Summer 2011 - 2012

 

 
In my prievious newsletter I mentioned I would be attempting to climb  Mt Earnslaw  a 9300 ft peak in the South Island.
 
After two days climbing in the Remarkables at the back of Queenstown in which my son and I climbed to the top of Single Cone a 7200 ft peak we felt ready to tackle Earnslaw albeit with some trepidation and caution. We were both carrying heavy packs which combined with all the climbing equipment weighed in at 28 to 31 kgs. The climb went well until we got to 7200 ft where we encountered very dangerous snow conditions.
 
We climbed for approximately 6 hours endeavouring to find our way through cloud ,but the conditions which included a large avalanche only 100 metres from where we were convinced us that we should retreat while we could. While I was disappointed not to continue, our decision turned out to be the correct one as two experienced parties both turned back the next day at an altitude lower than where we were.
 
I guess relating it to a business situation one has to know when to call it quits.So often people will invest In business ventures and  plough significant amounts  of time and money into it.They can be become obsessed by the perceived end result and fail to heed the warning signs which indicate the ventures is not going to succeed and “pull the plug” while they can.
 
 
 
Most people will be aware of the dire state of the European and US financial markets.  This has created an enormous amount of uncertainty in the market place with share market, commodities and currencies yo-yoing.  A large number of commentators are anticipating an unavoidable major financial collapse within the next two years.  They are predicating significant inflation and interest cost rises.  While I do not wish to be overly pessimistic or negative one should heed the warning signs.  To this end I am advising clients to keep a tight rein on debt, where possible eliminate debt and to ensure that they fix interest rates over the longer term.  Watch this space.
 
 
SELLING a business is similar to selling a house. Here are some pointers:
  • Make your business look good. Spruce it up as you would your house.
  • Your systems should be well documented and easy for a new owner to follow.
  • Plan ahead. It is easier for a buyer to find a small amount of money than a large one. Therefore, if you are overstocked, do something about it.
  • Check the tax situation with us.
  • You are going to be asked to provide financial statements. Why not put together a booklet with pictures of your business and information about it. Bring out the benefits to the new owner but be sure all of them are true. Include the financial statements at the back.
  • Draw up a plan of how you are going to market the business just as you would prepare a marketing plan for the business. Who is your target market? Where do you find them? If you employ an agent, work with that firm to market your business in the best way possible. Don't leave everything to the agent. 
 
 
YOU might have read about the recent tax case called Penny and Hooper.
 
It was about two surgeons. They did not break any tax laws. All they did was to pay themselves low salaries from their companies to reduce the amount of tax they might otherwise have had to pay. There is nothing in the law to say they should not pay themselves a low salary as they explained in court.
 
Their problem was the amount of the salary was artificial. They would never have worked for such a low wage. If it had been realistic they would have been unlikely to have attracted the IRD's attention.
 
If you contrive a way to reduce your tax, you could be accused of tax avoidance. The IRD might reset the figures as they think suitable and charge you interest and probably penalties.
 
If you contemplate paying yourself an artificially low or high salary to save tax, don't be greedy. If the amount of tax is small, IRD is less likely to take any notice. A low salary can often be justified for good commercial reasons. Be ready to justify high salaries to those who are not full-time employees on the basis of hours worked, pay rates etc. Consult us if in doubt.
 
 
Don't give discounts just to get business. It is one of the worst ways to promote new business as it comes straight out of your profit.
 
If you can reduce your price once, your customer will expect you to do it again. Further, if you can always afford to reduce your price, you are telling everyone you are overcharging.
 
By all means give a discount for a second or subsequent purchase immediately following an initial buy. You are catching the customer while in a buying mood. Discounting the second sale is good business as it is better to get some extra profit than none at all.
 
A joiner (see article "Networking saves the business" on the front page) gives new customers referred to him a 5% discount as a thank you to the referrer. We think people refer their friends primarily because they think you do a good job. We doubt the promise of a discount for someone else would encourage many people to recommend your business.
 
Many joinery businesses make quite small profits after taking out wages for the owners. Ten percent of sales is often good going. A 5% discount off sales represents a 50% cut in profit for a firm making 10% profit.
 
 
GEARING is the ratio of borrowed money to your own money. If you have a business which has a high proportion of borrowed money, you are said to be highly geared.
 
There is a very old saying in accountancy: "In good times get into high gear. In bad times get into low gear."
 
If you think these are bad times, get your borrowing down.
 
Keep an eye on the proportion of your borrowed money to your total equity (what you own). If 80% of what you own is financed by borrowed money, you are taking a big risk in difficult economic times. In fact, you could be gambling. For small businesses, for "you" read firstly the business and then both your personal situation and the business combined.
 
If you want to reduce your business borrowing, you could:
 
Consider hiring equipment rather than buying it.
 
Subcontract to other firms. The extra cost of hiring another business to work for you may be a better choice than tying your money up in equipment which doesn't get sufficient use.
 
Tighten up on debtors (money owing to you). Reduce the time you allow for payment. Above all, police the outstanding bills, regularly, frequently and swiftly. Make notes of any promises and remind your bad payers about them if you have to keep following up.
 
Keep an eye on your stock levels. If you have made some bad decisions, you have already lost money. Sell your mistakes early. Don't over-buy.
 
 
CAFES are a great source of stories for our newsletter.
 
A café near our work has excellent sandwiches. It was lunchtime, just before 1pm. While I was there I watched four people come in, look in the food cabinet and walk out. All the sandwiches were gone. I told the owner she was letting customers walk out.
 
"All our sandwiches are fresh," she said. "At the end of the day I throw out any which are unsold."
 
She was sacrificing sales to avoid wastage. She was losing not only the four sales for the day but also repeat business. Customers who like sandwiches and find none will stop coming.
 
It's one thing to get customers into your shop, but it's another to make a sale. Focus on how to increase the proportion of those coming through the door into paying customers. If you can measure your performance, do so. Then set a challenge to improve.
 
Study how other firms succeed. Fire any sales person who asks a customer "Can I help you". Learn better ways to sell and apply them. An obvious one is to show enthusiasm for the goods being looked at.
 
One client measures his companion sales. These are the sales you make as add-ons to the thing the customer came in to buy. He can tell if his staff is promoting additional sales and he rewards success.
 
Another area where clients miss converting sales is after a promotion. When the phone rings, get the caller's contact details, as a priority. Then, if the call has to be dealt with later, a competent sales person can call back. You may also be able to add the caller to your database for future promotions.
 
 
IRD is focusing on overseas superannuation schemes and the cash economy. Do not cash in your overseas superannuation without first consulting us as you could turn a non-taxable situation into one subject to tax. If you have an overseas pension scheme, not taken out in New Zealand, tell us when we do your tax return, even if you are not getting income from it. It could be taxable.
 
 
The IRD has reminded the public if they buy gold and then resell at a profit the gain is taxable. In fact, since gold never yields any dividends, even if you sit on it for years, it would seem a profit on sale could be taxable. What about gold coins? If you already have a collection of coins and add some sovereigns to it, is this part of your hobby? The answer, of course, will depend on the facts. The longer you keep the coins the more likely they are part of your hobby. Other evidence of your coin collection being a hobby would be your general activity and interest in coins.
 

About Us

We are a full service Chartered Accountancy firm based in Mt. Eden, Auckland, New Zealand.  We provide full tax accounting, management accounting, trust accounting services.

Member, Institute of Chartered Accountants