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Monday 20 May 2013

Budgets and Cashflows - explaining the difference

Budgets and Cashflows - explaining the difference
Information supplied by Calxa  

CalxaThe difference between a budget and a cash flow forecast can sometimes be confusing in the beginning. They can seem to show similar information yet both are very different and have different uses. Both are essential for the accurate financial management of your organisation.

A budget details what you plan to do with your finances for the relevant period of time.

This is usually over 12 months, and focuses on profit. In addition:
  • Accruals and other non-cash adjustments such as depreciation are often included.
  • A budget also reflects the planned objectives of what the organisation is trying to achieve and is linked to the strategic and business plans of the organisation.
  • A budget also provides a benchmark to then monitor performance. After each month you can compare what actually occurred against what was budgeted or planned to occur.
  • Usually the full year budget is broken down into months
A budget is NOT used to monitor the amount of cash in the bank accounts. That is where the cash flow forecast comes in.

A cash flow forecast details when the actual receipts and payments are likely to occur.
  • A cash flow forecast reflects when the actual income and expenditure is transacted from the actual bank account.
  • It is not based on accrual accounting and adjustments such as depreciation are excluded.
  • Large capital purchases not reflected in a profit and loss budget will be included in a cash flow forecast.
  • The full year cash flow forecast Is mostly broken down into a month by month basis. But in some instances it can be further broken down into fortnightly or even week by week depending on the circumstances
The main difference between a budget and a cash flow forecast is based on:
  1. The type of the transaction and;
  2. The timing when receipts and payments will occur
As a simple example: a budget will record the income when you have sent out the invoice whereas your cash flow will record it when you actually receive the amount in your bank account.

One point worth mentioning is not to assume that debtors will pay the following month. Often it may be later which is why it is important to know your Average Debtor Days which may show that payment occurs typically 64 days after sending out the invoice.

This also highlights the value of knowing some important Key Performance Indicators (KPIs) such as:
  • Debtor days
  • Creditor days
  • Inventory turnover days
  • Working capital ratio
Understand the difference between a budget and a cashflow forecast and you'll be well on the way to managing your finances.

This information can be found on the Calxa website, click here

How to book car expenses where different FBT methods apply

How to book car expenses where different FBT methods apply
How to book expenses for the Car – different types of claims

If your business is conducted as a sole trader/individual:
Then car expenses can be claimed for income tax as:
  1. cents per KM (less than 5000km)
  2. 12% of cost of vehicle (more than 5000kms)
  3. 1/3 of actual expenses (more than 5000kms)
  4. Actual business % (based on 12 consecutive weeks of logbook)
What does this mean for keeping the books and records?

Arguably all car expenses should still be caught as business expenses and coded into the expenses and then it is up to the Tax Agent to get the right treatment for the tax return.

However it has an impact for GST! Technically and correctly all GST can be claimed back (if your client is GST registered etc etc) at the time of the expense BUT then there must be a GST adjustment (ie pay some GST back to the ATO) based on the private use of the vehicle. The Tax Agent advises how much was claimed as a tax deductible business expense, work out the GST that would apply to that amount and then reduce the next BAS (claim for GST back)by the difference between what was claimed and what should have been claimed for the entire tax year.

If the individual only claims c/km then NO GST should ever be claimed on the car expenses.

If your business is conducted as an entity and the car is provided for part private use then FBT probably should apply. FBT makes all expenses for the car deductible and therefore a full GST claim (all other things being equal).

How do we book this – just claim all the GST and allocate all expense to the expense.

What records are required for FBT?
Help out your business owner and the accountant by ensuring:
  1. Odometer readings are taken on all company owned cars.
  2. Log books are kept for a consecutive 12 week period each 5 years for a car or when the driver changes or if a new car for the same driver then a new log book
  3. Dissect the entertainment expenses according to the classes of entertainment as described in the ICB guide to FBT.
  4. Seek further guidance from the accountant for any other information they may require.
Note: FBT is fairly ugly and fairly complicated. A Bookkeeper and BAS Agent cannot advise on the imposition of FBT on a business however you can still book expenses and collate information for the Tax Agent to properly advise on FBT matters.

