Managing finances
Tuesday, 3 July 2007
Last Updated: Monday, 13 August 2007
A good relationship with your bank can help you negotiate better terms for your banking needs. The onus is on you to be pro-active in getting the best banking solutions for your needs.
Even if you are satisfied with the pricing and service of your bank, you should still meet with your bank once a year to discuss your banking requirements and any improvements in products and services that your business could use. Business growth, changes in circumstances or new, improved banking products may mean that your current banking solution is not meeting your business needs.
Many businesses split their banking between two or more financial institutions to have more control over their financial arrangements. These businesses usually have one main bank provider which does most of their banking transactions.
But whether you have one bank or two, if you are not happy with the service or facilities provided by your bank, you should conduct a review of your bank(s) accounts and facilities in order to assess whether it is worth changing banks.
The process for reviewing banking arrangements is similar for large and small businesses. Don’t assume that just because your business is small it is not worth going through a formal review process. Doing so will put you in the driver’s seat when talking to your bank. Outlined below is a guide on how to tackle the task.
Step 1
Create a list of all bank accounts used by your business.
Include bank account details such as branch, BSB account no, account name, sweep or set off arrangement and what the account is used for.
You should also include all social accounts, old companies, branch accounts, petty cash accounts and special purpose accounts.
You may be able to obtain this information from your bank statements or by asking your bank(s) or your staff. You may be surprised at the number of accounts you have that you are unaware of. This may be the case with charities and not-for-profits in particular.
Step 2
Obtain a letter of facilities from all the banks you deal with. The aim is to build a complete picture of all your banking arrangements with your financial institutions.
In your letter, you should ask your banks to ensure that all facilities are covered, including:
- Credit or purchasing cards
- Merchant facilities
- Trade facilities
- Lease facilities
- Any information on loans that the bank provides
- Letter of credit
- Internet banking
- BPay
- Wage and cheque cashing
Step 3
The third step is to select your three preferred banks. Your selection can be based on criteria of your choosing, such as your main bank or the bank you have the most transactions with, quality of service, friendly staff, convenience, or competitive pricing. Knowing your existing bank manager or having a favourable impression of your banker is often a good reason to include a bank in your list.
Step 4
Once you have the required information, you are ready to approach your most preferred bank. Your aim should be to give the bank an opportunity to improve its pricing and to review your current business banking procedures.
Make an appointment to visit your business banker. Discuss various facilities you have with that bank, or with any other banks or lending institutions. It is usually the best to be open and disclose all relevant information. Information such as your last tax return and cash flow forecast may be requested by your banker, so take copies with you.
After providing this information, ask your banker to spend some time considering the best package and fees available to you. Usually a bank will give you its best rates when you agree to do all your transactional banking arrangements through them.
The areas you should be reviewing are loan fees, interest margins, merchant facilities, and cash handling if you are in a retail business or organisation. However, this will vary according to your business or your organisation.
Step 5
If your bank offers you improved pricing and service levels, and you decide to stay with your bank, you can stop the review process at this point. Ask your bank to send you a letter of agreement with details including the re-negotiated fees, charges and service levels offered. If possible, negotiate the terms for one to three years.
Step 6
If your bank does not offer a better deal in pricing, find out why and what is missing from the picture. Then, make an appointment with the next bank on your preferred bank list.
Go through the same process (Step 4) with this bank.
If you disclose your current pricing, the second bank may only offer you a deal that is only slightly better than your current. Unless the new bank offers substantially better pricing, product or service, it is advisable to remain with your current bank as the inconvenience and administration costs incurred by bank switching may outweigh any benefits.
If you receive the same response from your second bank, and it is unable to improve on your current pricing, it may be that you have the best pricing available for the volume of business that you do. At this point, you can either stay with your first bank or meet with the third bank on your list of preferred banks.
However, if the second or third bank on your list shows a definite improvement, you should consider your options:
Move to the new bank
Should you move all business to the new bank offering attractive pricing? If you are seriously contemplating the offer, consider the following factors before changing banks:
- Is the new bank willing to sign an agreement on the pricing for three years?
- Will your company incur additional costs as a result of switching banks? For example, costs in notifying customers and suppliers, changing deposit and cheque books.
- Is the new bank’s service level good? You may be able to find out by talking to some of its customers. You may have customers or suppliers who have an account with the new bank.
- Will the account manager allow you to meet his or her direct boss and the credit officer handling the account? These people are usually the decision makers on your account and meeting them to discuss your banking solutions will enhance their understanding of your business needs. If you are not allowed to meet with these people, the bank is giving you a message that you are not an important customer.
Ask your main bank to match the new pricing
You could approach your main or current bank to ask them if they could match the new, more attractive pricing.
Undertake a bank tender
- Undertaking a bank tender is more usually an option for larger corporations that have many facilities with banks. However, smaller businesses, especially those growing quickly, may wish to approach their banking in this manner.
