All around Australia, business owners and leadership teams are meeting with their accountants to plan for 30 June. But beyond tax planning and compliance, could those conversations add more value to your business?
Dean Love, Executive Director of accounting and advisory firm Pitcher Partners, says his clients often want to know what’s next, rather than what has happened in the past.
“There’s always a role for historic data, you can certainly learn from it. But you can't change it,” he explains. “We also make it a priority to talk with our clients about the decisions they’re making for the year ahead – and three years beyond that too.”
He shares five ways to make sure you’re proactively planning beyond your tax return.
1. There’s more to end of year reporting than the P&L
Love says companies should pay more attention to their cash flow statements.
“This cuts through the accounting ‘smoke and mirrors’, because cash determines the health of your business. Whether you’re accounting on an accrual or cash basis, you need to know where that cash has gone – and how that impacts your ability to fund your business plans or dividends.”
Looking at a cash flow statement for the past 12 months can help you see patterns in spending, and also forecast the year ahead.
Love also recommends an aged debtors report, to check whether working capital is tied up in receivables.
“We suggest clients push their ’90 day plus’ debtors to collect, as once you get beyond 90 days it can be quite risky and difficult. Often they’re still doing business with those clients – not realising they’re effectively financing that client’s business. If you have an overdraft, those debtors are costing you in real terms.”
For businesses with stock, an inventory aging report can help identify any obsolete or slow-moving products, which should be cleared pre-June 30 through promotions to make room for new inventory.
2. Benchmark your key performance metrics
What performance measures really matter to your business – and how do you compare with competitors and the industry average? It’s an important question to ask at this time of year.
“Key performance indicators are not ‘one size fits all’, but most businesses – whether product or service – should be looking at their gross profit margin,” suggests Love. “If it’s positive, that’s a good sign you are at least covering your overheads. If it is dropping off, it can be a warning sign and you need to look for the cause.”
Then you can make an informed decision to correct it – before it starts to impact your cash flow.
Love says it’s very easy to fall into the trap of working harder to generate sales, only to find you’re focusing your energy on less profitable service lines. The additional investment in time or money may not prove worthwhile – or sustainable.
He also recommends looking at working capital ratio to check the liquidity of your business. “This is a forward-looking measure of how easily you can meet your debts over the next 12 months. If it’s high, that may also be a red flag you’re holding too much in inventory, or receivables.”
3. Take time out of the business before June 30
Even though it may feel even harder to take time out of the day-to-day operations at this time of year, it’s essential to re-set your strategy before you discuss options with your accountant or financial adviser.
“If you only do one thing before June 30, do this,” says Love. “It’s an opportunity to get a helicopter view of your business, so you can focus on where you want it to go. If you’re too close to the detail, you’ll miss the bigger picture.”
He suggests taking an afternoon with your leadership team to set your strategic plan and direction for the next financial year – and then discussing financial models with your accountant to understand the potential impact.
4. The forward-thinking 3-way model
Love says developing a three-way financial model is a key part of their end of financial year discussions.
“This is how we tease out the forward thinking, and help clients plan for the year ahead. We can look at a certain scenario, and model the impact on the profit and loss, balance sheet and cash flow.”
As an example, one of Love’s clients was able to assess and plan for the impact of proposed development works on their trading activity. “It gave them a clear understanding of the consequences, and ensured everyone was on board.”
Sometimes this model highlights assumptions that may need to be challenged, or lets you avoid a costly mistake – because the numbers simply don't stack up.
“If you’ve acquired a business, you can also use this to see what the next 12 months look like – and then hold management accountable to achieving their goals. It becomes a measuring stick for performance, and makes sure the business plan plays out from a financial perspective.”
5. Set up a sound governance structure
Love believes businesses of any size can benefit from a structured advisory model – and this is a good time of year to establish that framework.
“If you’re still in a start-up phase, you may just need access to a business mentor to provide guidance on an as-needs basis. But as you grow, it’s a good idea to appoint a panel of advisers, who can add value in areas beyond your core business expertise – such as HR, marketing or legal advice.”
He says Pitcher Partners now participates on client advisory boards with an adviser or non-director status. “We are typically governed by a board charter, and represent the owners’ interests. We can help them form and monitor strategic plans, and support management in achieving those plans.”
This structure sets any business up for a more formal Board of Directors once they scale even further.
With all this in place, your business will be set for a more proactive approach to the financial year ahead. And while it’s obviously important to ensure reports are in place for the tax office, and make sure you’re being as tax effective as possible, it’s also worth taking the time to get more strategic value from your data.
This article origionally featured on the Macquarie Group.