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May/June 2003

How gross can your gross profit be?

  YOU will have often heard people refer to the Net Profit of a business as the "Bottom Line". It is obviously one of the most important figures in a financial report. Perhaps it should be presented as the top line.
  Another figure of considerable importance is the Gross Profit. It drives the Bottom Line. You can classify your expenses into those which vary directly with sales, and the rest, often termed Overheads. The cost of books and stationery in a bookshop is directly proportional to its sales. To a caterer it is the food and to the supermarket it is the stock on the shelves. If all three employ a reasonable size sales staff, then the wages paid will usually be a variable cost.
  Gross Profit arises from deducting the cost of the books and wages from the sales. In a well run business, this figure will usually be a fairly constant percentage to Sales.
  It will usually be fairly constant for everyone in the same type of business.
  This means like businesses can be compared.
  If something is wrong with your Gross Profit percentage to sales, here is a list of some possible reasons:
    • Your business is too small. For example, a sole-operator builder.
    • Wastage. This is common in restaurants.
    • Bad buying. Superettes may be too small to buy at the best prices.
    • Bad selling. Too much price discounting. Getting rid of old stock.
    • Shop-lifting.
    • Theft of money from the till.
    • Sales mix:
      — A change in the proportion of high profit to low profit sales.
      — A change in the mixture of labour- intensive and materials-intensive jobs.
      — A change to using more subcontractors and less direct labour
    • Bookkeeping errors:
      — Costing stock.
      — Pricing stock.
      —Stock omitted or double counted.
      —Amount owing to the business (under or over stating sales).
      — Amount owing by the business (under or overstating purchases or wages).
      — Outstanding cheques either being overlooked or being counted a second time as part of trade creditors. 
      — A payment for purchases not included as a business expense, perhaps charged as an overhead or even as a personal expense. 
      — A payment which is not purchases being included in purchases.
      —Sales omitted, for example, put into a second bank account and overlooked.
      — Deposits which are not sales included in the sales account (loan from you to the business, for example).
      — You or staff take stock for own use and an adjustment for this is overlooked or under/ over stated.
      — Some wages, for example office staff, wrongly included as a variable expense. Constantly monitor your Gross Profit percentage. A change of a mere I percent makes a big impact. Put energy into this part of your business to make your profit grow.

Tax traps - Car Parks

  If an employer leases a car park and makes it available to an employee, there is no Fringe Benefits Tax. This is because the car park is considered to be part of the employer's premises. On the other hand, if the employer has a licence to occupy parking space, such as any available park in the building, Fringe Benefits Tax is payable. The licence to use a parking space is not considered part of the employer's premises.
  If you run your business through a company, you are an employee. This law applies to you. 

Getting the best out of staff

  MARCUS Buckingham and Curt Coffman have written a book called First Break All The Rules.
  One of the points they make is particularly interesting.
  Many businesses review the performance of their staff and after a few complimentary remarks they start to discuss weaknesses. Plans are drawn to remove the weaknesses and therefore produce a better performing employee.
  The authors think this is wrong. People's personalities cannot be changed. Looking for weaknesses and trying to correct them is therefore likely not to achieve very much. Even worse, I suggest, the regular attention to weaknesses does nothing for that person's confidence.
  The authors suggest that you, the manager, learn to live with each person's weaknesses and accept them. Focus instead on their "talents"; those traits in which they have an innate ability.
  For example:
  Someone who relates well to people should be given work with plenty of people contact.
  Another person who gets a kick out of balancing the books belongs in the accounting department.
  Even though you might have a very small fine, study each person with a view to making the most of their talents.

Follow-up is important

  MANY businesses opportunities are lost because there is no follow-up system. How often have you rung with an enquiry or even an order and never heard any more? You discuss your problem and, yes, someone will come and give you a quote. And that is the last you hear. Does the firm not want your business? That is not usually the case. It just lacks a system. Your details have not been carefully recorded.
  Develop a follow-up system
which suits you. Some people use a diary; some a Filofax. One idea, which avoids the need for rewriting, is to have 31 manila folders, each numbered for the day in the month. Throw your memory jogger into a folder and retrieve it on the appointed day. If you don't have time to attend to the follow-up on the correct day, you can transfer the note forward, without rewriting, and not lose sight of it.There are also electronic systems designed to do much the same thing.

