Business challenges of 2016

No matter where your business is in its lifecycle, there is no shortage of challenges that will affect its ability to grow. But there are ways owners can overcome these hurdles if they simply invest enough time and effort into planning for the future.

Here are three challenges 2016 so far that every business should consider if they want to achieve success:

• Cash flow

One of the greatest concerns for many small businesses continues to be cash flow, with the most significant negative influence being the time it takes to receive payments which affects how well small businesses can meet their ongoing expenses. Planning ahead and carefully management of cash flow can help ensure cash flow concerns don’t impact on a business’s long-term viability.

• Digital strategy

The ever-growing digital world continues to reward small businesses with a comprehensive digital strategy. Last year saw the introduction of mobile friendliness as a ranking factor for websites, due to devices like tablets and smartphones becoming the devices of choice for consumers browsing the web. Staying ahead of developments and trends, like making your business’s website is mobile friendly, will ensure your business will stay ahead of the competition.

• Succession planning

Succession planning continues to be an issue for small businesses. Family businesses, in particular, usually struggle to plan for the future, particularly in relation to preparing for the next generation. In 2016, small businesses need to spend time planning for the future in areas like succession and business continuity.

No tax penalty when restructuring your business

Federal Parliament recently passed legislation that will allow small businesses to change the legal structure of their enterprise without incurring a capital gains tax (CGT) liability. Instead, the CGT liability can be deferred until eventual disposal.

The legislation, ‘Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016′, will apply from July 2016. It provides an optional rollover for small business owners who change the legal structure of their business when transferring assets from one entity to another.

The effect of the rollover is the tax cost of the transferred asset/s is rolled over from the transferor to the transferee, providing greater flexibility for the small business.

The rollover will apply to any gains and losses which occur from the transfer of active assets that are:

• CGT assets

• Depreciating assets

• Trading stock

• Revenue assets

Businesses that qualify for the rollover are ongoing businesses who transfer asset(s) as part of a genuine restructure.

Whether a restructure is “genuine” is determined by the facts and circumstances of the restructure, such as:

• Whether a bona fide commercial arrangement is undertaken for the purpose of enhancing business efficiency

• Whether the transferred assets will continue to be used in the business

• Whether or not it is a preliminary step to facilitate the economic realisation of assets

To be eligible for the rollover, each party to the transfer must be either:

• a “small business entity” with $2 million or more in turnover for the income year during which the transfer occurred;

• an entity that has an “affiliate” that is a small business entity for that income year;

• “connected” with an entity that is a small business entity for that income year; or

• a partner in a partnership that is a small business entity for that income year.

Since the new rules are rather technical in nature, obtaining professional advice may be in a small business’s best interest to ensure they can take advantage of the restructure rollover.

Cutting down to the essentials

Self-managed super funds (SMSFs) are an attractive option for those who want more control over their retirement savings. However, trustees who have run a fund for as long as SMSFs have been in existence (around 20 years) are likely to have accumulated a lot of paperwork, especially if they engaged in various super strategies throughout the years.

Since SMSFs have a statutory obligation to retain certain documents for certain lengths of time, it can be difficult to know what records trustees can afford to cull and continue to satisfy super rules. Another consideration is what information is necessary to provide the ATO so it can calculate any tax due when trustees die and the balance remaining in the fund is to be paid to beneficiaries.

For instance, when an SMSF trustee commences a pension, they are required to prepare trustee minutes which must be kept for ten years. The minutes must be signed and retained as they confirm the terms of the pension being paid to the member.

Records of the major investment decisions and any records that relate to the appointment of fund trustees also need to be kept for ten years. Appointing an enduring power of attorney is another long-term record that must be kept.

A good option for those wanting to cut back on storage requirements is to store documents electronically, as the ATO will accept electronic copies of many super documents. All trustees need to do is scan the papers and save them to a storage facility, like a USB thumb drive.

However, trustees should always keep a paper version for one key document; the fund’s trust deed. Trust deeds formally document the existence of a superannuation arrangement between fund trustees and members, as it outlines the rules particular to a super arrangement. Not having a properly executed copy of a trust deed may create some confusion over what rules apply to the super fund.

Super funds with a pension in place should retain a signed record of the commencement documentation. Other records of investments that are older than ten years old could be disposed of unless they are required to confirm the cost base of assets for capital gains purposes.

