McLEAN AND CO.

Accounting                    Taxation                      Business Advice and Development Assistance                              P.O. Box 10 , Clive        133 Main Rd, Clive          Tel. (06) 8700952         Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  MAY 2004
 

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.nzwhich 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.

 

NEW CLIENTS

We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:

www.mcleanandco.co.nz/Documentationrequired.htm

 

INDEX

  1. Relevant Business and Taxation Articles.

  2. What is Profit and how to Improve it?

  3. Past Email Newsletters

  4. Past Client Newsletters

  5. GST- changing Filing Frequency

  6. Do you need to file an IR3 Income Tax Return?

  7. Do you need to file a Personal Tax Summary?

 

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:

Accounting Concepts                                 www.mcleanandco.co.nz/Page69.htm

The Companies Act 1993                           www.mcleanandco.co.nz/Page99.htm

Negative Gearing                                        www.mcleanandco.co.nz/Page126.htm

Fixed or Floating Mortgages?                    www.mcleanandco.co.nz/Page119.htm

Buying a Franchise                                     www.mcleanandco.co.nz/Page122htm

 

 

WHAT IS PROFIT AND HOW TO IMPROVE IT?  

Profit is what’s over after you’ve paid all your expenses. It is a consequence of what happens in and to your business.   Some of these things are within your control and some of them are outside your control.   

There are four specific factors that determine profit.  These are:

The price you charge for the products and/or services you sell

The quantity (or volume) of products and/or services you sell

The costs you incur directly in producing or buying the products and services you sell.  These are called variable costs because they increase or decrease as your sales increase or decrease

  The costs you incur whether you make sales or not.   These are best described as fixed costs because they do not generally change with changes in sales volume. These would normally include Bank Charges, Advertising, Rent, Power, Electricity, Wages, Motor Vehicle Expenses, Depreciation of Fixed Assets, Printing and Stationery, Accounting and Legal Fees  and other Costs of a fixed nature.

 

A sample Profit Statement can look like this (with varying sales):

 

EXAMPLE A

 

EXAMPLE B

 

SALES

2000@$1

2000

4000@1

4000

 

 

 

 

 

Less Cost of Sales- Cost of Purchases of Goods for Resale (Variable Costs)

   

2000@$0.50

 

1000

   

4000$0.50

   

2000

 

 

 

 

 

GROSS PROFIT

 

1000

 

2000

 

 

 

 

 

Less Overhead Expenses (Fixed Costs)

 

1500

 

1500

 

 

 

 

 

NET PROFIT/ Or (LOSS)

 

(500)

 

500

 Thus:

Gross Profit (or Gross Margin) is the result after comparing the sales achieved and deducting the unit price of the product for resale purchased

Net Profit (or Net Loss) is the result after deducting the Fixed Costs from the Gross Profit.

Example A is a Net Loss due to the fact that Gross Profit is less than the Fixed Costs

Example B is a Net Profit due to the fact that Gross Profit is more than the Fixed Costs  

If you are looking for ways to increase your profitability then you have to focus your attention on the four profit determining factors-  price, volume, variable costs and fixed costs.    Profitability can be increased by taking action to increase or decrease any of the four factors, as long as the required conditions are met.  

Factor

Possible Action

Required condition

SALES VOLUME

Increase

Price remains constant so the increase in volume translates into higher gross profit

 

Decrease

A saving in fixed costs is achieved by reducing the size of the business and the saving is greater than the reduction in the profit

 

 

 

PRICE

Increase

Either no change in sales volume or if sales volume increases, the decline is more than offset by the increase in price so that total revenue is still increased

 

Decrease

Sales volume increases sufficiently to compensate for the decline in price and/or new customers are won who will be retained in the future as and when price is increased to normal

 

 

 

VARIABLE COSTS

Increase

Improvement in product or service quality allows a higher price to be charged which is both accepted by the market and which is sufficient to offset the higher variable cost.

 

Decrease

No change in product or service quality, which could have a consequential effect on sales.

 

 

 

FIXED COSTS

Increase

Sales increase through better service delivery by an amount which is sufficient to compensate for the increase in fixed costs.

 

Decrease

Sales remain unchanged or if they decline the fall in gross profit is less than the decline in fixed costs

   

There are three things to note about this summary:

No single factor can be considered in isolation without considering its impact on. Or the impact from each of the other three factors.
A profit improvement strategy may involve either an increase or decrease in each of the four factors.
A favourable change in price and/ or your variable costs will improve your gross margin per dollar of sales, whereas a favourable change in your sales volume and/ or your fixed costs indicates greater productivity.  That is, the overheads you incur in your business are lower per dollar of sales.

