Tag Archives: BDO Central

Are you paying the right amount of tax?

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As we start to get a better understanding of the new ‘Business as usual’ operating landscape and the initial urgency around business disruption dissipates, at BDO our focus has now shifted to ensure local business have the ongoing support and strategies in place for the medium to long term time periods.  By building resilience and taking full advantage of the options available to them, businesses now have the opportunity to finesse, pivot and diversify to best position themselves for the future.

One of the strategies we are encouraging businesses to adopt is to ensure that they are across the tax changes implemented during the initial Covid-19 lockdown.  These changes can affect how much provisional tax you should pay, as well as how different costs might be treated in your reporting to the IRD.

Paying provisional tax based on standard uplift may not be the most cost effective option for you moving forward.  Below I will look to provide an overview of the key tax changes that all SME owners need to ensure that they are across so that they are prepared for any future opportunities.

Claiming depreciation on buildings

One tax support measure following covid, is the reintroduction of tax depreciation on (non-residential) commercial and industrial buildings and the allowance for tax depreciation on newly acquired buildings and capital improvements made to existing buildings from the 2020/21 tax year. The tax depreciation rate will be 1.5% straight line or 2% diminishing value.

For entities that had previously been claiming depreciation on their non-residential buildings, this change will see reduced taxable income levels following from recommencing a claim for depreciation from the beginning of the 2021 tax year.  You may want to consider the impact of this claim when you are considering the amounts you need to pay for provisional tax.

For entities accounting for deferred tax, this reintroduction of a claim for depreciation will also result in a significant change to the deferred tax balances in the 2020 year results.

Increased minor asset write-off thresholds

In March, the government also lifted the threshold for writing off the purchase cost of minor assets. Previously set at $500, SMEs can now claim in full at the time of purchase for assets with a cost of up to $5,000 in the year they were purchased. This threshold increase is only temporary, and expires on 17 March 2021. However, the threshold will only drop to $1,000, remaining double what it had been in 2019.

Loss carry back provisions

The Government’s new “carry back” rule has been implemented to help SMEs recover some past tax losses and put that recovered cash flow toward future recovery efforts. This rule is more complicated than the previous two, and you should consult with your tax accountant to help calculate how this change may be applied in your business.

Tax losses in 2020 and 2021 can be offset against profits earned the previous year (2020 and 2019, respectively). These losses can be based upon a filed tax return or by provisional tax estimates. Estimates need to be based upon extensive analysis and reasonable forecasts and SME’s may be charged interest if payments are underestimated.

Research & development claims & refunds

R&D is often among the first functions to be discontinued or scaled back when cash flow is limited. To keep the New Zealand economy at the forefront of global innovation, the Government has brought forward the refund date for the R&D tax credit by one year. Businesses with research and development departments can claim up to 15% of their eligible annual R&D spend, up to $120 million.

The R&D tax incentive was passed last year but some of the broader refundability rules weren’t set to go into effect until the 2020-21 income year. These are the rules the government has moved forward. If your SME has R&D costs speak to your business advisor about whether your projects meet the eligibility criteria for a refund.

Recovery is about seizing opportunities

Businesses can’t leave money on the table when funds are tight. Thanks to these changes, there is now a range of tax benefits available to help small to medium-sized businesses move into the 2021 year as positively as possible.  Given that payment dates for tax are often staggered throughout the year, it is important that you take stock of the changes that were implemented and consider how these may influence your tax responsibilities.   

Drive performance by better understanding the numbers

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Hawke’s Bay’s economy is booming.

The region is experiencing growth across a range of sectors and industries, unemployment numbers are dropping, house prices continue to rise and there is an air of business confidence within the region which is encouraging business owners to look to their future and what opportunities these positive developments could bring. One of these opportunities is an increase in business investment which is exciting for both established and developing businesses. With that said, it is important that you have a clear understanding of your business fundamentals so that if opportunity comes knocking, you are in a solid position to best understand the offer on the table. Below we focus on four financial ratios that should be monitored on a monthly basis.

Gross margin

Measured overall and at product level, this formula measures the amount of margin each dollar of sales is contributing toward overhead costs and profit. The result is found by dividing gross profit (subtract cost of goods sold from sales) by sales. A 40% gross margin means that for every $100 of sales, $40 of gross margin is generated to cover all other costs and profit.