Differential pricing

Different markets within New Zealand

  Internet shopping can teach us a lesson about pricing. It is not uncommon to set different prices for different markets. The perception the price you find on the internet is the lowest is often true. A client told us recently of two of his experiences. Here is what he said.
  "I went to buy a television set and started by exploring the internet. Not all firms quote their prices, so I went shopping as well. One retailer was charging nearly 30 percent more in his shop than he was asking on the internet.-
  He continued. "But, let me tell you, I am not as smart as my wife. I looked for a rental car on the internet. She went to her favourite travel agent. I couldn't get close to the price she was able to obtain. She also found a better deal on airfares than I could get from the internet.

Export market

  Another client was exporting to Australia. She charged the same price there as here, except she put an "A" after the $ sign. Goods selling for $NZ20 here were being sold for $A20 overseas. This was when our currency was worth 80 cents Australian. She could hardly be accused of dumping!

Within the same market

  You can even price identical goods differentially in the same shop! Supermarkets do it all the time. Bigger is not always cheaper.
  Different packaging also provides an opportunity for differential pricing. A box of chocolates in a pyramid-shaped box was about 20 percent lighter and 5 percent more expensive than the same goods packaged in the standard way. Never overlook the power of packaging, regardless of your type of business.

The power of priorities 

  WE ASKED an Action International coach for some comments on priorities. This is what she said:
  People find it difficult to think ahead and to tackle things in order of their importance. Both are essential ingredients for success. Spend your time, energy, money and personnel on the top 20 percent of priorities.
     • Put strategies in place to take special care of the top 20 percent of your customers. If you employ staff, put your energy in developing the best ones because they will produce the most for you.
     • The only things you should do in your business are those which you have to do, those no one else can do, those involving final responsibility.
  "Do this and watch your productivity and personal satisfaction rise to new heights!"

In brief

Boosting sales

  HOW about the antique dealer who emails his customers when he is putting some of the things they like on Trade Me.

Quote

  "WHEN I find a business that is struggling financially, it is often because the owner cannot sell." — Rich Dad's Prophecy, by Robert T Kiyosaki

Loyalty cards

  A CLIENT complained: "I have a Whitcoulls card, a coffee shop card, a card from the local bookshop/stationer, an AA card, a Flybuys card and so on. Soon I shall need a bigger wallet to contain all my loyalty cards." There are so many they are losing much of their effectiveness.
  Be different. Keep a record of your customers" purchases and send them a voucher when they hit the target purchases figure.

Unwritten contracts

  MANY people believe a contract doesn't exist unless it is in writing. This is not true. It is just harder to prove the existence of an agreement if there is no written evidence. A contract has several elements including:
  An offer by one person, an acceptance by another person and a price.
  If you can demonstrate these existed, you might have a contract. Our law requires contracts involving real estate to be in writing. A verbal agreement to buy a house is therefore not a binding contract.

Quote

  "Edison was a fanatic about writing down every idea that came to him". At work with Thomas Edison by Blaine McCorm ick.
  Michael Hill, Jeweller, does the same. Do you do this?

Keep good records — the onus is on you

  KEEPING good records is very important for tax purposes. It is your responsibility to justify your claims for expenditure, if called upon to do so. Therefore, the more documentary evidence you keep the better. Sometimes copies of the bills are either not available or are insufficient evidence.
  If you go overseas, keep a diary as evidence of your business activity.
  A way to keep a reasonable record of casual, low-cost entertaining, such as a coffee shop lunch, is to keep a notebook of the date, cost, who was entertained and a brief note of what was discussed.
  Car parking presents a problem. Meters do not provide receipts. You can only do your best. One way of accounting is to put, say, $20 of small change in the car and each time you top it up with another $20 of your own money, draw a cheque to reimburse.
  Those who take a work-related vehicle home should be familiar with the IRD requirement for the employer to write to the employee prohibiting its private use. It is worth also getting the employee to sign this letter agreeing to the arrangement.
  The employer must check at least once every three months to see the employee is obeying. Do you do this? Do you write a diary note of the date and time of inspection?
  The same rules apply if you are the sole shareholder-employee of your own company. Write yourself a letter etc. Laugh if you wish: that is the legal requirement for avoiding Fringe Benefits Tax. Have a pile of blank forms to record you have carried out the inspection and fill them in once a quarter to show you have complied. If there is more than one director, get another to write the letter etc.
  If your company borrows money, make sure the documents you sign are on behalf of the company. Banks or lawyers have been known to get this wrong, particularly if the money will be used to buy you a new home. This error can prove expensive.
  IRD selected a family trust for a thorough examination. The first thing they asked for was the trust minute book. Are you keeping good trustee minutes?
  Be very careful with your paper work especially for major transactions and most especially if you have a family trust. 

