There are a number of recent changes in how you can use your investment property for tax deductions. Below is an overview of what you can and cannot do post June 30.

No more deductions for travelling to and from your investment property

The days of writing-off the costs of travel to and from your residential investment property are about to end. From 1 July 2017, the Government intends to abolish deductions for travel expenses related to inspecting, maintaining, or collecting rent for a residential rental property.

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Depreciation changes and how to maximise your deductions now

Investors who purchase residential rental property from Budget night (9 May 2017, 7:30pm) may not be able to claim the same tax deductions as investors who purchased property prior to this date. In the recent Federal Budget, the Government announced its intention to limit the depreciation deductions available.

Investors who directly purchase plant and equipment – such as ovens, air conditioning units, swimming pools, carpets etc., – for their residential investment property after 9 May 2017 will be able to claim depreciation deductions over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. If you are not the original purchaser of the item, you will not be able to use the depreciation rules to your advantage. This is very different to how the rules work now with successive owners being able to claim depreciation deductions.

Investors will still be able to claim capital works deductions including any additional capital works carried out by a previous owner. This is based on the original cost of the construction work rather than what a subsequent owner paid to purchase the property.

There are very limited details about how this Budget announcement will work but we will bring you more as soon as we know.

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Business as usual for pre 9 May investment property owners

If you bought an investment property recently, are about to renovate, or have not had a depreciation schedule completed previously, you should consider having one completed.

As a property gets older the building and items within it wear out. Property owners of income producing buildings are able to claim a deduction for this wear and tear. Depreciation schedules are completed by quantity surveyors and itemise the depreciation deductions you can claim.

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Higher immediate deductions for co-owners

It’s not uncommon to have multiple owners of an investment property. Co-ownership can, in some circumstances, quicken the rate depreciation deductions can be claimed for the same asset. This is because depreciation is claimed on each owner’s interest. If an owner’s interest in an asset is less than $300, they can claim an immediate deduction. In a situation where there are two owners split 50:50, both owners could potentially claim the immediate deduction, bringing the total immediate deduction available up to $600 for a single asset.

The same method can be used when applying low-value pooling. Where an owner’s interest in an asset is less than $1,000, these items will qualify to be placed in a low-value pool. This means they can be claimed at an increased rate of 18.75% in the first year regardless of the number of days owned and 37.5% from the second year onwards.

In a situation where ownership is split 50:50, by calculating an owner’s interest in each asset first, the owners will qualify to pool assets which cost less than $2,000 in total to the low-value pool.

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The value of renovations

It’s best to get a depreciation schedule completed before you start renovations so the scrap value of any items you remove can be recognised and written-off as a 100% tax deduction in the year of removal. This is available for both plant and equipment depreciation and capital works deductions. When new work is completed as part of the renovations (i.e., a new roof, walls, or ceiling), this can also be depreciated going forward.

In some circumstances, there may be depreciation deductions available for renovations completed by a previous owner.

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Deductions for older properties

Investors in older properties may still be able to claim depreciation costs. This is because a lot of the items in the house will not be the same age as the house or apartment. Hot water systems, ovens, carpets, curtains etc., have probably all been replaced over time. Additional works, extensions or internal refurbishments may also be deductible.

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Further restrictions on foreign property investors

We have seen a number of measures over the years restricting access to tax concessions for foreign investors, particularly for residential property investments. The recent Federal Budget goes one step further, restricting access to tax concessions, increasing taxes, and penalising investors who leave property vacant. Measures include:

• Charge for leaving properties vacant – Foreign owners of residential Australian property will incur a charge if their property is not occupied or genuinely available on the rental market for at least 6 months each year. The charge, which is expected to be at least $5,000, does not appear to apply to existing investments but those made on or after Budget night, 7:30pm on 9 May 2017.
• Excluded from main residence exemption – Foreign and temporary residents will be excluded from the main residence exemption. The main residence exemption excludes private homes from capital gains tax (CGT). Existing properties held prior to 9 May will be grandfathered until 30 June 2019. However, it remains to be seen whether partial relief will be available to those who have been residents of Australia for part of the period they owned the property and whether this change will apply to Australian residents who were classified as a foreign resident for part of the ownership period.
• Increase in CGT withholding tax – When someone buys Australian real property (i.e., land and buildings) they are currently required to remit 10% of the purchase price directly to the ATO as part of the settlement process unless the vendor provides a certificate from the ATO indicating that they are an Australian resident. These rules do not currently apply if the property is worth less than $2 million. From 1 July 2017, the CGT withholding rate under these rules will increase by 2.5% to 12.5%. Also, the CGT withholding threshold for foreign tax residents will reduce from $2 million to $750,000, capturing a much wider pool of taxpayers and property transactions.
• Rules tighten for property purchased through companies or trusts – Australian property held through companies or trusts by non-residents or temporary residents is also being targeted by expanding the principal assets test to include associates. The move is to prevent foreign residents avoiding Australian CGT liability by splitting indirect interests in Australian realestate property.
• Level of foreign investment in developments capped – a 50% cap is being placed on foreign ownership in new developments.

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The push for affordable housing

The Government is very keen to ensure that investment is directed into ‘affordable housing.’

The 2017-18 Budget announced an increase in the CGT discount for individuals who choose to invest in affordable housing. The current 50% discount will increase by 10% to 60% for Australian resident individuals who elect to invest in qualifying affordable housing.

In addition, the Government is creating investment opportunities for Managed Investment Trusts (MIT) to set up to acquire, construct or redevelop property to hold as affordable housing. In order for investors to receive concessional taxation treatment through an MIT, the affordable housing must be available for rent for at least 10 years. For foreign investors, MITs are one area where the Government is actively encouraging participation rather than restricting it.

This article originally appeared in Your Knowledge by Knowledge Shop.

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Disclaimer

MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

Are you paying more tax than you need to? Are you looking at how to reduce taxes including the tax paid by your business? Then read on as we have some top tips for you to consider!

How to reduce taxes: Timing is everything

Accelerate deductions

For businesses, if your cashflow is good, make the purchases you need before the end of the financial year to claim the deduction, particularly those with turnover under $10 million. The $20,000 immediate deduction reduces back to $1,000 on 30 June (see Why 90,000 more businesses can access the $20k instant asset write-off this year).

For individuals, it’s a good time for charitable giving.

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Delay income – One off opportunity for high-income earners

Taxpayers with assessable income above $180,000 face an additional 2% tax on every dollar above this level. The 2% ‘debt tax’ is scheduled to end on 30 June. The difference in timing between the reduction in the FBT rate that occurred on 1 April 2017 and the removal of the 2% tax on 1 July offers a one-off opportunity to reduce your taxable income through salary packaging and other planning initiatives.

If you are likely to have a one-off spike in income, for example from the sale of a business or other significant assets, it’s worth seeing if you can delay the sale until 1 July 2017 to avoid paying an additional 2% tax. Just be aware of how the arrangement is structured. In many cases the sale is treated as having taken place for tax purposes when the parties enter into the contract, even if settlement occurs at a later point in time.

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Money or debts owed to private companies

It’s common for business owners to take cash out of their business or for the business to fund some personal expenses through the year – these appear in the shareholder loan account. If this has occurred, it is important that these debts are either repaid by 30 June (you can declare dividends to pay any outstanding shareholder loan accounts) or a formal loan agreement (with specific conditions) is put in place. Without taking action, the ATO will treat any outstanding amount as a deemed dividend taxable in the hands of the shareholder at their marginal tax rate.

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House-keeping for business

There are a number of things businesses can do to put themselves in the best position to be able to claim tax deductions. One of the most basic housekeeping tasks is to ensure that you are maintaining accurate financial records. Make sure you are implementing these top bookkeeping tips for small businesses.