Unless you are offering customers a discount, or incurring additional direct costs, your gross margin shouldn’t change whether your sales increase or decrease. We often hear business owners say “I am chasing an increase in sales”, to which we would add “provided you maintain your gross margin”. If sales increase but your gross margin decreases (perhaps as a result of increased commission or discounting), you may be working harder for each dollar of sales but making less in dollar terms.

Measuring how quickly your inventory turns over is a critical measure for many business owners where inventory (or stock) is a significant asset. Slow moving inventory can lead to lower gross margin through discounted selling price, obsolescence, and carrying costs. Understanding your optimum stock levels, particularly how these may trend differently from season to season can help to ensure your costs are measured and justified.

Inventory turnover can be measured in number of days, found by dividing average inventory value by cost of goods sold multiplied by number of days in the reporting period (e.g. 365 if reporting period is one year). A low number of days indicates inventory is selling quickly, however understanding your product mix is important as average inventory days vary widely across product lines.

Cashflow

Money in the bank or positive cashflow is a good indicator that business is going well. Many retail businesses are largely cash based operations, with customers paying for the goods at point of sale, and suppliers requesting payment shortly after delivery. This means that managing and reviewing cashflow is an essential skill for business owners.

Periods of high sale activity and strong cashflow can be followed by lulls which often coincide with GST and tax payment due dates along with fixed costs such as rent and employment expenses.

This is particularly evident over the Christmas trading period for many retailers where high sale volumes during December are followed by significant cash outflows in January.

Forecasting cashflow can help highlight these pinch points and enable you to plan accordingly. There are many tools available to assist business owners with cash forecasting, such as Spotlight and Futrli.

If your business is set to retain its competitive nature during this growth period and stay ahead of the pack it is vital that you plan ahead, and have a good level of financial literacy.

Understanding the numbers is not just for accountants – as a business owner your success depends on your ability to measure the impact of external changes on your business and implement timely changes.

Profitability

There are many measures of profitability, including operating profit, earnings before interest, tax, depreciation, and amortisation, and net profit to name a few. Choosing a consistent measurement to monitor is important as well as an understanding of what is and isn’t included in that measure.

Net profit before tax is a measure of what is left for the owner after overhead costs have been deducted from gross margin. To find the net profit margin divide net profit before tax by sales. A1 2% net profit margin means that for every $100 of sales, $12 of net profit is generated for the owners of the business.

If the owners of a business are not working owners, but are paid a salary, it can be more comparable to deduct their salary cost (or a proxy amount for which they would pay someone to manage the business) from overhead costs before calculating net profit margin. This is called “normalising” so that comparison of profitability can be made with other similar businesses or against industry benchmarks.

Profitability is negatively impacted by increasing overhead costs. Carefully reviewing each overhead item to ensure it is necessary and efficient can be a useful exercise.

Strategic planning for business success

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In our experience, we find many businesses rate strategy as hugely important but don’t have the time, skills or knowledge to implement meaningful strategy in their own businesses. This often stems from business owners being subject to the ‘tyranny of urgent’ – meaning everyday tasks often take precedence over the more valuable and highly necessary big-picture requirement of taking stock of where the company is going.

In today’s modern environment, business value is no longer primarily driven by physical or tangible assets but increasingly by non-financial business drivers. Financial measures are those that can be directly measured; for example, revenue margin, profit, administration costs, debt reduction and cashflow. Non-financial measures are those that cannot be represented by a data point but are more likely to be descriptive or evident by their absence. For example, you may rely on qualitative feedback from customers to determine whether an employee has achieved their goal with respect to providing exceptional client service.

Understanding your value drivers

Success and future strategic positioning depends on the effective measurement and management of these critical non-financial or intangible resources, alongside financial metrics. The first step in this process is understanding your organisation’s value drivers. What are the key non-financial and financial resources in your business? How important are your different resources to achieving your overall value proposition? How strong are your existing resources and how can you use them more effectively? If your existing resources aren’t meeting your needs, what gaps do you need to fill?

Have you considered your overall operating environment, competitive position, benchmarks and market analysis data? Have you considered the key risks for your business both now and in the future?