What happens when a SMSF trustee enters bankruptcy

The SMSF sector in Australia has experienced enormous growth over the past decade, and many of the funds set up are made up of two members, usually a husband and wife or de facto couple.

While having more control over your superannuation savings has become a popular option amongst couples, members need to be aware of the many rules that govern the establishment and continuation of SMSFs, such as what to do when one or both members become bankrupt.

The bankruptcy of a member can have significant ramifications for the other member of the SMSF, as well as the bankrupt.

When a member of an SMSF enters bankruptcy, the ATO provides a six-month ‘grace period’ before the SMSF is ceased, to allow a restructure of the SMSF so that it either makes the essential conditions required or can be rolled over into an industry fund.

During the six-month grace period, the ATO requires:

• the bankrupt to remove themselves as trustee as soon as possible

• the bankrupt to inform the ATO in writing using Form NAT 3036

• to be notified within 28 days if there is a change in trustee

If one member of an SMSF enters bankruptcy, they must resign as trustee as soon as possible. The other member will need to remove the bankrupt’s property from the SMSF before the grace period is over, as well as:

• sell any real estate and halve the proceeds

• transfer the bankrupt’s share of the liquid assets to a managed fund

• consider whether they want to remain as a single member SMSF, or roll over their entitlements to a managed fund.

If both members enter bankruptcy, they must sell all assets for the market value available at the time, and then transfer all of the liquid assets to a managed fund.

Defining your target market

Knowing your target market can help to differentiate your business from competition, tailor your marketing efforts to better meet customer needs and potentially boost sales.

A broad target market that tries to appeal to “everybody” can easily get lost amongst the crowd.

Demographics alone, such as age, gender, income and occupation, do not provide enough insight into the attributes of your target customer.

When constructing a target market profile, narrow down your typical customer with consideration to geographic, psychographic, and behavioural characteristics to develop a clear and specific vision of your target market.

Geographics
Segmenting your target customer through geographics involves considering what continent, country, city or town they may live in, the size of the area, the climate and if they live in specific neighborhoods.

Psychographics
Categorising your target market through psychographics, uses personality and interests to define your target customer. Psychographics analyses variables such as lifestyle, attitude, values, personality traits, social class, activities and opinions.

Behavioural
Behavioural segmentation involves your target customer’s behaviour towards your products or services. It can include the benefits sought, how often they will use your product or service, their loyalty to your brand, their readiness to buy your products/services, or if your products/services are used for a specific occasion such as a holiday or an event.

Why your cash flow is out of control

Cash flow is one of the biggest obstacles facing small businesses trying to secure funds for their growth. On top of ongoing expenses and bills, poor cash flow strategies can negatively impact a business’s customers, staff and clients. Here are some of the potential reasons why your business’s cash flow may be out of control, and how you can change things up to make your business thrive once more:

You don’t know the difference between cash and profit
Profit is the difference between a business’s income and expenses. Cash is how much money the business has in the bank. Even if a company is considered profitable, as its expenses accumulate (paying off loans, purchasing equipment etc.) the business can still go broke if customers fail to pay on time.

To avoid problems like timing issues, businesses should work to build up their working capital (short term cash). Using an income and expenditure budget (which tracks how profitable a business is) as well as a cash flow budget (which represents cash inflow and outflow each month) can help build up working capital.

You don’t monitor your cash flow budget
Businesses need to learn how to create and use a cash flow budget, so they can monitor their financial information on a monthly basis and analyse the information so any necessary changes can be made immediately.

You’re not managing your debtors
If your customers aren’t paying on time, here are a few methods you can put in place:

• Provide specific quotes that include the due date for payments

• Organise to receive deposits or payments up front

• Don’t wait to send an invoice – send your bill as soon as the work or project is completed

• Format your invoices correctly with the specific due date for payment (rather than ‘in 14 days’)

• Make it easy to be paid by offering BPAY, EFTPOS, credit card and website facilities

You misunderstand short term and long term cash requirements
Short term cash, also known as working capital, is money needed to cover the period between when working for a customer commences, and when the customer pays for the work. Long term cash is money that every business needs to buy or set up a business, fund medium to long term growth and asset/equipment purchases.

