Archive for September 2011
Business Banking
There are a number of differences between the financial needs of an individual and those of a company, and having access to specialist business banking facilities is absolutely essential in the current economic climate. For a business to grow and perform well in the long term, it is important to be able to rely on long term stability from their bank, and to be confident that any savings or borrowing are flexible enough to support your goals.
With a specialist business bank like the few Commercial Banks looking after your needs, your company will be able to take advantage of a full range of services and access to a long term relationship that promotes stability and investment in the future.
Relationships are extremely important in business, and for any business whether large or small, the ability to develop a consistent partnership with their bank is important, as this will pay dividends in the long term growth potential that a company can expect.
Business banking is very complex, and is a two way process that requires great attention to detail from all parties. Having a stable financial basis from which to manage funds on a day to day basis is essential to promote growth and profits.
With the support and advice available from a specialist business relationship manager at your bank, you will be able to get access to a range of business banking services and products that will support your goals because they are tailor made for use by companies.
Business Tax – The Basics
If you are starting a new business, or you are simply looking to update your knowledge in the area of business tax, you should seriously consider using a firm of tax accountants to assist you. Taxation is a complex area and, with regulations changing on a regular basis, it is nearly impossible for any individual business owner to stay on top of things.
Using a tax professional on the other hand is the only certain way you know you are doing things properly and fulfilling obligations, whilst at the same time ensuring that you are not paying too much tax.
To clarify the situation, let’s take a look at some of the basics you need to understand about the way business tax operates for Australian businesses.
Every Australian business must register for a tax file number and lodge annual income tax returns. In most instances you will also have to apply for an Australian Business Number which must be used to complete activity statements and lodged with the Australian Tax Office on the due dates. These returns ensure that you are paying the correct amount of GST. If you have employees, or are paying yourself as an employee, you need to record all payments made and include this on your business activity statement. At the end of the financial year you must also lodge a PAYG installment return. This is used by the Australian Tax Office to calculate the correct amount of income tax deductions your business has to pay. This means that you must also register for PAYG withholding if you make payments and have to withhold tax from your employees. These amounts have to be paid quarterly or, alternatively, whenever your BAS is due. The goods and services tax applies to any business that is carrying on an enterprise where the annual turnover is $75,000 or more. Business Activity Statements (BAS) must be lodged at least annually, although most businesses choose to lodge them quarterly. If you are in the wine industry or sell luxury cars, you also have to register for the wine equalisation tax or the luxury car tax. If you are paying your employees any form of benefit, you must also register for the fringe benefits tax. This may require you to lodge an annual fringe benefits tax return, and to pay quarterly installments on your activity statement. Balancing payments are also due to be made on 21 May every year. One of the most important aspects of taxation is the superannuation guarantee. Although you don’t have to register you must pay a minimum level of superannuation contributions for every eligible employee. This includes directors and contractors in some circumstances. At the moment, the minimum level of contribution is 9% of an employee’s ordinary time earnings.
The complexity which the above matters raise highlights the importance of using a qualified professional to assist you with every aspect of your business. Using a qualified firm of tax accountants is the first step every business owner should take to ensure they set up their operation effectively and efficiently.
Business Loan: The Debt-to-Equity Ratio
Business financing or obtaining a needed business loan is not really rocket science on the part of banks, non-bank lenders or financial institutions. It is just a matter of realizing a return for the risks taken given their cost of money.
Sounds easy enough – but, what does it really mean. Banks and other lenders just want to get repaid and earn a reasonable profit. Just like you expect in your business – you want customers to pay for your goods and services. Lenders are no different and the principles are the same.
Banks have to get their inventory (cash to lend) from either depositors or investors (both of which add costs to the lender) – very similar to a manufacturer purchasing raw materials. However, when the manufacturer sells its finished product – the company expects to get paid (to cover both costs and profits) in a relatively short period (60 to 90 days).
Banks / lenders on the other hand could wait years (even decades for large commercial or real estate loans) before recouping their principle (costs) let alone their profit (interest and fees). Thus, banks and other lenders must work very hard to ensure the safety and soundness of the company requesting a loan (borrower) and to reasonably ensure themselves that they will be repaid.
Most lenders (banks and non-bank lenders) typically look for two items when assessing a business loan prospect. Is the business willing to repay the loan based on how it or its owner have repaid debts in the past (credit report) and can it repay; meaning does it have the cash flow (inside the business) to make the monthly payments and will this cash flow continue over the life of the loan.
But, as stated, while this is not rocket science – banks and other lenders tend to get quickly caught up in long-winded calculations in determining a borrower’s ability and willingness to repay. One such calculation is a business’s Debt-to-Equity ratio (sometimes called the Debt-to-Worth ratio).
David A. Duryee in his book “The Business Owners Guide to Achieving Financial Succe$$”, states about the debt-to-equity ratio “It is a basic financial principle that the more you rely on debt verse equity to finance your business, the more risk you face. Therefore, the higher the debt-to-equity ratio, the less safe your business.”
Here, equity could mean either outside equity injected into the company by investors, founders or owners, equity generated through the business from sustained profitable operations, or both.
In plain English, this has to do with the assets of the business. Most businesses have to purchase or generate some type of assets over time; be it equipment or property, intangibles or financial assets like cash and equivalents or accounts receivables.
Thus, if your business has financed these assets with a lot of debt – should your business not be able to pay, there would be many other debt holders in line to liquidate those assets to try and recoup their loses – making your new debt holder (the bank or lender) lower on the list and in a worse position to get repaid should your business default.
To clear this up a bit more, as Mr. Duryee states, think about this ratio in dollars; “If you apply a dollar sign to this ratio, a debt to equity ratio of 2.25 would mean that there is $2.25 in liabilities for every $1.00 of equity, or that creditors (banks and lenders) have a little over twice as much invested in the business as does the owners.”
To calculate your business’s Debt-to-Equity ratio, simply divide your total liabilities (both short-term and long-term) by equity – or visit the financial ratio calculator at Business Money Today and look for the Safety Ratio section.
Most bankers or lenders will not even consider a loan prospect with a debt-to-equity ratio over 3.00 times – but, some equipment or capital intensive industries may have higher ratio standards.
Know this, according to Kate Lister in an article with Entrepreneur magazine; the debt to worth ratio will show a lender how heavily financed your business is with other people’s money (not including investors’) and if your ratio is high, your business will be considered high risk or un-lendable.
To combat this, work to ensure your business’s debt-to-equity ratio is as low as possible should your business seek outside debt financing in the near term. You can either increase the amount of equity in your business (take on more investors, generate and retain more net profits, or infuse more in owners’ equity) or work to reduce your overall liabilities (paying off suppliers, other debtors or reducing any outstanding liability on the business’s balance sheet).
Lastly, not only will lenders review your current debt-to-equity ratio, but will attempt to measure it over time (that is why most bankers and/or lenders ask for three or more years of tax returns or financial statements). They not only want to see a low ratio today, but want to see this ratio trending downward over time. As your business’s debt-to-equity ratio trends down, the safer your business becomes when seeking a business loan.