Three common mistakes

Cutting costs

  An extraordinary number of people think they can increase their profits by cutting their costs. Small businesses are usually run quite economically. They have little fat to trim. They do not have the bureaucracies of larger firms. They cannot afford it.
  A management accountant, in a major New Zealand company, wanted to collect some statistics on the output of the most important machine in a factory employing about 30 people. Four people worked in the office. He was told these people were very busy and could not manage this extra assignment. "If that is the case," he said, "lets look at the work we do now and see if we need it all.- The analysis showed many statistics were being collected but never used. The office needed only about two people and there was plenty of capacity to collect the information requested. An examination of costs in a firm this size does pay off

In bad times cut back on advertising

  Sorry, this is the opposite to what you should do. Be prepared to increase your promotional activity in bad times just when everyone else is doing the reverse!

Your advisors are always right

  Sorry again, few of us are multi-millionaires. Business is complex (and fun) but no-one knows all the answers or will be absolutely right all the time. You are the captain. It is your job to call the shots.

Company annual return

  EACH year you receive a form from the Registrar of Companies requiring you to put in two dates. These are the dates you decided not to appoint an auditor and you held your annual general meeting. Invariably, they are the same date. The day you sign the minutes on completion of annual accounts is the date required for this return. 

Tax calendar

May 31    Deadline for Fringe Benefit tax return normally due 20 April
June 7     3rd instalment 2003 Provisional Tax (June balance date)
July 7      1st instalment 2004 Provisional Tax (March balance date)
               2002 Terminal tax (June balance date)

Staff profile

  Grant Johnston
  A country boy born and raised in Northland. I spent my childhood in Kaeo/Whangaroa where my father was the local chemist and my family was very into big game fishing. We built our own game fishing boat and my mother featured in the Advocate many times with her catches. I was shipped off to board with my grandmother while attending High School at Kamo and then on to the big smoke for University.
  I put myself through University by working in such places as petrol stations (when petrol was 50c a gallon), grocery shops, burger bars, fishing boats, fencing contractors, bars and eventually 10 years in an accountants office where I advanced from Accountancy student to Office Manager.
  Qualified about 1980. Got involved in motorsport and did a bit of rallying. Married in 1982 and went to UK for the big OE in 1985. Spent 5 years as Financial Accountant for Yves St Laurent in England and did a hit of parachuting with the Flying Tigers club. Returned to NZ in 1990. Became an owner/operator of a Valentines Restaurant in 1991 and our first child (Brandon) was born in 1992. Became an owner/operator of a Robert Harris Coffee Shop for about 7 years during which our daughter (Shannon) was born in 1993. In 2000 I joined JMV.
  Current interests are any watersports (particularly scuba, waterskiing and surfing), golf, snow skiing, and being involved with my children's sports, i.e. karate, rugby, netball. I also enjoy watching rugby and league and reading when there is time.

Congratulations to the Winner of our competition for a trip for two to Fiji:

Sigma Holdings Limited
T/A Casey Panelbeaters

All information in this newsletter is, to the best of the author's knowledge. true and accurate. No liability is assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter. You are advised to consult professionals before acting upon this information.
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About Us

We are a friendly two partner practice with approximately eleven staff located on Apollo Drive, Mairangi Bay. Our clients are varied and our skills range from business structuring to trusts to Look through companies and tax planning.
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63 Apollo Drive, Mairangi Bay, Auckland
P: 64 9 478-5292
E: jmv@jmv.co.nz
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