McLEAN AND CO.

EMAIL NEWSLETTER AUGUST 2002  

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  Any feedback would be welcomed.

McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay.    Readers are invited to peruse the practice website www.mcleanandco.co.nz,  which lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters,  and has links to other websites that may assist your business.    Being a small firm itself,   McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base.  Enquiries are welcomed.

 

INDEX

  1. Tuition and Education Fees not Eligible for Tax Rebate

  2. 99% of Taxpayer Calls are Answered Correctly

  3. Nine Tools for winning Customer Loyalty

  4. Rental Property Partnerships that Derive a Loss 

  5. Credit Risk

  6. Factoring

  7. Franchising- Advantages/ Disadvantages

 

RELEVANT BUSINESS AND TAXATION ARTICLES

The McLean and Co. website contains an extensive number of articles prepared by McLean and Co. relating to taxation and business matters.    Here are a selection that will be of interest:

ACC moves to Single Billing                                                      www.mcleanandco.co.nz/page61.htm

Comparison Sole Trader/ Partnership/ Company                       www.mcleanandco.co.nz/Page7.htm

To Lease or Own                                                                         www.mcleanandco.co.nz/Page21.htm

Rental property Income                                                              www.mcleanandco.co.nz/Page43.htm

Imputation System                                                                      www.mcleanandco.co.nz/Page54.htm

 

TUITION AND EDUCATION FEES NOT ELIGIBLE  FOR TAX REBATE

In claiming your donations rebate  you are reminded that tuition and education fees cannot be claimed as a rebate.

"There have been cases where students have claimed a rebate from Inland Revenue for fees paid to their education or training institution," says Bruce Thompson, General Manager Service Delivery, IRD.

"It is important that all students know that they cannot claim money back from Inland Revenue for fees.

"Donations to primary and secondary schools are sometimes called 'school fees' and these may be claimed, but this does not apply to tuition and education fees.

"Students who think they may have incorrectly claimed a donation rebate for fees are encouraged to talk to Inland Revenue," says Mr Thompson.

Students can call Inland Revenue on 0800 377 774 between 8 am and 8 pm weekdays and 9 am and 1 pm on Saturday. Remember to have your IRD number handy.

 

99% OF TAXPAYER CALLS ARE ANSWERED CORRECTLY

Mr Bruce Thompson, General Manger Service Delivery, IRD said, "the Dominion Post  (24 August 2002) statement that one in four of the 80,000 calls each week to Inland Revenue are given the wrong information is incorrect."

The department has worked hard to improve its call centre capability. Increasingly we are getting compliments for our customer service:

Customer satisfaction results in 2002 were up to 85% compared with 63% in 2000.
Tax agent call satisfaction rate was 93% in 2002.
The average speed for answering a call this year was 1 minute and 30 compared with 3 minutes and 30 seconds in 2000.

Our call centres take a large variety of calls of which 99% were measured as answered correctly.  About 60% of calls received are business calls. Each of our call centre staff are specialised for the type of calls they receive.  We monitor over 40,000 actual client calls a year, always seeking to improve our systems and the skills of our people.

Inland Revenue normally has 150,000 counter interviews in a year. It is true these are by appointment, this is to ensure people don't have to queue. 98% of those appointments are conducted within one day.

Mr Brent Gilchrist is quoted in the Dominion Post as saying that "it is a tremendous battle to make an appointment and it can take a good number of weeks."

"This is simply incorrect," said Mr Thompson.

In addition to interviews we conduct 2500 Heartlands interviews. Heartlands is an inter-Government agency initiative that brings government services to more remote rural towns and provides a one-stop-shop for the community and an outreach service.

 
NINE TOOLS FOR  WINNING CUSTOMER LOYALTY
 
Dont let customers go after one sale.   Win them back with a follow- up  programme
  1. Thank-you notes: This is a no-brainer, but you'd be surprised at how many entrepreneurs neglect to write thank-you notes--especially when they get really busy. Take the time to show your customers that you genuinely appreciate their business. They'll remember your thoughtfulness because most of your competition won't send out thank-you notes.
  2. Postcard mailings: If you target consumers, send out monthly mailings that make good refrigerator fodder, such as "Quote of the Month," "Recipe of the Month" or useful tips on such topics as time-management, gardening or anything else that interests the bulk of your customers. Avoid being too promotional here. Just provide the kind of information that customers will want to hang on their frig. The added benefit to you is that whenever guests visit your customers' homes, they'll see your name, potentially leading to conversations about your business.
  3. E-mail updates: Think of your e-mail update as a press release that you send to your customers. Providing them with regular product, service and customer updates via e-mail at least once per month will convey a sense of positive momentum. This keeps customers in the loop and, over time, gets them excited to be involved with you and motivates them to pass on referrals.
  4. Getting together over coffee or lunch: Try to spend face time in a nonsales environment with your customers. Ask about their family, hobbies, personal goals and so forth. When you show customers that you really care about them on a personal level, they're yours for life.
  5. Birthdays, anniversaries and other special occasions: These occasions are very important to your customers and their families and friends. Be among the few who actually remember a customer's special days, and that customer will never forget you!
  6. Follow up on well-being: For example, if you find that a customer's wife has been sick, call periodically just to find out how she's recovering
  7. Pass referrals: One of the most powerful ways to encourage loyalty in customers is to pass them referrals. When you get a chance, scroll through your customer database and think through people you know who might add value to your customers.
  8. Entertaining at your home: Throw a party for your best customers. You'll be amazed at how much rapport and goodwill you can build with people when you get them in your home environment. Your guests will also find value in your party as a networking opportunity for them.
  9. Post-sale feedback: Demonstrate that you care about the quality of your service. Call customers and ask them questions like:
Are you pleased with the service you received?
What did you like most about working with us?
What would you like to see improved?