Measuring business performance

After identifying and mapping the value drivers, you can start measuring your business’ performance, once you’ve decided which are the most important values to measure. An excellent way to determine whether an indicator is worth measuring is to establish what key performance questions you need to answer. For example, what is it that you want to measure? Why do you want to measure this? How do you plan on using this information moving forward? How do you want this data presented? Who will be responsible for this measure? When is the most suitable/appropriate time to conduct this measure?

Using the above questions is a useful tool to ensure all decision makers are working towards the same overarching business goals. It can assist in validating any key changes that may need to be implemented, while also endorsing current practices or procedures within the business that are generating positive outcomes.

Lag and lead measures

Lead indicators are measures that provide information about expected future results based on current performance. For example, marketing investment, research, product development, employee skill development and practice growth trends. Lag Indicators provide information about past performance such as revenue, profits, overheads and accounts receivable.

By combining lag and lead indicators you can not only determine whether you have achieved goals set in the past, but whether you are on track to achieving goals set for the future.

Organisational success measures

Common organisational success measures include:

• Customer satisfaction – referrals, repeat business and customer gain sources

• Product/service innovation – cross selling opportunities/skills utilisation

• Marketing activities – measure effectiveness against agreed milestones and objectives

• Customer profitability analysis – customer segmentation

• Output quality – timing vs service quality

• Staff attraction/retention – proportion of first choice candidates secured and turnover rate

• Profitablity growth

• Value creation – financial and non- financial growth for each quarter and the expansion/review of service offerings

Strategic thinking is particularly more important for business owners in these fast- changing days of disruption. The need to be pro-active towards addressing this changing operational landscape is vital as it will likely determine which businesses flourish, and which will be left struggling to keep afloat. We often ask clients, when was the last time you took time to think about where your company might be in five, 10 or 20 years? And when we persuade clients to make that time to think strategically, they usually end up saying ‘Now I understand why it was important’.

It’s Great to be an Employer

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I decided a celebration of the good things about being an employer was in order. These things apply whether you own your own business or you manage someone else’s business.

I am often asked why anyone would want to work in HR – with a clear implication that it involves a lot of unpleasant ‘stuff’ no-one likes doing. This is partly true, but it’s not all bad by any means.

On other occasions, when I have been a self- employed consultant and I have been asked why I haven’t employed staff to help with the workload, I have cynically replied that I know all about employment and why would anyone be an employer? We can become a bit jaded if we have been through some tough employment issues of late but let’s not forget the positives. I decided a celebration of the good things about being an employer was in order. These things apply whether you own your own business or you manage someone else’s business.

At the highest level every person you employ and every wage you pay is a vital contribution to our economy and society in many ways. You, personally and directly, have improved our employment statistics. You have boosted the tax take that funds so many great things like health, education and our national infrastructure.

Closer to home, at a very practical level, you are feeding the families of your employees, paying the bills, and building homes. If you provide health insurance you may have helped your employees in a time of real need. If you have EAP or other wellbeing initiatives you are helping people to be well and live better and stay in better shape for their loved ones. Over the long term you are helping your employees save for their retirement (it doesn’t matter that it’s compulsory).

When you recruit, train and develop people you are developing their skills, their confidence, and their career. Sometimes this includes supporting them to step outside your organisation to continue their growth. You are providing opportunities that will lead them down all sorts of pathways to bright futures. It is satisfying to share our knowledge and experience and enthusiasm for our respective field with those coming behind us. You often learn something from them as well – most likely an app on your phone you’d never heard of, and if you’re lucky some insights into how they see your organisation that are pure gold.

Even when you provide casual holiday jobs to tertiary students which helps your business at a busy time, you are powering the next generation of employees to start their employment journey. When you employ part time school students on the weekend you are teaching them life skills, work habits and team behaviours that will help them find their first ‘real’ job.

When you create a team, small or large, you are bringing people together and creating all kinds of connections that enrich their lives. In the workplace your employees develop friendships that last a lifetime. They connect with people who become their flatmates, sports team-mates, car pool buddies, or mentors.

Depending on the jobs you can offer and the industry you are in you may be providing your employees with a purpose and an opportunity to make a difference to others or to our world. That’s a pretty cool reason to be an employer.

You are most likely helping the people who work for you to fulfil their dreams – whether that is doing their dream job or perhaps saving money to achieve their dream – a house, overseas travel, or a car.

