A word about good planning

2021 delivers a raft of new finance and tax issues for business owners to get to grips with. Gofi8ure’s Lisa Martin provides some clarity and advice to help you stay on top of your business finances.

It’s no secret we’d all rather forget 2020. The pandemic not only had a significant impact on the viability and finances of New Zealand’s businesses, but many business owners also struggled to get their head around various new tax and compliance requirements.

2021 presents another unique set of potential money and tax-related stumbling blocks, and GoFi8ure’s Lisa Martin believes the key to dealing with them lies in mastering the four functions of management – namely planning, leadership, organisation and control.

Most people bring core skills or expertise to a business, Martin explains. “But as a business owner they’re naturally wearing 12 other hats, and often planning just doesn’t come naturally.” Leadership isn’t necessarily a natural asset either; Covid has tested everyone’s organisational agility to the max; and, as for ‘control’ – this is where a business owner must understand the control mechanisms of his/ her business and stress-test absolutely everything.

“You can’t just rely on gut instinct to run a business. You need helicopter-view software tools to measure such things as time engaged, billing, employee productivity, efficiency and effectiveness. “Can you measure fluctuations in revenue, sales prospects and lead generation, or Key Performance Indicators (KPIs)?” Business finance best practice is all about planning – Martin makes this very clear. And the self-employed should take note too. A business plan or strategic plan is vital, she says – one that’s linked to your business’s projected revenues and the costs associated with earning that revenue.

Do you require capital and have you planned your resource allocation? “The biggest responsibility for a business owner looking for growth or just wanting to work better with money is resource allocation – the biggest of which is payroll, so start with HR. “Then there’s IT, which impacts on efficiency and effectiveness. Subscription models usually fit that bill, so how much will that model cost?” Rent and/or franchise fees must also be factored in.

“Make sure all the essential expenses incurred while earning your income are both accurate and allowed for,” says Martin. “It’s vital that, despite the uncertain future and fluctuating relationships with some of your suppliers, you get a handle on what costs you generate to earn that income.”

Martin recommends having, not one, but three bank accounts – covering working capital, “rainy day money”, and one focused on tax savings.

Forming the right mindset

Planning allows people to get into a certain mindset. So when money comes in from a specific paid invoice, they should immediately transfer the GST component to a tax savings account or put a third of the invoice, GST excluded, into a current account to cover the wages. The balance goes to a savings account. It’s about linking your strategic plan across all the things that cost your business money, explains Martin.

“As money comes in, assess what you do with it – ask ‘have I done the best with this money? Have I saved it? Have I put aside the money tagged for Inland Revenue?’”

She advises asking your accountant or advisor about how to manage fluctuating monthly revenues against overall annual expenditure; how to match activity with budget; and to forecast out over the rest of the year. Cloud payroll software is also useful for calculating a leave liability report – thereby ensuring that staff are not accumulating too much leave, and you’re not racking up too much debt.

“It’s also wise to have a bank account with a similar amount of money to that liability. So if you did have to close the business tomorrow, for whatever reason, you have the funds to pay out that leave owing. “Remember, annual leave always has the potential to financially hurt business owners.”

Also, if you secure a Small Business Cashflow Loan from the government, do you know where to put that money on your balance sheet? It would be best deposited into a savings account, recommends Martin, and only used for its original intention. “Don’t forget, you’ll be asked by Inland Revenue to account for it.”

Then there’s the Covid wage subsidy that the majority of New Zealand businesses received in 2020. “That money is taxable income,” Martin reminds business owners. “It’s classed as income and, for self-employed people especially, will need to be declared on March 31st, 2021. For companies with payroll that subsidy comes into your income statement as a negative expense, a source of funds to shoulder the burden of paying wages when you might not be earning, and a negative expense is ironically classed as income.”

When it comes to business ownership and money, it’s vital that you know what you’re doing, Martin adds. “You can’t just wing it. Know your obligations, know what you’re signing up for, know when money needs to be paid back, know what’s deductible and what you’re paying tax on. Then have that money put aside.”

Engaging the right advisor

Before the year progresses too far, discuss your business’s financial plan with an advisor – that could be a financial planner, an accountant, a tax agent, or anybody else who comes highly recommended. “It would be so helpful to connect with that someone who can unbundle your business hopes, dreams and wishes for 2021 and beyond,” says Martin.

“At GoFi8ure we like to discuss what you want to do, and why. We help with strategy, value creation, resource allocation and, of course, planning. “People often have overly ambitious business goals – that’s understandable. But we like to bring them back to earth by asking the hard questions around planning, tax structures, employment contracts for staff, ACC responsibilities, legal cover, and whether there are other potential decision-makers involved.”

She says GoFi8ure’s planning consultations usually take at least an hour. “It’s time well spent because we’re talking about one of the biggest financial assets you’ll ever build. “You’ve got to get it absolutely right.”

As for Covid-19, Martin’s advice around planning for 2021 includes dealing with any kind of risk around physical premises. If you’re a retail store, develop a strong online presence. If you’re a café owner, can you plan for a pop-up option? And never rely on shoebox bookkeeping – make sure you’re all set up with a cloud accounting software application such as Xero, and have all your documents stored efficiently and effectively in the cloud.

“Above all, if you’re in doubt over anything relating to the management of your business – just ask for help,” says Martin. “That’s what we’re here for.”  

https://gofi8ure.co.nz/