Bottom line basics

Talking about money makes many of us uncomfortable. Sometimes we’re even conflicted about wanting to make money.

Money, after all, is one of the few things left in modern life we don’t discuss openly with even our closest friends or family members. In a business context, this discomfort with money often extends to a reluctance to deal with budgets, bookkeeping, and accounting. Most of us are intimidated by numbers. More often, we just find it unpleasant to think about bills and expenses, cash flow and profit margins, and most especially, debt.

Well, if you’re in business, you’re going to have to discuss money. And you’re going to have to be able to do so without it seeming like a report card of your character. If a customer’s bill is overdue, it’s not impolite to tell them. When meeting with a prospective client, you’re not being rude when you let them know how much you charge. When hiring a consultant, it’s reasonable to ask not only their hourly fee, but how much the whole project will cost. And to set limits.

The bottom line of business, after all, is the bottom line. Of course, some of us just feel lost when we hear people using financial terms; it seems like a foreign language. So, to make talking about money – and finances and accounting – easier, here’s a handy list of some commonly-used terms.

“Red ink” or “in the red”
On accounting ledgers, negative numbers used to be written in red ink. So the expressions “red ink” or “in the red” refer to showing a loss.

“In the black”
Positive numbers, on the other hand, were written in black ink. So if your accounts finish “in the black,” you’ve come out with a profit.

The “bottom line”
At the top of your financial statements, you list your income. You then deduct your expenses. The number you’re left with on the last line of your profit-and-loss statement is how much money you’ve made — or lost. That’s your company’s “bottom line.”

Overhead, or fixed expenses, or your “nut”
These terms refer to each month’s expenses, even if you don’t make a sale. Fixed expenses include rent, utilities, insurance, and administrative salaries. Your “nut” is the total amount of these fixed expenses.

Variable expenses
Costs that change depending on how many sales you make. In other words, if you run a sporting goods store, your rent is fixed every month, but your marketing expenses change depending on how many advertisements you decide to run.

Cost of goods sold (COGS)
This refers to what it costs you to purchase the inventory you sell or to purchase the raw materials to manufacture your products.

Revenue
Total amount of money received from sales.

Income
The amount of money received from any source. You can, for example, have money coming in to your business from loans or investments.

Profit
Money you have left after deducting your expenses. There’s gross profit or net profit.

Gross Profit
The amount of money you receive after deducting the cost of goods sold and sales commissions but before deducting general and administrative expenses.

Net Profit
The amount of money you receive after deducting the cost of goods sold, sales costs, and general and administrative expenses.

Net Loss
The amount of money you’re in the red if, after deducting all expenses from all revenue, you’ve lost money instead of having made money.

Contributing a lump sum into super

Australians can make two types of contributions each year; concessional contributions, which are taxed at 15 per cent, and non-concessional contributions, which are not taxed.

There is a limit of $35,000 for concessional contributions and $180,000 for non-concessional contributions. However, individuals do have the option of using the three-year bring forward rule that allows taxpayers to contribute a lump sum of $540,000 as a non-concessional contribution if they are under the age of 65.

Using the three-year bring forward rule means individuals cannot make extra non-concessional contributions over the next two years.

Individuals that have accumulated a large sum of money from savings, an inheritance or sale of an asset, and want to contribute the amount to their super, may be best suited to making a non-concessional contribution.

Making a non-concessional contribution means you will not have to pay tax and will be able to transfer the whole amount as a lump sum contribution into an SMSF.

However, for those who are expecting more funds in the future, it may be better to put $180,000 into the fund on year, and another $180,000 in the following year.

For those who have sold an asset, you may have a capital gain and have to pay capital gains tax. Maximising your concessional contributions ($35,000 a year) can lower your taxable income for the current financial year and also reduce your capital gains tax liability.

Those with an SMSF who are self-employed can contribute a lump sum of $70,000 to their fund at the end of the financial year. They can also allocate $35,000 this financial year and $35,000 next financial year to reduce their capital gains liability.

Renting out a room can incur CGT

A large number of Australians who rent out a room in their home, whether it be via Airbnb or another avenue, are unaware that the practice can incur capital gains tax (CGT).

Many assume CGT is not on the cards because profit made from the family home (or ‘primary residence’) is usually tax-free. However, those who earn an income from a portion of the family home may inadvertently create a capital gain for the ATO to grab.