Employment is not just a transaction where we are trading work for money – it’s a relationship that can enrich your life and your employees’ lives. Be proud to be an employer. Celebrate the good times for your own sake as well as your staff. When times are tough and you have to make the hard calls remember all the good you are doing, every single day.

First Impressions Count

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Organisations generally invest significant amounts of time on the recruitment process to fill vacancies, plus checking the credentials of the preferred candidate and getting them signed up. After investing all that time and money it’s important to get your new employee off to a good start.

It may be timely to review your induction process, or if you don’t really have a process, to consider developing some structure around it. The first impression you make on your new employee in the initial days and weeks will very likely have a lasting impact. Assuming they arrive at the new job excited and enthusiastic, the last thing you want to do is diminish the new energy you just brought to the business.

These days most businesses give priority to a sound health and safety induction, which is absolutely critical. This needs to be done by someone who believes in safety and can communicate your culture and expectations relating to safety. It needs to be documented so you have evidence of completion but try to ensure that it doesn’t come across merely as a compliance exercise to ‘tick the boxes’.

Taking time to think beyond the essentials like health and safety means you can create a well organised and consistent experience for your new hires. They will feel like they have joined a professional, well run organisation and that you care about your employees by taking time to settle them into the new job thoroughly.

It is beneficial to include organisation history, values and culture in your induction programme. This helps the new employee to connect with the organisation and to begin to understand ‘how we do things around here’ and why that is. It can also engender pride in the business (we are the biggest, the first, fastest growing, started from small beginnings, proud to be family owned etc.)

In a small organisation you may only need a one page checklist to remind you of the key information to cover off (key people the new appointee should meet, building security and facilities, payroll paperwork, computer log-in, any equipment or uniform to be issued, house rules, hours and break times and so on).

In larger organisations you will probably have a policy manual for the employee to read through and sign-off. This may be on-line, as so many things are these days. This is great for allowing the employee to go through the information at their own pace and to refer back to material later, and can be presented in a very engaging way with useful links to follow and video content and so forth.

There is often a lot of information to present to new employees so you need to consider ‘information overload’ and what can realistically be absorbed on day one or two. Consider the pace of the induction process and what you can reasonably spread over the first week rather than the first day.

While the paperwork and/or the online process is valuable you also need to be careful not to overlook the human factor. This includes introducing new hires to key people so they know who’s who in person, rather than a list of names and positions in the manual. Each of those introductions also makes the person feel welcome and is opportunity to express how pleased the organisation is to have them on board.

Most organisations will assign another team member as a ‘buddy’ for the first few weeks. This provides someone the new hire can ask what may feel like dumb questions in the early stages, rather than having to bother their manager. Hopefully they can also provide some social support in the first few

days to make sure their new colleagues meets team mates, knows where to park, where to buy lunch, and has some company for lunch if wanted at the start. Again, it’s important to choose the right person for the buddy role, making sure they are approachable, knowledgeable about company processes, have the time to devote to the task and will be a positive influence.

The little things count. Make sure someone is assigned to get the workplace essentials ready for when the new employee arrives so they feel welcome and that you are well organised – workstation, computer, phone, stationery, uniform, PPE, equipment, and so on. It also means they can be productive quickly, rather than waiting for email access and IT log-ins to be set up.

We all know that being thrown in the deep end is not a good way to start a new job. Having invested in finding the right person, it makes sense to put some effort into settling them into the job well to make the appointment a success for both parties.

Protecting your assets in the event of insolvency

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Despite being law in New Zealand for well over a decade, the Personal Property Securities Act 1993 (“PPSA”) remains a mystery to some and misunderstood by many.

The minimal time and costs involved in protecting your interests under the PPSA can make a significant impact when compared to the economic loss you could suffer when the correct procedures have not been followed.

A Brief Background to the PPSA

The PPSA overhauled the pre-existing laws and numerous registers in relation to personal property and introduced a new set of rules relating to security interests in personal property. One of the fundamental changes was to replace the former key concepts of “ownership” and “title” with that of “priority”.

Underpinning the PPSA is the Personal Property Securities Register (“PPSR”). This serves as a public notice board that a party is claiming a security interest in certain assets. This register is online and, being accessible 24/7, it provides real time information about any security registered against an entity.