In other words, any profit improvement strategy must focus on either or both of two things:

Achieving a higher gross margin per dollar of sales by increasing price and/or reducing variable costs, and/or
Achieving greater sales per dollar of fixed costs by increasing the productivity of those things which have a fixed cost.  

 

IMPROVING GROSS MARGIN

Remember your gross margin is the difference between the price of your product and what it costs you to buy or make it.  Therefore , the only way to increase your gross margin is to sell at a higher price or buy at a lower price.   In most cases, but not all, you will have limited scope to buy at a lower price.   For this reason your selling price is the critical variable.  

You should be aware that to a price discounting policy to capture sales can be a dangerous policy for the financial health of a business.  The following table illustrates how much you have to increase sales by if you reduce your prices:

 

Reduce Price By

 

 

 

Present Margin

 

 

 

 

 

 

20%

25%

30%

35%

40%

45%

50%

55%

60%

2%

11%

9%

7%

6%

5%

5%

4%

4%

3%

4%

25%

19%

15%

13%

11%

10%

9%

8%

7%

6%

43%

32%

25%

21%

18%

15%

14%

12%

11%

8%

67%

47%

36%

30%

25%

22%

19%

17%

15%

10%

100%

67%

50%

40%

33%

29%

25%

22%

20%

12%

150%

92%

67%

52%

43%

36%

32%

28%

25%

14%

233%

127%

88%

67%

54%

45%

39%

34%

30%

16%

400%

178%

114%

84%

67%

55%

47%

41%

36%

18%

900%

257%

150%

106%

82%

67%

56%

49%

43%

20%

 

400%

200%

133%

100%

80%

67%

57%

50%

 

That is, if your Gross Margin is 30% and you reduce price by 10% you need sales volume to increase by 50% to maintain your profit.  Its unlikely such a strategy will work .  

Many small business people regard price as the only factor influencing the buying decision of their customers.  Sure , there are some customers who may only buy at the lowest possible price but this does not apply to all customers and it may be that a premium price can be achieved if the product or service is marketed in such a way that the customer perceives added value and you promote other features and benefits that you can offer your customers. For example better quality, longer warranty, satisfaction guarantee, 24 hour accessibility, more convenient location, greater resale value etc.  

 

IMPROVING PRODUCTIVITY

This is all about getting more sales per dollar of fixed costs.  It can be achieved by either or both, increasing your sales at a faster rate than your fixed costs increase or reducing your fixed costs without affecting your sales.  

Advertising your product or service is one of the best ways to increase your sales.  Effective advertising means getting the most out of your advertising dollar and includes:

Ensure you use the most effective media pertinent to your product or service

Target your customers- never try to appeal to everyone and focus specifically on those people who you know will benefit from your product/ service

Make your offer compelling and relevant to the market you target

Backup  your advertising/ marketing strategies with first class service to get repeat   business and further business by word of mouth  

Fixed Costs must be incurred for you to remain in business.   In the short term they do not change as your volume of sales increases. Some of these costs are discretionary in the sense that you can make a decision to reduce them simply by cutting back. Others, however, are committed and you cannot avoid them.  

The critical thing with each fixed cost is to ask yourself the following questions:

What service does this cost provide to my business

Can I obtain the same service from another source at a lower cost?    If so, is it practically feasible to switch to another supplier of that service?

If I do switch to another supplier, would I get equivalent quality and would this affect the quality of my product or service?

If I were to spend more on this service would it generate a gross profit that exceeds the additional cost?  

You will notice that all of these questions are directed towards what you are getting for what you are spending.  They are not simply concerned with whether or not you can eliminate or reduce cost.    Take wages for example.  In difficult times people will often think of dismissing staff.   This may be appropriate but should be considered carefully, as it may be more appropriate to invest more in staff training to show them how to improve customer service and how to sell more to customers.  

