect across international markets.
In Australia, the economy is uneven. We're starting to see a slow-down in some sectors as the impact of the interest rate hikes (there was a substantial fall in new and used dwelling investment last quarter) and the end of the economic stimulus packages are felt (business investment was down 6% last quarter). Production within our economy is also slowing with a 0.9% fall in the March quarter. The strength of our economy continues to be driven by the mining sector and continued resource demand from China. Plus, with an election looming, everything slows down as the economy shifts into a 'wait and see' mode (except advertisers and media buyers perhaps!).
So, remain cautious and ensure that you plan for the next 12 months and keep a strong eye on performance (see plan or perish below!).
With a new financial year just under way you have the opportunity to financially map your business. If you get this financial mapping right, you reduce your risk and remove some of the surprises that can occur along the way.
Start by putting together an operating budget for the business. This should not be last years' figures adjusted by some percentage. Look at each line item and assess it critically. Start with your revenue and work up a reliable estimate of your income for the coming year.
You should start to think about what marketing or other activities will be required to produce this income. Once you are comfortable with the income estimates have a look at your expenses and again work up your expenditure budget. Be tough on your costs. Can you manage them more effectively? Also, allow for increases that are likely to flow through into the current year or any additional costs you will incur due to growth. Working through this exercise should allow you to produce your operating budget and identify your likely profit for the coming year. Once you have this figure then it might be an idea to do a couple of alternative estimates so that you understand the impact of changes to your assumptions.
Once you have your forecast profit position, reduce that to a cash flow forecast. You need to know both your profit and cash position. Arriving at your cash position is about understanding the timing differences: How long will it take for your customers to pay you? How much stock will you need to hold? And, what are the payment terms required by your suppliers? With your cash flow, don't forget to allow for things like tax payments, loan repayments, dividends and any capital purchases that are planned. These can be 'big ticket' items and if you don't allow for them then you will get caught out.
As part of your cash flow forecast identify your capital expenditure requirements. Don't deal with these on a one-off basis as they arise, plan them in advance.
The Tax Office is very interested in the way business owner's access money from their businesses. Trusts are currently in the spotlight.
A common approach utilised by many businesses with a discretionary trust is to distribute income to a company, pay tax at the corporate tax rate but leave the distribution in the trust for use by the business owners. In effect, the distribution only occurs on paper. Owners then use the distribution as working capital to fund growth, or in some cases, to fund personal assets. The Tax Office intends to tax any of these distributions that remain within the trust (called unpaid present entitlements) under Division 7A.
This change essentially requires you to:
- Ensure that distributions to corporate beneficiaries are paid in full before the company's lodgement day for the year in which the income is appointed; or
- Put a complying loan agreement in place between the company and trust before the company's lodgement day for the year in which the income is appointed; or
- Look at restructuring to achieve the best result for you and your business.
If you have borrowings, take some time to review them to ensure that you have adequate funding for the coming year and the mix is right. Banks are lending, but with caution. A key criteria is whether the management of the business appears to be in control. Loan applications made on an urgency basis or unexpectedly will get a tougher treatment than a business that identifies their requirements well in advance. Explaining why the funds will be required, how long they will be needed for, and the basis on which they can be paid, will advance your cause.
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This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.