EOY: Financials and Accountant

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1 Institute of Certified Bookkeepers Making you Count EOY: Financials and Accountant ICB Technical Webinar Series 28 th July 2015 Institute of Certified Bookkeepers Making you Count Your presenters Deborah Thompson Chris McComb 1

2 How the presentation works IF YOU CANNOT HEAR ME!! CHECK YOUR PC SOUND Sound will be through your computer s speakers You should be able to hear me now????? If NOT please check your sound is on During the presentation we will mute This avoids background noise Asking questions via chat facility on your Control Panel 2

3 Agenda Prepare Client Meeting Finalising Last Year and This Year Business Analysis v v v Review the Year that WAS Using ratios to review business Outcomes Client Meeting Reporting to Accountant Finalise Last Year 3

4 Finalise Last Year Check that previous year is finalised Has Accountants Journal been completed or Create Journal to match accountants reports Data file rolled over if applicable or Make sure data is protected from change Accountant s Adjusting Journal Date Account Name Type Debit Credit Acc Data Is Accountant s Journal completed in software? 30/6/XX Depreciation-office equipment Expenses $ Office Equipment Accum Depn Assets $ Depn Motor Vehicle Expenses $ M/V Accum Depn Assets $ Borrowing Expenses Expenses $ Borrowing Costs Assets $ Legal Fees Expenses $ Legal Fees Assets $ Ref: EOY reallocation of accounts Enter journals received from Accountant to match BS and P/L reports 4

5 Calculating Adjustments Match P/L and Balance Sheet to accountants records Calculating Adjustments Match P/L and Balance Sheet to accountants records 5

6 Calculating Adjustments Journal created from previous information Type Account Name Debit Credit Assets Less MV accum depn $6, Goodwill $25, Less accum amorgsagon $5, Expense DepreciaGon Expense $6, AmorGsaGon Expense $5, Equity Owners Equity $25, ICB Trial Balance Template Excel Template Provides adjustment journal after adding your trial balance & Accountant s trial balance Modify accounts or add lines if required 6

7 Accountant s Figures Differ Main Accounts Differ what to do o Receivables Add separate Account Accountant Receivables Difference o o Payables - Add separate Account Accountant Payables Difference GST - Add separate Account Accountant GST Difference o Seek reasoning of difference where possible Review and Finalise This Year 7

8 Finalise This Year Review the 12 months Create Prepayment and Accrual Journals if required Create Payroll Entitlement Journals if required Protect data from accidental change Detecting Anomalies/Errors Review a General Ledger Detail Report & look for errors or anomalies Regular payments are there 12 monthly payments E.g. electricity, rent or lease payments General Mistakes regular payments could be in various accounts, find and consolidate E.g. bank charges & bank merchant fees Look for anomalies in transactions E.g. debit transactions in an income account (could be correct but worth checking) 8

9 DetecGng Anomalies/Errors Review a General Ledger Detail Report & look for errors or anomalies Look for unusually large transactions E.g. Repairs & Maintenance which actually could be Assets purchased Payee names can give you a clue to mistakes E.g. Telstra in Repair & Maintenance Check all Assets purchased & any loan documents Business Analysis Look at the Year 9

10 Business Analysis Comparison P/L This Year/Last Year Profit compared to Cash Business Ratios Industry Benchmarks Profit & Loss This Year Last Year Review % differences between year This P/L has increased turnover of 5.3% but ultimate Nett Profit down 6.79% What has happened Expenses increased by 33% 10

11 Profit & Loss This Year/Last Year Sales Revenue less Cost of Goods Sold For trading entities, Gross Profit indicates the level of efficiency with which labour and/or materials are turned into income Profit & Loss This Year/Last Year Prepare Report to compare $ and/or % differences Are their issues you need to review and explain? Increased Sales Are there increased Cost of Sales Have expenses increased with CPI or more? Identify accounts with large increases should they be on the Balance Sheet or correctly entered on P/L E.g. Assets that are now claimable 11

12 Profit & Loss This Year/Last Year Prepare Report to compare $ and % differences Are their issues you need to review and explain? What is good about the Profit & Loss E.g. Sales increased 5% & COGS increased less than 1% Have Wages jumped because increased Staff or other reasons Are there expenses that could be curtailed Are there expenses that are one-off e.g. Computer purchase only every 5 years Are there expenses included that should be drawings Profit does not equal Cash & Cash does not equal Profit Profit but No Cash Increased Sales Sales not paid turns into Debtors Increased Stock levels can take cash to buy goods advantageously Assets purchased they don t appear on the Profit & Loss Increased PAYG Instalments Paying off Debt business loans Owners Drawings e.g. taking larger drawings as business is growing 12

