In the good books: A look at budgets, red flags, and taxes
We had a few really random questions for Angus this week that didn’t fit into some of the other categories, but he did not fail do deliver. We learn something new every time we talk to him.
If you’d like to chat to Angus, go check out the new website we made him. We think it’s pretty fresh. Alternatively, you can email him at email@example.com, or connect with him on LinkedIn.
1. What purpose does a budget serve? Why do I need one?
A budget breaks down all the goals from your business plan into bite sized chunks. In essence, it makes that big revenue or profit goal a little less daunting. It also helps keep you on track.
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Budgets are usually broken down into monthly figures.
We go a little further and suggest that people break down some key metrics into weekly or even daily figures. It’s really helpful to know how much you need to sell each day to reach your monthly and yearly revenue target. If you miss your daily target, you can make up for it tomorrow.
It helps keep what’s important front of mind.
2. What tools are available to help me make a budget?
If you use Xero, there’s a really helpful Budget Manager feature available. This feature of Xero is really underutilised but we think everyone can benefit from using it.
Feeding data into the Budget Manager is really easy. From there you can run Budget Variance reports which so you how you are tracking by comparing real time data from Xero against your budget.
You can quickly see if you are over or under on expenses and how revenue is tracking against plan.
3. In what areas do startups usually under or over-estimate in their budget?
As a rule of thumb, we suggest that our clients under-estimate revenue and over-estimate expenses.
In reality, revenue is almost always over-estimated. This makes life tough from day one.
The conventional wisdom is to set a stretch goal with revenue. The trouble is that if you don’t hit the stretch goal, there really isn’t a plan B. We don’t get that. So we ask people to low ball their revenue figures, at least in the first couple of years. That way they can set their expenses accordingly without blowing the bank account.
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There are a few categories that are commonly underestimated.
- Advertising and marketing is the most common area. Start-ups need the oxygen that marketing provides. Google adwords are a great source of new business but the cost can quickly escalate. It’s really important to put an upper limit on expenditure so that you don’t blow the budget.
- Another area is rent. People often sign lease agreements thinking that the monthly lease charge is all inclusive. In fact, the lease normally covers only the rent of the premises.
There are a whole host of other operating expenses that the landlord can pass onto the tenant. These include body corporate fees, electricity for common areas, cleaning, water and council rates. These quickly add up, particularly in the larger cities. We suggest that tenants negotiate hard and see if some or all of these costs can be included in the month rent.
- Salaries are another area that can quickly blow out, particularly if you are paying overtime. It pays to keep that in mind when budgeting.
4. What red flags should be wary of when I look at my balance sheet?
The old adage that most start-ups fail because they are under-capitalised is absolutely true.
By far the most important metric for a start-up is liquidity. That means that your business is solvent and it can meet its liabilities as they fall due. It’s also a legal responsibility for company directors to ensure they are trading whilst solvent.
Liquidity is easily calculated by dividing your total current assets by your total current liabilities. A figure over 1 means that you are liquid; under 1 means that you might be running into difficulties paying your short term liabilities as they fall due.
It’s best practice to check this monthly as an early warning system.
Debt is another area to monitor. We think a little debt is ok so long as you are using it to buy assets. It’s not such a good idea to borrow to meet the operating expenses of the business.
5. What kind of reports will an investor want to see?
The reports will vary but almost certainly an investor will want to see the most recent financial statements. If a company has been trading for a while, the potential investor will probably ask for financial statements from the last three years.
They will be looking primarily at trends in the company’s books. Is revenue growing? Are costs under control? Is the company solvent? Is the company’s debt under control?
Depending on the size of the investment, a potential investor may undertake a full “due diligence” process which may look at every area of the business from HR to IT and ever place in between.
Investors are looking to “pressure test” a business so be prepared for them to look to find fault.
6. What taxes are New Zealand businesses required to pay?
Businesses have to pay income tax on their profits at 28%.
Once a business is profitable, businesses have to start paying both provisional and terminal income tax. Provisional tax happens in the first year after a business records a profit and is a bit like paying your income tax as you go. This can have a big impact on cashflow so you should speak to your accountant about preparing for it.
If your business is likely to turn over $60,000 in revenue, you must register for GST and file a return at least every six months. You must also include your GST number on any invoices that you send clients.
If you are offering fringe benefits to your employees (and that includes yourself if you are an employee), you will need to file a Fringe Benefit Tax return.
7. What can I do on a day-to-day basis to prepare for tax day?
- Open a business bank account. This sounds really obvious but it’s surprising how many people start a business with transactions coming in and out of their personal account. Having a business bank account makes it so much easier to track business related expenditure and revenue.
- Use accounting software. We recommend Xero but any accounting software is almost always better than none.
- We advise clients to keep all their receipts. You only need to keep receipts over $50 for GST purposes but given how easy it is to scan and upload receipts into Xero, we suggest that you do it for every receipt. That way you can always prove every transaction for income tax purposes.
- Think about where you spend your money. There are a lot of really cool apps that are based overseas but you may not be able to claim any GST. The same is true of Google and LinkedIn advertising.
Any asset over $500 in value must be recorded as an asset in the balance sheet and depreciated. If an asset is under $500 in value, you can expense the full amount. This is really important so if you are buying an expensive asset, talk to your accountant first. At the very least, make sure you retain the receipt for tax time.
8. In what situations should I seek help from a professional with my taxes?
You would expect us to say this but we really think that every business should get an accountant to prepare both their GST and income tax returns for them.
At the absolute minimum, you should engage an accountant to do your end of year financial statements and tax returns for you. If you do it yourself, you are very likely to overstate your profit and pay too much tax.
Tax law is very complex. The Income Tax and the GST Acts run to hundreds of pages. In general, it’s always best to outsource this to an expert to avoid inadvertently overlooking any tax liabilities. You can’t put a price on peace of mind.
9. Are there any tax schemes for new businesses or startups in New Zealand?
Not as this time. Every business it treated equally for tax purposes.
Thanks Angus – you never disappoint. If you found this useful, please consider sharing it within your networks. If you’d like to chat to Angus, you can email him at firstname.lastname@example.org, or connect with him on LinkedIn.
Tags: accounting, Angus Ogilvie, Budget, Generate Accounting, Tax