Even though CGT is affected by events throughout a vendor’s ownership period, it is often calculated many years down the track, and unfortunately, many may not remember or be able to locate records for a relatively short time in which they were renting part of the house out.

Some people are aware that renting out a portion of their home may trigger a capital gain event, but still fail to calculate the percentage of the property the calculated gain should be attributed to.

Vendors need to work out the portion of the property that was used for ‘investment’ or ‘income producing’ purposes based on the floor area rented out as a percentage of the total property. This needs to then be apportioned to the period that space was made available to rent throughout the duration of ownership.

For example, a couple who bought their property for $1.5 million back in 2006, sell it for $3 million in 2016. During their ownership, they rented out a bedroom and bathroom for four years and worked out that the rented space is equivalent to 15 per cent of the property.

15 per cent of their capital gain ($1.5 million) is subject to CGT, which comes to $225,000. Their next step is to calculate the proportion of time the part of the property was rented out. Since the area of the property was rented out during four of the ten years of ownership, they need to work out four-tenths of $225,000, which is $90,000.

Since they owned the property for more than a year, the CGT discount of 50 per cent applies, making the assessable net gain $45,000.

How much the actual tax works out to be depends on whose name the property is taxed in. For CGT purposes, and if the property is positively geared from an income tax perspective, it is better to put the property in the lower income earner’s name.

If the property was negatively geared, the couple would need to consider the tax benefit they would sacrifice. Negatively geared properties result in a larger tax deduction if claimed in a higher income earner’s name.

Boss or leader?

Entrepreneurs like to be in charge. You start your business so you can call the shots – not someone else. But if you want to grow your business, you’re going to have to learn to give responsibility to others. The question is – how do you become a leader, not just a manager, of others?

The reality is that it takes time and attention to learn how to be a good boss. We may be good at what we do, but being a boss isn’t a natural skill. While it is hard enough to get used to the idea of having others make decisions in your business, the problem is exacerbated because many entrepreneurs never had positive role models of how to be a good manager.

Moreover, the old-fashioned concept of being a boss meant issuing orders and having others follow. Sort of a militaristic hierarchy. For some, this idea of “My way or the highway” management is still appealing. Many entrepreneurs hire their first employees with the idea that they’ll do a lot of the dirty work the entrepreneur no longer has time for. They’ll be extra sets of hands – not extra brains.  

But if you want your business to grow, you need extra brains, no matter how smart you are. Those who are on the front lines of carrying out a task – whether it be making a product, making a sale, or shipping the boxes – are usually in the best position to suggest improvements. So we need employees who can think. This requires leadership, not just management.

While this may seem self-evident, hire well. Just as it is easier to be a good parent if you have good kids, it’s much easier to be a good boss if you have good employees. You can’t choose your kids, but you can choose your employees.

When we need help, we’re often tempted to hire anyone we can get. But if you want to be confident giving someone authority, you need to hire someone you consider capable and trustworthy. Of course, this means paying a competitive salary with competitive benefits. You can’t hire good employees on the cheap.

Never give someone responsibility without also giving them authority. If you’re going to give someone a job, allow them to do it; don’t make them come back to you for every decision. This means you have to learn to be comfortable with people making some decisions that are different from those you’d make. Some decisions are just different – not wrong.  

Sometimes, however, employees will indeed make what turns out to be a wrong decision. How do good bosses handle that? They spend time with the employee learning why a decision was wrong and how to avoid it the next time rather than rehashing the history and looking for blame.  

You also have to share information. Many bosses dole out information as infrequently as bonuses. As a result, employees often don’t have enough data to do their jobs well. You can’t just hand off tasks to others, you’ve got to sit down and spend enough time so they know all the relevant details: the project’s purpose, customer pressures, deadlines, budgets. Let them know their limits: how much can they spend without coming back to you?  Be clear on the importance and priority of each task.  

Most importantly, let people know they’re being given responsibility because you know they can handle it, not just because they’re a warm body. Most people try to live up to the trust they’re shown.

Finally, recognise that while you want to be a good boss, you’re still the boss. You’re the one who sets the overall vision, direction, and standards of your company. Organisations need leaders, and employees respect fair and thoughtful leaders, especially those who also respect them.