Without this invaluable information, you'll have a hard time improving your products and services. Besides, when you ask customers for feedback and implement their comments, they feel a sense of ownership in what you're doing and thus become more loyal to your products and services.

 

RENTAL PROPERTY PARTNERSHIPS THAT DERIVE A LOSS

The use  of partnerships as a tax-planning tool in the family context is well  known.   IRD have been active in reviewing taxpayer treatment of profits in family partnerships.

The Commissioner has the ability to reallocate  profits (or losses) of a partnership.   This ability only applies to partnerships involving relatives.

The allocation of rental property losses between a husband and a wife was considered in Case S2 (1995) NZTC 7.102.   The husband set off the losses against his income.    IRD wanted to share the losses equally.

The TRA found that the property was equally owned by the husband and the wife as joint owners. The Judge considered that it was commercially unrealistic to suggest that all losses should be allocated to the husband.   As the division of profits was subject to review by the Commissioner and under general tax avoidance provisions the approach of IRD was upheld. 

 

CREDIT RISK

Credit has only one function in business- to increase sales.   If  by offering credit, your sales do not increase, then there is no point in granting credit.  It would be logical to ask every customer to pay up front if no sales would be lost

There  are three components of credit risk:

Potential gain i.e. extra sales

Potential loss  i.e. bad debts and costly recoveries

Probability of payment.

The aim of a business should be to generate a lot of extra sales, minimise the potential loss by having a small number of bad debts, both in quatity and value, and also the collection of debts with minimum cost and effort.

Ideally. a business would like the credit risk to be low.  The risk is low if the mark up is high.   This is because the cost of goods sold is low relative to the value of the sale.

Similarly, the credit risk is high if the margins are low.  In this case the cost of goods sold is high and is much closer to the value of the sale.

If a business  services just  one or a small number  of customers  the credit risk is high  as a major customer  could collapse financially and cause  similar financial problems to that business.   It is therefore a better situation  to have a large number of customers when credit is provided.

You should assess the customer you are planning to grant credit to. Do a financial analysis.   Does this customer depend on one main business for his sales?   Does  this customer sell only one product?    Is this customer well diversified-  i.e. amongst its customer base and the products or services it sells?   What is the payment record of the customer?

It is still possible to make a profit out of high risk companies by setting a reasonably low credit limit.   Your aim here is for your profit generated from earlier sales to exceed the loss caused by bad debts in the future.  You can take a gamble on granting credit to high risk companies provided you don't have too many of them, and have systems in place to check that they are staying within their credit limit.

Most of the time, you are looking to grant credit since the potential gain is usually higher than the potential loss.  The exception is where a customer's failure would threaten your survival.

 

FACTORING

Factoring is the cash purchase of your sales invoices at a discount by another party (the factor).    

The rate of discount varies between factors and the services included.   The factor advances you up to say 80% of the value of your invoices and takes over the collection of your accounts from your customers. 

There are two factoring types:

·         The 20% balance, less the factoring fee, is paid to you when the factor receives the customer’s remittance.   You are still responsible for bad debts.

·         The factor company carries the bad debt risk.   No further fee is paid

 

There can be some difficulties with factoring.   For example, the link between you and your customer can be broken through the factor handling statements and cash receipts, so look for a factor that provides a confidential service.   Also, the factor may impose tighter credit controls than you would normally adopt, leading to a loss of sales.   So make sure that the factor does not interfere with your credit policy.  

Factoring is one way that businesses can improve their cash flow and maximise the use of their working capital.  

Factoring services are available from finance companies an factoring companies.  

FRANCHISING- ADVANTAGES/ DISADVANTAGES                                                            

Franchising is a method of distribution or marketing in which a business (the franchisor) grants a contract to an individual or business (the franchisee) the right to carry on a business in a prescribed way in a particular territory for a specified period.     

ADVANTAGES TO FRANCHISOR
Rapid penetration of market
Use of other people’s money and energy to expand business.
Economies of scale.
Ideas from other franchisees and franchisor.

DISADVANTAGES TO FRANCHISOR
Loss of control.
Giving away profits and ideas.
Failure of franchisees to follow rules.
One bad franchisee contaminates all.

ADVANTAGES TO FRANCHISEE
Bulk buying power.
Planning permission already obtained.
Market studies already carried out.
Pooled resources to allow greater advertising.
Shorter learning curve.
Lower capital outlay.
Assistance from franchisor for administration, marketing techniques etc
Help when unwell.

DISADVANTAGES TO FRANCHISEE
Pay royalties when not making profits.
The franchisor may go bust.
Poor business activity of another franchisee or franchisor may refect on them
May be forced to buy product supplied by franchisor which may not be cheapest.
Lack of flexibility- business methods dictated by franchisor.

 

If we can assist further, please email McLean and Co as follows:

 CONTACT McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK

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