Is the PPSA applicable to me?

Generally, if a business is supplying goods to customers on credit, the PPSA is going to be applicable and the business should be familiar with how it operates.

Terms of trade should include language that reflects the PPSA. At a minimum, there should be a clause in the terms of sale that grants a security interest in any goods supplied for the purpose of the PPSA.

The granting of a security interest should be viewed as the first step that a creditor takes to protect its interest. Although not compulsory, in order to provide any meaningful protection, the

next step should then be to register that interest on the PPSR as soon as possible. This process is completed online, is quick, and at present costs $16.10. Failure to register your security interest may result in a secured party losing priority to other creditors who have registered.

Internal PPSA Processes

Preparing and Understanding Financing Statements
A secured party registers a financing statement on the PPSR. Ensure that you have correctly identified the legal entity you are dealing with. Mistakes made in this respect when registering on the PPSR may render a financing statement invalid or ineffective.

Goods subject to the security interest are termed ‘collateral’. If a secured party is supplying goods on an ongoing basis, it is generally only necessary to register one financing statement, however, be sure the description of the collateral is broad enough to cover all likely future supplies.

Financing statements are valid for five years after which time (if not renewed) they expire and become invalid. Ensure that that if security is still required, the financing statement is renewed before its expiry to ensure continued protection.

Correctly Executed Documents

Ensure that terms and conditions of sale or credit applications are filled in correctly and signed by your customer. It is not uncommon for businesses to provide us with terms of sale that have not been signed or otherwise agreed to.

Easily Accessible Documents

In the event of insolvency, the receiver or liquidator will request to review these documents to ensure the validity of any security interests. Signed terms and conditions should be stored in a secure and easily accessible location.

Dedicated Generic PPSR Email Address

In the event of liquidation or receivership, legislation imposes strict timeframes for secured creditors to respond and make an election in respect of their security. As email is usually the primary mode of communication, we suggest using a generic PPSR email address that is monitored by more than one person. We often find the email address on the PPSR is for an individual no longer employed or on extended leave. A secured creditor who fails to respond to a liquidator’s notice within the requisite timeframe runs the risk of surrendering their security and becoming an unsecured creditor.

What should you do now?

All businesses, especially those supplying goods on credit, should be aware of the provisions and the effect of the PPSR. Failure to register a security interest could have dramatic consequences as to who benefits from the sale of an asset in an insolvent estate.

BDO can undertake a risk review to ensure adequate coverage in the event a client or customer is placed in receivership or liquidation. Some simple and inexpensive checks could save you thousands of dollars.

DISCLAIMER: this article is intended to provide general information about the Personal Property Securities Act 1993. It is not meant to be construed as specific legal, accounting, or insolvency advice.

The art of letting go

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When the time comes for employees to make a change and resign their employment it generally occurs under a shroud of secrecy. People go to great lengths to ensure their current employer is the last to know.

This isn’t an ideal scenario for any of the parties. The employee has to sneak away to interviews, they can’t use the current organisation as a referee and they angst about their boss finding out. Their employer doesn’t get a chance to address any issues that might be influencing the person’s decision to leave and has minimal time to plan for the change. Other team members get taken by surprise and are unsettled. Customers wonder if something untoward has occurred. The new appointee may not get the opportunity for an effective handover with their predecessor.

In the less common scenario where there is transparency, everyone tends to be a great deal more comfortable and the whole process operates with goodwill. This tends to happen when there is a specific reason for the move which employees feel they can be open about such as personal health or family circumstances (for example their partner transferring to another location). But surely we should aim for this open approach more of the time?

There are some organisations that have strict policies requiring employees to leave immediately on giving notice, particularly if there they are moving to a direct competitor. In this context secrecy is perhaps understandable but still a disadvantage to all parties.

There is no doubt that staff turnover is a disruption to business and managers would generally prefer not to lose current expertise and have to spend time and money recruiting replacements or arranging temporary cover. However, we are also realistic and accept it as part of the normal employee life cycle. We can reduce that level of disruption if we encourage employees to be transparent about the process.

So how do we create an environment that encourages people to deal with leaving more openly? It needs to be something that is reinforced as part of our structured HR processes as well as our informal communication with people.