 

ILLUSTRATION OF INCREASING PROFIT  

It is startling what effect relatively small changes can make to your bottom lines.  The following illustration indicates that , in these circumstances that profit increased by more than double with change factors of only 5% for the number of customers, the frequency of purchase, the average sales value and an increase in the Gross Margin %, and a 10% change factor in fixed costs:  

 

Now

Change Factor

Plan

No. of Customers

1,000

x 1.05

1,050

Frequency of Purchase

10

x 1.05

10.5

No. of Sales transactions

10,000

 

11,025

Average Value/ Sale

$62.50

x 1.05

$65.60

Total sales

$625,000

 

$723,240

Gross Margin %

40%

x 1.05

42%

Gross Margin $

$250,000

 

$303,760

Less Fixed Costs

$220,000

x 1.10

$242,000

NET PROFIT

$30,000

 

$61,760

 

PAST EMAIL NEWSLETTERS

You can view the archive of past McLean and Co. Email Newsletters by pressing the following link:

www.mcleanandco.co.nz/EmailNewsletter.htm

 

 

PAST CLIENT NEWSLETTERS

By coming a client of McLean and Co you will also receive paper-based client newsletters.   You can view the archive of past McLean and Co. Client Newsletters by pressing the following link:

www.mcleanandco.co.nz/ClientNewsletters.htm

 

 

GST- CHANGING FILING FREQUENCY

GST Returns can be filed on a one, two or six monthly basis.  Taxable periods end on the last day of the month.

The one-month taxable period is available to everyone.  This would benefit you if you receive GST refunds regularly   e.g. for businesses in the initial stages, when you are incurring more expenditure than income, or if your business does a lot of exporting.   This allows you to claim your GST refunds on a monthly basis rather than having to wait for two or six months.

The two-month period is automatically given to people at the time of registering for GST if you have not requested any other taxable period.   However, if your taxable supplies exceed or are expected to exceed $24 million in any 12 months, you must use the monthly basis.

The six-month taxable period is available if the total value of your taxable supplies:

has not exceeded $250,000 in the last 12 months, or

is unlikely to exceed $250,000 in the next 12 months

You must apply in writing to change your taxable period.  If you meet the requirements,  IRD will change your taxable period and send you written confirmation, advising you of the date you new taxable period will apply from.

 

 DO YOU NEED TO FILE AN IR3 INCOME TAX RETURN?

Fill in the details below to work out whether you must file an IR 3 income tax return or receive a personal tax summary for the year from 1 April 2003 to 31 March 2004 .

1.
Did you receive income with no tax deducted - from business, partnership, an employer, interest, rent, royalties, estates and trusts, or anywhere else? Yes No

2.
Did you earn withholding payments - usually from contract work? Yes No
 
More information on withholding payments

3.
Did you receive income from an estate or trust? Yes No

4.
Did you receive shares from your employer either free or below market value Yes No

5.
Were you assessed for provisional tax? Yes No
 
More information about provisional tax

6.
Did you receive any income from overseas? Yes No
 
Answer "No" if your only overseas income was:
social security pension subject to the special banking option for the full year
interest and dividends under NZ$200 with tax deducted

7.
Do you have a loss to carry forward from the previous year (from business, rental, etc)? Yes No

8.
Did you change your balance date part way through the year? Yes No
 
Generally this will apply only to someone who's in business or who's just stopped running a business.

If you answered "Yes" to any of questions 1-9, you will need to file an IR 3 tax return.
 

 

 

DO YOU NEED TO FILE A PERSONAL TAX SUMMARY?

Do you need to receive a personal tax summary?   In many cases IRD will send  you one automatically, but if they dont if not you will need to request one. The questions below  will tell you if either of these situations applies.

See also more information about personal tax summaries .

9.
Did you or your partner receive family assistance from Inland Revenue? Yes No

10.
Did you or your partner receive family assistance from Work and Income, and your combined income was over $20,000? Yes No

11.
Do you qualify for a student loan interest write off (excluding the full interest write-off for full-time, full-year students)? Yes No
 
More information about write offs eligibility.

12.
Did you have a student loan interim assessment? Yes No
 
More information about interim assessments

13.
Did you pay tax as an IR 56 taxpayer (home help, nanny, gardener, embassy staff, overseas company rep or 'Deep Freeze' personnel in Antarctica)? Yes No
 
Booklet about IR 56 taxpayers

14.
Did you earn over $200 of interest and/or dividends? Yes No
 
Joint accounts: take into account only your share of the interest

15.
Did you use a special tax code during the year, or did we contact you because you appeared to be using an incorrect tax code? Yes No
 
More information about special tax codes

16.
Did you use a CAE or EDW tax code and earn more than $200 from that source? Yes No
 
These codes are for casual agricultural workers and election day workers

17.
Were you a New Zealand resident for tax purposes for the whole year 1 April 2003 to 31 March 2004? Yes No
 
More information about who is a NZ resident for tax purposes , especially for people leaving the country.

If you answer yes in questions 9-16 and question you will need to file a Personal Tax Summary

 

 
 
The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.    

 

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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