Why cash should NOT be the "KING" in your business

2017-05-15T23:18:00.000+10:00

Last week, I had a catch up with an old friend who owns a small business. We chatted over some cash related issues in his business and mentioned that "cash is truly the king" in every businesses.

While I agree that cash is important, I rejected the notion of "Cash is King" in our business. I suggested that "Cash" should not be the king in your business,

The owner should be the king and cash is merely the subject that we can manipulate as we see fit to ensure our business runs smoothly and in accordance to your business' visions and missions.

Having said that, here are couple of things all business owner should understand about how cash is very relevant to your business:

1. Cash Flow

If you haven't already known, Cash Flow management is very crucial to any businesses. This could be even more relevant to small or medium size businesses as they tend to not have the large cash pool to fund ongoing operational costs.

All business owner should have a good insight of the operational cash flow position and monitor it regularly. Without it, you will not know the actual cash flow position of your business.

It's possible to have a negative cash flow situation despite the large sales and nice profit figure. If this happens, your business may endure the cash shortfall in the short term, but without positive cash flow, it is certain that no business can survive this.

In addition, having a regular monitor of your cash flow will ensure you can put the right strategy as soon as you notice any cash flow issue in your company.

2. Working Capital

Working capital is the capital that you use to run the day-to-day operation of the business. In other words, Cash is the major component of your working capital (Current Asset - Current Liability).

Close monitor of your working capital via budgeting and forecasting is a good habit to have to maintain your working capital in an acceptable level. If your working capital is too low, you may struggle in growing your business. But if it's too high, it could mean that you're not using your cash properly (i.e. reinvesting).

3. Account Payable

Accounts Payable function as a bridge between you and the supplier. You will need to maintain a minimum level of cash to ensure the business can pay supplier within the agreed term.

Maintaining a good relationship with the supplier is crucial for your cash flow as it may enable you to negotiate a longer payment term in the future.

4. Account Receivable

Just like Account Payable, Account Receivable is a bridge between your business and customers. In addition to customer relationship, you need to manage the cash collection from customers as this will help with your cash flow level.

In conclusion, cash management is a crucial part of your day to day business management and you need to manage it well otherwise bad things can catch you by surprise.

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Meal Entertainment - Actual Method FBT analysis

2017-05-04T00:03:00.000+10:00

Have you been wondering if there's an easier and better way to review the entertainment account for FBT purposes than the traditional line by line review?

You have come to the right place where I share a better and more efficient way of doing it without sacrificing quality.

Please note that the below information is from my personal experience and does not constitute as tax advice. You will need to consult your tax advisor if in doubt.

Ledger analysis

For a smaller firms, the ledger analysis is not as bad provided that there is a proper procedure to code transaction to the correct GL account. However for larger firms, it may not be as straight forward due to the large number of transactions throughout the year.

As FBT review is an annual review, it's most likely that company pay less attention to understand what's the underlying issue with it and end up having difficulties in doing proper analysis of the meal entertainment accounts. This will not only cost company more in resources but can also put the company in not favorable position in audit situation.

So, what is the better way of tackling this issue??

Before going to the technical analysis, we need to ensure that the company's "Chart of Account" are properly set up for FBT purposes. this will be the foundation of our analysis platform that enable us to conduct the analysis in a more effective and efficient way.

So let's start off with the step by step process:

1. Review the “Chart of Account” to ensure it has a specific FBT sensitive accounts to capture meal entertainment. For example, setting up 3 separate meal entertainment accounts as below:

a. “Meal Entertainment – subject to FBT”,

b. “Meal Entertainment – Not subject to FBT”

c. “Sustenance”

2. Educate the business to code each expenses to the right account (for more understanding of which are constitutes entertainment for FBT purposes, please refer to this ATO website – they have a good table outlining some examples).

3. Download each ledger and do transactional analysis by using “Keyword search” review in Microsoft Excel (further explanation below).

Using this approach enable you to quickly identify a group of transactions that need reclasses to the correct account (i.e. from “sustenance” to “Meal Entertainment – subject to FBT” account or vice versa).

"Keywords Search" Review

The idea of this process is utilising Microsoft Excel formula to look for certain pre-determined keywords and flag them automatically.

Below is an example of how to analyse the meal entertainment ledger.

1. Download “Meal Entertainment – Subject to FBT” ledger account for the period you want to analyse.

2. Create a “keyword” table (“insert” – “Table”) somewhere in your working file. Populate the table with any keywords that you want to search for in the line items, for example keywords that you considered "sustenance” or exempt from FBT.

Below is screenshot example of “Minor and infrequent exemption” keywords.

3. Create a name for the table for the next step (i.e. NoFBT).

4. Apply the following formula to the ledger – refer to screenshot for example.

=SUMPRODUCT(--ISNUMBER(SEARCH(“table name”,”decription cell”)))>0

As per the example above, the formula used in cell “E2” is

“=SUMPRODUCT(--ISNUMBER(SEARCH(NOFBT,D2)))>0”

This formula will return results as follows:

“True” – if the formula finds one of the keyword specified in table used in the “description” cell.
“False” – if the formula does not find any of the keyword used in the “description “cell

5. Filter "column E” to “True”. These represents the FBT exempt transactions due to “Minor and infrequent” benefit exemption.

6. Analyse to confirm exemption and organise a reclass journal to the relevant account (either “Meal Entertainment - Not subject to FBT” or “Sustenance” account).

There you have it, the above method is one of the many effective review processes I implemented into the business and many appreciated the time savings as a result of this.

Obviously there are plenty of other initiatives that can streamline the FBT review process such as setting up a robust “Spendwizard” category for p-card system, providing the relevant education to the business on available exemption and many others. But those are topic for some other time.

I hope you find this article helpful and feel free to leave a comment or question below.

Fleming Tan

Why cash should NOT be the "KING" in your business

Meal Entertainment - Actual Method FBT analysis