- Specialist consultants with experience in bank tenders are usually engaged to write the tender or a Request for Information (RFP) and to analyse the results of the tender. However, your company can conduct a bank tender itself. A good starting point is to ask your major bank for a pro-forma spreadsheet to be completed (see the attached example). Providing the same pro-forma spreadsheet to all banks tendering for your business will enable you to more easily compare the banks’ pricing and product information.
- If you hire consultants, make sure you ask for their references and check them out before entering into a contract.
- You should contact the banks you are inviting to tender, for the name and contact details of the right people with whom to discuss your tender. You should also provide these banks, with information about your accounts, size and volume of transactions, and future growth of firm
Don’t be surprised if a number of banks do not respond to your tender. They may feel that you already have the best pricing or deal and cannot improve on it. They may also feel that they are unable to offer you a better deal due to your industry or geographic location.
Once the banks have submitted their tender, you should discuss their pricing with staff who deal directly with the bank. Take note of any set up fees, computer requirements or software changes that you would have to incur, bank locations compared to store / office locations, and other inconveniences or costs not included in the pricing. Consider the products that are most crucial to your company such as BPay, internet banking or cash handling and focus on them.
Also consider any loan funding that is included in the tender. If it is more than overdraft or purchase cards, then this will require some expertise as it is often the documentation that can cause problems, not the interest rate (see article Understanding the risks in loan documentation).
Make sure that the bank products offered in the tender are currently available. Some banks may promote new products that are not available yet which is not helpful to a business dealing with the present. Ensure all products that you sign up for are currently working in the market. Ask for references from other customers, if in doubt.
If you are unsure that your bank offers you competitive pricing, you can compare its interest rates, fees and charges against the market’s benchmarks, with the new CPA Australia / Cannex small business indicators. The CPA Cannex indicators are updated weekly. Source CPA Australia
Back to top Battle of the spreadsheets
By Lucinda Schmidt
It’s one of the biggest headaches for fast-growing businesses. You don’t want to pay your accountant’s hourly charge-out rate for basic data entry, but you can’t find a good bookkeeper to do the legwork for your business activity statements — without stuffing it up and costing a fortune to fix the mess.
The good news is that the tax office is trying – slowly – to sort out the bookkeeper vs accountant dilemma. Draft legislation is expected to be released soon, which will allow bookkeepers who meet certain standards to register to lodge BAS.
The bad news is that nothing much will change before next year – and some accountants are fighting tooth and nail to protect their territory from what they see as underqualified bookkeeper upstarts.
Here’s how it works at present: when the Federal Government brought in the GST in 2000, it realised that the accompanying BAS requirements would overstretch the existing number of tax agents (mostly accountants).
So it allowed external bookkeepers to also help prepare BAS statements, as long as they worked under the supervision of a tax agent or were a member of a specified professional body (mainly the big accounting ones).
In practice, the rules (known as section 251L) have not worked well. There has been an explosion in the number of bookkeepers, but many of them do not pass the test to be legally allowed to lodge BAS statements (although some do it anyway).
Many are sole contractors, with no professional indemnity insurance or ongoing professional development. Because anyone can call themselves a bookkeeper, qualifications range from someone who has done a two-week course with software providers such as MYOB or Quicken, to someone with a full accounting degree.
Others are part of the burgeoning franchised bookkeeping industry, where groups such as Jim’s Bookkeeping and Busy Bookkeeping employ some of the 120,000 individuals that the tax office estimates now work as bookkeepers.
Meanwhile, businesses that are too small to hire an in-house finance person, but too big to do it themselves, are increasingly relying on bookkeepers to cope with the huge compliance burden. Bookkeepers charge around one-third to two-thirds of the tax agent rate, but many businesses have trouble finding a good one.
Enter the tax office. Over the past three years it has held symposiums, undertaken research and formed a Bookkeepers Action Group (yes, BAG) to try and nut out the complex relationship between small business, bookkeepers and tax agents.
The general thrust has been that bookkeepers want more recognition and they think it’s time for tax agents to embrace their help. But the tax agents are sick of fixing up bookkeepers’ stuff-ups, and they’re worried that the lack of uniform standards and quality assurance for bookkeepers means the whole tax industry will be seen as less professional.
“From the tax office’s perspective, bookkeepers are an emerging intermediary profession,” says tax office spokeswoman Lisa Harris. “The research conducted in 2005 has indicated the need for the bookkeeping industry to develop professional standards and an education and information regime to support this.”
In response, bookkeeping industry associations are springing up, promising to exercise quality control over their members and provide on-going professional development.
In last year’s federal budget, the Government allocated $57.5 million over four years to establish a new regulatory framework for tax practitioners. Part of the framework includes the proposed new rules to register bookkeepers who prepare BAS for a fee.