• For companies, directors’ fees and employee bonuses may be deductible for the 2016-17 financial year if the directors pass a properly authorised resolution to make the payment by year-end (payment should be made as soon as practicable). Just be aware of the 2% debt tax for high-income earners
• For Trusts, it is essential that decisions to distribute pre 30 June income are documented in writing
• Write-off bad debts
• Review your asset register and scrap any obsolete plant
• Bring forward repairs, consumables, trade gifts or donations
• Pay June quarter employee super contributions now if cashflow allows
• Realise any capital losses and reduce gains
• Raise inter-entity management fees by June 30

When you’re looking at how to reduce taxes, there are a multitude of strategies that can be adopted within the law but it’s important to get the advice of experienced business accountants. MGI South Queensland have a team of expert tax accountants on the Gold Coast and in Brisbane who can help ensure that you’re not paying more tax than you need.

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Disclaimer

MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

The ATO has turned its focus to work related travel expenses and is pursuing certain claims in court.

A recent case before the Administrative Appeals Tribunal (AAT) highlights many of the issues that commonly occur when claiming travel expenses for work related travel. In this case, a truck driver claimed large work related travel expenses over two years – $24,736 in the first year, and $17,489 in the second.

Large work-related tax deduction claims often pique the interest of the ATO and in this case, the ATO audited the taxpayer’s returns, then made amendments to take into account allowances the taxpayer received from his employer for travel but had not declared as income. The taxpayer responded by lodging an amended return, increasing his claim to $33,503 in the first year (later reducing it back to $26,235). The ATO responded by initiating a specific audit of his work related travel expenses across both years. The result was that the taxpayer’s claims for work-related travel were reduced to $0 for both years and he was slapped with shortfall penalties totalling just under $8,000.

At this stage you are probably wondering why you would bait the ATO, particularly when the documentation supporting your claims was inconsistent. But, the taxpayer objected to the ATO’s decision, which launched a further investigation. This time the ATO conceded on some claims. Despite this, the taxpayer brought his case before the AAT.

The AAT found that the taxpayer did not prove that the ATO’s amended returns were excessive, primarily because he did not keep records for work-related travel expenditure when away from home overnight driving trucks. The penalties applied by the Commissioner were also found to be reasonable. The issue in this case appears to be that the truck driver just didn’t believe that he needed to keep records under the substantiation exemption and that he was entitled to claim the full amount of the Commissioner’s reasonable rates each day he travelled.

While this case appears excessive, the main parameters highlight common issues that arise for work related travel expenses claims.

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What paperwork do you need to claim work related travel expenses?

Every year, the Commissioner publishes the reasonable rates for travel expenses – accommodation, food and drink, and incidental expenses. If claims fall within these reasonable amounts, you can deduct travel allowance expenses within Australia without being required to keep full written evidence of all the expenses. But, even if you can rely on the substantiation exception, you may still be required to show the basis for determining the amount of your claim – that is, you still might need to prove that you actually incurred the expenses, and the expenses were work-related.

An area of concern is where these reasonable rates are applied carte blanche. For example, you might be travelling overnight but don’t leave until the afternoon. You have breakfast and lunch as usual before travelling, sleep away from home, then return home the next night. In this circumstance you could not claim breakfast and lunch on the first day because these meals would have been consumed before the travel began.

Also, under the ATO’s travel allowance, reasonable rates for accommodation expenses are only applicable if you are staying in commercial accommodation such as a hotel, motel or serviced apartment. If you choose to stay with family or friends while you are travelling then you can’t claim the ATO’s reasonable amount.

If you choose to claim amounts above the Commissioner’s reasonable amounts, you need to keep records substantiating all of your claim (not just the amount in excess of the Commissioner’s rates).

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Just because you receive a travel allowance does not mean you have a legitimate claim

One of the issues highlighted in this case was the misconception that because someone receives a travel allowance or overtime meal allowance, this automatically entitles them to a deduction. The expenses still need to be incurred in the course of work-related travel in order to be deductible. Also, the ATO’s reasonable rates don’t apply unless the allowance itself is ‘bona fide’ – that is, the amount must reasonably be expected to cover accommodation or meal expenses that will be incurred while travelling for work.

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To qualify as a work related travel expense you need to sleep away from your home

To qualify as a travel expense, you need to travel away from your ordinary residence. The ATO takes that to mean that you’re sleeping away from home – not just travelling for the day.

The difference between travelling in the course of your work, living away from home, or relocating is important. The tax treatment between these is quite different.