• I have seen some great Employment agreements and policies that accept resignation as normal and encourage people to discuss possible changes with their Manager at an early stage, so they can plan the best possible transition for everyone. These documents specify the minimum amount of notice but encourage employees to give as much prior warning as they can. The key element is the positive tone.

• Career planning and performance review processes are a good opportunity to talk about future plans with employees, to understand their aspirations and provide guidance. Be clear about development opportunities and progression the company can offer – opportunities not being clear or not being delivered on is a common reason for people leaving their job. If they are valuable talent and you have plans for them make sure they know it. However, we should also acknowledge that experience outside the organisation can be a beneficial part of someone’s career path and discuss how the organisation will accept and support that.

• Provide regular opportunities for real dialogue about how things are going in the current job – any frustrations, concerns, workload issues, and the things people love and want to do more of. There may be simple things you can do to retain the employee.

• In your informal communication and one-to-ones with team members make sure they know you are committed to being a mentor and will support their career, wherever they choose to take it. Share examples of how you have supported others in the past through your networks and as a referee. Let them know they can seek your advice about changing jobs without fear of any awkwardness or disadvantage.

If organisations handle the leaving process well it makes the change easier for everybody, and it also improves the potential for the employee to refer future recruits to you or to perhaps return when the time is right.

Too small for independent advice?

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Many small business owners assume that company boards are for the big boys – yet the benefits of independent directors or advisors apply to all businesses, irrespective of size or structure.

Owner-run businesses can be averse to appointing outside directors or advisors, driven by a mix of ‘she’ll be right’ mentality, a desire to keep everything in ‘the family’ or putting change in the ‘too hard’ basket – which can stall business and growth potential.

This mindset is likely to be holding back many owner-run businesses. Looking at family businesses run in New Zealand, most do not have a functioning board of directors. Many only have a single director, or one or two directors who only meet formally to sign the annual report. If you’re a business owner – have a look at your board minutes – when did your board last meet to plan strategically?

Even where an owner/operator believes they have the skills required to implement these strategies, an external, non-family and non- executive director or advisor will provide access to a broader base of skills and experience – as well as becoming an ambassador for the business across new networks of influence.

There is concern that major structural weaknesses relating to the governance of private and family owned businesses exists in New Zealand. Daily operations tend to take over at the expense of important strategic decisions that set the course for the business’s future. Business owners are commonly guilty of working too hard ‘in the business’ instead of working ‘on the business’. This constant juggling act is a day to day occurrence with a multitude of warring priorities that keep you from these important tasks.

But an essential responsibility of any director is to ensure the sustainable future of the business enterprise. It is not feasible for the directors of a family business to do that without taking time out to consider the big picture; the economic environment, the competition, the threats and the opportunities that are unique to their business. An external advisor can often provide the prompt needed to ensure you allocate the necessary time to focus on the ‘big picture’ aspects of your business.

A good external director or advisor will start thinking and planning in a multitude of areas you had not previously considered. Because they are external to the daily operations of the business, they will be particularly useful in the identification of risks to your business then assisting to devise appropriate strategies to deal with those risks.

External advisors are able to provide support and guidance to business owners and even valuable mentoring to possible successors. The objectivity and professionalism they bring can also enhance family or shareholder harmony.

Most business owners have technical skills and qualifications in their particular area, but often lack formal training or strong skills in all aspects of managing and growing their business. Sometimes the missing skill sets are covered by employees but at a governance level, the right person will bring a further range of skills and experience which may not currently exist in your business. A person from a different background will bring a fresh perspective as well as objectively challenge the status quo.

How do you find the right person to serve on your board of directors? The local Institute of Directors can assist. Look for someone whose personality, values and culture you respect and

believe will be a good fit with you and your business. Speak to your business advisers – accountants and lawyers – they are likely to have people in their network who might be a good fit for your business.

Once you have found the appropriate person they need to be properly briefed and given sufficient material to properly understand your business, your part of the industry and the market environment. They need to know what the problems and challenges are so that these matters can be addressed rather than ignored and allowed to fester further.

A good person will add structure and rigour to directors meetings and will challenge you. This is likely to be a significant change from the way you have previously operated and should result in a significant improvement to the way the business operates and its performance as a whole.