Another proposal is a tax office internet portal for bookkeepers, as well as a dedicated help-line, allowing them better and faster access to the tax office.
What this should mean for you, the client in the middle of the mess, is that it will be easier to find bookkeepers who are qualified to do BAS, and it will also cost less because the bookkeeper’s dealings with the tax office are fast-tracked.
Some accountants/tax agents think it’s a great idea, because they are happy to focus on financial analysis and end-of-year tax work, and leave the bookkeepers to do BAS, accounts payable/receivable, payroll and other data entry. But others are fighting the changes, fearing they will lose work and that the tax office will favour bookkeepers over tax agents.
“There is some tension,” says Roger Booker, owner of the Busy Bookkeeping franchise group. “By and large the better tax agents don’t want to do data entry, but the poorer quality tax agents are scared of losing work.”
Garry Addison, the senior tax counsel for CPA Australia, also acknowledges concerns from some tax agents. “They struggle to get service from the ATO, and this may take some resources away from tax agents,” he says. “Also, there’s a perception that somehow bookkeepers will be on the same level as tax agents, even though they don’t have the same qualifications.”
Still, he thinks the proposed changes will be good for clients. “Hopefully the new framework will make it easier for micro businesses to choose someone with the right skills to lodge their BAS,” he says. Haven’t we heard that before? “Well, it’s going in the right direction at least,” Addison says.
Questions to ask your bookkeeper
Roger Booker from Busy Bookkeeping suggests asking the following:
- Do they understand section 251L and are they compliant? If they claim to be, ask for proof.
- Do they have professional indemnity insurance?
- Do they have on-going training?
- Are they a sole trader or do they have employees or other support?
- Do they offer a quality guarantee?
- Are they professional partners of QuickBooks and/or MYOB?
- Can they establish procedures to minimise problems for the tax agent and client at year-end?
- Are they willing to proactively work with the tax agent or do they seek to avoid them?
Back to top
Providing fringe benefits is all part of the process of keeping good employees and attracting new ones. It is usually perceived as being more common for big business, but SMEs also provide many of these benefits.
Fringe benefits bring the inevitable issue of tax, fringe benefits tax (FBT) to be precise. FBT has been around since 1986 and remains a compliance headache for most employers. It’s great to reward employees with fringe benefits such as a car, loan, etc, but be mindful of the FBT consequences.
FBT is payable by the employer on benefits, other than salary or wages, paid to employees. It is deductible to the employer as a business expense, but there are some compliance headaches and traps to be wary of. Fringe benefits can also be paid to former employees and to the spouse or child or relative of an employee.
If a fringe benefit is paid to an employee and it is subject to FBT, its value must be determined so the correct amount of tax to pay can be calculated. That’s where the complexity and compliance costs can become an issue.
Cars are the most common benefit
The most commonly provided fringe benefit is the company car. There are two methods that can be used to work out the taxable value of that car: the “statutory formula” method or the “operating costs” method. The statutory formula method is the most common because it is simpler to use. The FBT is worked out by multiplying the base value of the car by a percentage determined by how many kilometres the car is driven in a year, remembering of course that the FBT year starts on April1. Those percentages are:
Total annual kilometres travelled |
% |
Less than 15,000 |
26 |
15,000 to 24,999 |
20 |
25,000 to 40,000 |
11 |
More than 40,000 |
7 |
So, the further the car is driven, the less FBT is payable. Under this method, it doesn’t matter if the car is driven totally for business use, totally for private use, or somewhere in between.
The operating costs method requires working out the total operating costs of the car (fuel, oil, servicing, etc) and reducing that total by the proportion of total distance that is for private use. It is most often used where business kilometres travelled are high, but is more complicated and requires more records (logbooks) to be kept and calculations to be made. That said, a sample calculation of the FBT payable under the two methods might convince an SME that the operating costs method will produce a significant enough saving in FBT to warrant its use.
If the statutory formula is used, there are a number of traps to be wary of, and the tax office warns that it regularly comes across these errors.
The cost price (which includes GST and dealer delivery) is obviously part of a car’s base value for FBT purposes, but registration and stamp duty are not included.
The base value of the car also includes accessories fitted at the time of purchase such as air conditioning, window tinting, and rust-proofing. However, the cost base does not include accessories fitted to meet the special needs of a business, such as a two-way radio in a salesperson’s car.
When, for example, an employee is on holiday, the FBT on the car can be reduced provided the car is garaged at the employer’s premises while the employee is away.
If the employer has owned the car for more than four years, there is an FBT saving because its base value is reduced by one-third. This is a once-only reduction and applies only to the original base value of the car.
Actual kilometres travelled (not an estimate) must be recorded on March 31 each year in order to work out how many kilometres were travelled in the FBT year.