Bank Feeds - How to check if they are reliable

Bank Feeds - How to check if they are reliable  
Bank feeds - revisit the approach to relying on feeds and how BEST Practice Bookkeeping makes it simple

It has been reported of late that Bank feed downloads are missing transactions causing a nightmare for reconciliations. This is not new, I recall experiencing the same problem when downloading bank transactions history reports. So what do we do?
It appears that all of the software incorporating Bank Feeds are UNABLE to do an independent check that; the calculated balance is in fact the balance of the bank account. Therefore the reconciliation process from totally within the programs are only checking the balance against itself - not a true reconciliation.
It’s important to remember ‘Bank Feeds’ is just a tool therefore the integrity process ‘the old school approach’ of bank reconciliation to the bank statement should remain even if the cloud software has provided a bank balance to reconcile to.

An article in BoxFreeIt outlines this issue well. A bookkeeper experienced missing transaction and has stated “The only way I would have found it is because I’m still old school about bank recs. I don’t believe in just ticking the green boxes”, “There still needs to be some verification that what you’re doing is correct.”

Best Practice Approach
Bank FeedsMATCH all transactions in Bank Feeds before attempting Reconciliation
REMEMBER: if you delete a transaction you MUST return to Bank Feeds to match again
RECONCILE to bank balance provided by software or online bank balance
CHECK reconciled bank balance with original bank statement provided by bank
IF difference do a manual check against bank statement
RUN Bank Reconciliation Summary to help understand the difference

In summary, a bookkeeper’s role is to be the ‘integrity police’ and understand all financials figures. Therefore always treat software as a tool for efficiency and run checks to prove what the software reports. These checks include:
  1. Check Software Bank Balances to original or online bank statements
  2. Check money left in cash drawer or petty cash
  3. Run Bank reports to clarify the balances
Don’t just trust the downloaded bank balance provided by the software

Superannuation Guarantee Rate

Superannuation Guarantee Rate

There has been a lot of advertising on television of the increase in the Superannuation Guarantee Rate increasing from 9% to 12%.  This has led to much confusion for employees; from the 1st July 2013 the rate is increasing to 9.25%.  It is not until the 2019/20 financial year the rate becomes 12%.  

To what amounts is the 9.25% applied to?

9% applies to all pay physically paid before 30th June 2013.

9.25% applies to all pays physically paid after 30th June. 

The new 9.25% rate is applied to salary (OTE) amounts paid after 30th June 2013, irrespective of when those amounts accrued.

Employers have an obligation under the Superannuation Guarantee (Administration) Act 1992 to pay the superannuation guarantee charge (SGC).  The SGC is calculated as 9 %( to 30June 2013) or 9.25% (from 1 July 2013) of the total salary & wages (OTE) paid by the employer to the employee.

Ordinary Times Earnings (OTE) is earnings in respect of ordinary hours of work.

IMPORTANT:  Check your payroll programs and make sure they are changed to include the increase of superannuation guarantee (9.25%) before any payments are made in July.  This might put extra pressure to finalise the year’s wages and close off/rollover the software earlier than you normally do.  Start reviewing your systems now.  Check you have all the correct details for your employees such as; address, DOB, FBT information, RESC information.

Impact on June & July 2013 Payroll

1.      Consider paying the super before 30 June to get the tax deduction.

2.      Check whether salary packages need to be re-engineered

3.      In order to get a tax deduction for the 30 June 2013 year the business must have PAID the superannuation out of their bank account into the superfund or at least the clearing house.

4.      Check salary packages.  Many employees are engaged on a salary package with a total amount which includes the SGC.

5.      Review your employment agreements, industrial agreements, minimum wages and awards for direction whether the super increase can be adjusted within the current package or must be added to the package.

6.      Start reviewing your End of Year payroll adjustments NOW, talk to us and we will help you through the process.