13 Profit does not equal Cash & Cash does not equal Profit Cash but No Profit Unpaid Suppliers Larger Creditors list keeps the cash but can lower Profit Customers owing less money Good collection brings cash into business, but doesn t add Profit Business Activity Statements maybe a tax debt not paid, need cash available for that Business Analysis Balance Sheet Explain all items on the Balance Sheet 1. Foreign Bank/Debtors/Creditors 2. Reconciled GST, PAYGW & Super liability 3. Entitlement provisions 4. Sub-ledgers of: Customer Deposits, Gift Vouchers, receipt of goods 5. Directors Loan Division 7A we need to ask accountant 6. Do we have reports to review the loans & mortgages 13

14 Business Analysis - Ratios Financial Ratios are used as a tool to analyse the financial situation of a clients business from their financial statements, by Clients, Investors, Bookkeepers & Bankers Business Analysis - Ratios What is a Ratio? A financial ratio is a simple mathematical comparison of 2 or more pieces of information from a company s financial statements Business Owners, managers & Bookkeepers use ratios: To chart a company s progress (business health) Over time uncover trends Point to potential problem areas in a business Can be used for predicting future progress & opportunities Bankers and Investors use ratios for: Investing in the company Or loaning the company money 14

15 Ra6o Return on owners equity Gross Profit Margin NeV Profit Margin OperaGng Profit Margin Current RaGo Formula Net Income Owners Equity Gross Profit Sales NeV Profit Sales OperaGng Profit Sales Current Assets Current LiabiliGes Various Ratios Debtor Days Trade Debtors x 365 Sales Creditors Payment Rate Trade Creditors x 365 COGS Inventory Turnover Rate Inventory x 365 COGS Gross Profit Margin Gross Profit Margin = Gross Profit Sales(total Income) Is the business making a sufficient margin? So for every $ you make, how much is left to cover expenses after COGS 2 ways to improve: Increase prices Decrease costs to produce 15

16 Gross Profit Margin Gross Profit Margin = Gross Profit 2014 comparison 2015 Sales increased by 5.30% COGS increased by less than 1% Has our Gross Profit Margin Increased Sales(total Income) Nett Profit to Sales Nett Profit to Sales = Net Profit Sales(total Income) Is the business overspending? What are the influences for lower Net Profit So for every $ you make, how much is left as Nett Profit 16

17 Current Ratio - Liquidity Current Ratio = Current Assets Current Liabilities The Current ratio shows the balance between current asst & current liabilities can the business pay its short term debts. Lenders like to see a 2:1 ratio. $2 assets to pay $1 of debt Debtor Collection Rates? Debtor Days: Measures the number of days cash is being collected from debtors Lower debtor days assists cash flow Retail business has predominantly cash sales, so we would expect low Debtor Days Non-cash businesses should generally aim to have their debtor days between 30 and 50 17

18 Debtor Collection Rates/Debtor Days Debtor Collection Rate = Trade Debtors Sales X 365 Or a more complex calculation is: Debtor Collection Rates? Suggestions to improve Debtor Days 1. Thorough credit application process 2. Robust & active credit control process 3. Reduction in payment terms 4. Timely invoicing encourages timely payment 5. Support different methods of payment make it as easy as possible for clients to pay 18

19 Debtor Collection Rates? How much difference can lower Debtor days make? Lets take a turnover of $200k pa Reducing debtor days from 60 to 45, each month we are receiving $16.6k of cash 15 days earlier 15 days interest on an overdraft at 12.59% is $2089 in interest expense saved Other Benefits Improved cash flow enabling early settlement discounts with suppliers Reduced bank charges Less work managing cash flow Less stress Creditors Payment Rate Creditors Payment Rate = Trade Creditors Cost of Goods Sold X 365 The longer your Debtors take to pay, the longer payments to Creditors take Don t include ATO in creditors as this will effect your creditors payment rate 19

20 Inventory turn-over ratio Inventory turn-over ratio:- Indicates how many times a business inventory is sold & replaced over an accounting period Why does it matter? A higher Inventory Turnover Ratio means that you have less cash tied up in inventory to support a given level of sales Why does that mean? If the business owner understands when inventory is required, seasonal fluctuations and growth, without tying cash up unnecessarily (& assisting cash flow) Inventory Turnover Rate Inventory Turnover Rate = Inventory COGS X 365 A high ratio may indicate positive factors such as good stock demand and management. A low ratio may indicate that either stock is naturally slow moving or problems such as the presence of obsolete stock or good presentation Obsolete stock should be written off to reduce the inventory values and improve the ratio. 20

21 Return on Owners Equity Return on owners equity = Net Income Owners Equity Compares your net business income to the equity you ve invested in the business It reveals how much you re making from your investment: E.g. if you ve invested $200,000 & the business is generating a net income of $100,000 a year, your return on owner s equity is 50 per cent Able to compare what you ve earned from your business to what you may have earned from another investment Cash Flow using Ratios Ra6o Formula Debtor Days Trade Debtors x 365 Sales Creditors Payment Rate Trade Creditors x 365 COGS Inventory Turnover Rate Inventory x 365 COGS Ra6o Formula Debtor Days 46,000 x 365 = 15 days 1,116,439 Creditors Payment Rate 46,700 x 365 = days 482,748 Inventory Turnover Rate 82,020 x 365 = 62 days 482,748 21