Some fringe benefits are exempt from tax
It’s important to note that SMEs can provide their employees with a number of work-related items that are not subject to FBT; that is, they are exempt from FBT. These include:
- Car phones.
- Mobile phones (where used primarily for use in the employee’s employment).
- Protective clothing.
- Briefcases.
- Calculators.
- Laptop computers. Printers designed for use with laptops are also exempt from FBT.
- Subscriptions to professional journals.
Car parking for employees can get messy from an FBT point of view. Generally, it is exempt, unless there is a commercial car park within a one-kilometre radius that charges more than $6.62 a day. More useful for SMEs is that the provision of car parking on their premises is exempt from FBT.
Fringe benefits are part of the employment scene for many businesses. SMEs contribute just over 20% of all FBT collected, so it is a significant issue for them. For FBT purposes, working out the tax payable on fringe benefits is something of a mechanical exercise, but it does require the keeping of certain records and information.
It is important for SMEs to get that right. The tax office provides an FBT guide for employers, available on its Website www.ato.gov.au, and, of course, if things get complicated, SMEs should consult their accountants or advisers.
By Tim Harcourt
Since the Hawke Government floated the dollar more than two decades ago, exporters have got used to fluctuations in exchange rates as part and parcel of doing business off shore. For example, after the Sydney Olympics, the Australian dollar was worth around 50 US cents, but since then we’ve seen a gradual appreciation of the dollar (that is, the Australian dollar has risen in value in terms of the US dollar) and as a result we’ve been “living in the 70s” for some time (with apologies to the iconic rock band Skyhooks).
However, smart exporters don’t let fluctuations in exchange rates ruin their business plans.
They see a moving exchange rate as a fact of life of operating in the global economy.
They make decisions based on long-term plans and building strong relationships with clients, customers and business partners. One lesson of the Asian financial crisis is that Australian firms that stuck in the region “through thick and thin” were well regarded in Asia when the economies bounced back (nobody likes a carpet bagger who takes off when the going gets rough only to magically re-appear when times are good again).
Some undertake “hedging” in their contacts to mitigate against changes in the exchange rate.
According to research by Austrade and DHL, around 24% of large and 25% of medium-sized exporters engage in some form of hedging (compared to only 5% of small exporters and 4% of micros). So if you’re a medium sized exporter, hedging is clearly an option.
According to Paul Edwards, senior manager, risk management advisory, for HSBC, exporters should always look to hedge. “Hedging is an insurance against the swings and roundabouts that are common place in foreign exchange markets. Hedging allows you to lock in profits. It’s important for exporters to remember they are not in the business of running foreign exchange positions but rather selling ‘widgets’. By covering foreign exchange exposures, exporters will be able to focus on their underlying business rather than being exposed to the fluctuations and vagaries of global financial markets”.
Ian Rogers, trade services manager for Australasia for HSBC, recommends that exporters set up a foreign exchange account in US dollars as it “provides a natural hedge”, he says. “I would also look into insurance, products from EFIC like Headway and other risk mitigants beyond the traditional letter of credit,” Rogers says.
So in short, hedging is an option and there are many financial services available to prospective exporters who will have to deal with a dancing dollar in world markets.
*Tim Harcourt is chief economist of the Australian Trade Commission and author of Beyond Our Shores.
Back to top
The seven most common excuses for late payments.
If you hear any of the following excuses, watch out. The company that owes you money may be in trouble or is just a chronic late payer. Don’t give the benefit of the doubt. Cash is king and you need those bills paid.
1: The computers are not working; the server is down; we have changed over computer systems … These could all well be true. Ask how serious the problem is. Point out that all your other clients have manual payment methods in place.
2: We never got the invoice. That’s an easy one: just email another one, along with a duplicate of the original. Remind the debtor that you always issue invoices on time and ask them to contact you if any are missing in the future.
3: The person who signs the cheques is away. Most companies have two people who sign the cheques. Ask them to authorise the bank to pay the cheque with just one signature. If this is just a diversion tactic, try getting under their guard: ring early in the morning or late at night, or through a different department, and ask to be transferred.
4: Our practice is to pay bills once a month. So you’ll have to wait. Point out the terms agreed to, email them a copy and call again.
5: You must send original invoices or we don’t pay. Send them a copy of the original, signed and dated.
6: We’re busy dealing with more important things. Set a time to ring back
7: The cheque’s in the mail. Wait a few days and follow up again. This time ask for the cheque number. Confirm it has been sent to the right address and to the right person. This might spring payment, just to stop you asking pesky questions.
Source: SmartCompany.com.au
SmartCompany has teamed with Nine Network's Your Business Success to bring you lessons from top entrepreneurs, including Jim’s Group’s Jim Penman (right).
Every week we take a different theme and share entrepreneurs' insights, tips, challenges, mistakes and triumphs.
Money Management. Fast growing sales is critical for a growing business but if costs are out of control or debts are old, the business is not healthy