22 Cash Flow using Ratios Buy Inventory on day 1 takes 62 days to sell Creditors are being paid on day 35 from purchase Debtors take 15 days to pay, after goods received Inventory - 62 days Debtors-15 Creditors - 35 days Negative Cashflow 42 days Therefore the Business Owner needs to fund the business for 42 days Industry Benchmarks 22

23 Industry Benchmarks Institute of Certified Bookkeepers Making you Count 23

24 Outcomes Outcomes What makes a successful year for your client? Monetary goals Pay down debt Profitability Team/Employee goals: Productivity Efficiency Effective communication between team members Education & Personal Development Goals Business Development Provide quality service to clients Generate repeat business 24

25 Outcomes Can you help the client define their business goals: Accomplish: What the business owner wants to attain in the future Preserve: What the business owner wants to keep Terminate: What the business owner wants to eliminate Avoid: What the business owner wants to stay away from Outcomes Not Great What if the year has not fulfilled expectations, can you help the client deal with the problems Profitability Show client through Financial Reports areas to cut expenses Team/Employee goals: Low employee - moral can you help improve communication Business Development order tracking, office management, customer follow up Quality of service are these in your area of expertise Business fraud Banking Suppliers Customers & Receivables Stock Payroll 25

26 Ways to detect Fraud Unusual Behaviour Complaints Missing Deposits, unreconciled deposits Excessive Voided Sales Invoices Post office boxes as shipping addresses Excessive Credit Sales Excessive Write off Bad Debts Excessive purchases Duplicate payments Ghost Employees Stock shortages Employee overtime 51 Institute of Certified Bookkeepers Making you Count 26

27 Client Meeting 27

28 Discussions with Client Reports for Client Overview of Financial Performance: Balance Sheet June with Last year comparison Profit & Loss YTD with Last year comparison Payroll YTD Activity Superannuation details & payment dates Summary GST Report for full Financial year (or monthly reports) Bank Reconciliations report for each Bank Account 28

29 Reports for Client Aged Receivables /Trade 30 June Aged Payables /Trade 30 June Inventory report (including current 30June Stocktake Report - was this included into inventory report? Detailed General Ledger for each account you wish to discuss with client e.g. Capital Assets, Gift Vouchers, Bank Loans, Directors Loans/Drawings Discussions with Client Comparisons Last Year Analysis Profit & Loss/Balance Sheet Highlight the differences for client List abnormal expenses in the year Wage Costs current versus last year Cost of Goods current versus last year Highlight movement in Balance Sheet Major Assets bought effects of change in law Liabilities trend Margins Gross Profit Margin Profit margin versus Markup Cashflow issues time for cashflow budget Budgeting is this the time for a Budget? 29

30 Build a Policy for the Business General Strategy (& your protection) Create and follow a process that is transparent Involve Business Owner Build in authority controls for making payments Segregate duties when cash is involved Review Balance Sheet and Profit and Loss for abnormalities Compare with prior years Build Financial and Payroll Policies to follow Keep work notes Provide a Task Report for Owner 30

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32 Review Annually Review Policies Who and what are the staff roles and responsibilities Review Processes (learn from the year) Review Payment Plan and Bank Access Review Financials Monthly review Profit and Loss and Balance Sheet Review Gross Profit Margin Compare reports this time last year Monthly Review Outstanding Receivables and Payables Review stock levels Institute of Certified Bookkeepers Making you Count 32

33 Accountant Pack You ve done the great work what to give the tax agent? Evidence of all account balances 33

34 You ve done the great work what to give the tax agent? Balance Sheet - Assets Bank Reconciliations & 30 June Debtors/Receivables reconciliation Debts written off evidence of follow up Asset register including all new acquisitions & associated invoices Assets isolated effected by law changes Depreciation schedule if applicable Stock-take details if applicable You ve done the great work what to give the tax agent? Balance Sheet - Liabilities Creditors/Payables reconciliation@ 30June Finance contracts Reconciled loan accounts with accompanying statements (inc bal 30June) RBA account reconciliation GST annual reconciliation Unpaid superannuation 34

35 You ve done the great work what to give the tax agent? Balance Sheet Equity Details of any fees paid Partnership distributions throughout the year Profit & Loss Payroll reconciliation reports Any adjustments e.g. private usage details You ve done the great work what to give the tax agent? General information Log-in and access details to the data Copies of checklists completed Reports for the tax agent Note areas of specific tax treatments Queries and areas for review Notes and explanations 35

36 Institute of Certified Bookkeepers Making you Count EOY Bookkeepers Project Plan EOY Business Owners Project Plan Business Owner EOY Considerations EOY Checklist Accountants Adjustment Journal Template Superstream Checklist for Employers Superstream Setup MYOB, Xero, Saasu, Intuit Financials Policy Template Payroll Management Policy Template 36

37 We Appreciate Feedback 37