MGI has a number of expert tax accountants and consultants in Brisbane and on the Gold Coast who can provide you with the most up to date tax advice to help you reduce your tax. Don’t leave yourself exposed to the risk of ATO scrutiny. If you have any questions talk to an MGI tax accountant today on 3002 4800.

This article originally appeared in Your Knowledge by Knowledge Shop.

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Disclaimer

MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

How much will Queensland’s first Social Impact Bond impact the NFP sector?

In Australia, there are around 600,000 not-for-profit organisations of all shapes and sizes working in areas ranging from advancing education to protecting the environment. For many an ongoing challenge is raising vital funding to support their purpose and expand their service.

While governments and philanthropy provide significant sources of funding, not-for-profits are disadvantaged somewhat when compared to their for-profit cousins in being able to access capital investment. Whilst a for profit entity can simply raise equity to investors in exchange for a return on investment, NFPs have been relatively limited in offering similar arrangements due to their NFP status and structure.

The demand for social and environmental solutions in Australia is at record levels, and yet the competition for each charitable dollar and government grant that is on offer has never been so great.

The question arises – how can NFP organisations obtain access to the capital required in order to fulfil their growing not-for-profit purpose?

One potential answer to this conundrum for NFPs is a relatively new concept in Australia called Social Impact Bonds (‘SIBs’). SIBs are a type of ‘payment by outcomes’ funding mechanism that engages private capital. Typically, instead of a government paying directly for the provision of a social service, private investors provide capital to a service provider to achieve agreed-upon social outcomes. If these outcomes are achieved, the Government pays the upfront investment along with a financial return to the private investees.

The first SIB in Queensland was recently announced in March 2017 by the Queensland Government through Social Ventures Australia, to assist in reunifying children in out-of-home-care. This announcement was on the back of a similar SIB launched in New South Wales, which has been generating strong social and financial returns since its inception.

Investor returns on this SIB will be linked to the number of children successfully reunited with their families through the program, and the program is targeting returns of 7.5 per cent per annum.

The benefits of such a scheme are not only for the affected Queensland children, their families and the private investors, but the Queensland Government stand to benefit also. In 2014/15, the Queensland government spent an average of $50,000 on each child in out-of-home care. The multiplier effects for achieving the social and financial returns of each program are therefore clear to see – the more savings that are achieved by the Government, the more likelihood of further SIBs being introduced. The better returns for investors, the more demand for SIBs.

 

For-profit sector beware.

Whilst SIBs are in their relative infancy in Australia and in particular Queensland, they have been providing access to private capital for charities and NFPs in the UK and other European countries for a number of years. And not just large scale projects that would be out of reach for most of the estimated 600,000 NFPs in Australia – smaller bespoke SIB opportunities in which NFPs can all apply to obtain a slice of the pie.

With growing volatility a concern for many investors in the for-profit sector, the NFP sector may have just levelled the playing field in attracting private investment.

To find out more about improving financial sustainability in an NFP read my recent blog What is Keeping Not For Profit Directors Up at Night

Steve Greene is an experienced chartered accountant with MGI specialising in NFP accounting, auditing and consultancy services.

Fundamentally, there is only one reason that businesses go broke – they run out of cash. Business cash flow problems are a major problem for small growing businesses as well as bigger well-established ones.

So how do businesses (even listed ones) run out of cash and what can you do to make sure it doesn’t happen in your business?

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There are three basic reasons for business cash flow problems

1. They are not profitable in the first place

They don’t have a business cash flow problem; they’ve got a profitability problem. In other words, the lack of cash flow is a symptom of poor profitability (or even losses). If you have a profitability problem, unless you fix your business model and restore profitability, you’ll never get cash flow under control.

2. The second is that they use short-term working capital to fund the acquisition of long term assets

In other words, they use their working capital (short term funding) to purchase plant and equipment or property (long term assets). If your business is growing rapidly, this is a big no, no. You’ll need that working capital to fund your growth, particularly larger inventory holdings.

In most cases this issue can be fixed by sale and lease back of the assets (assuming funding is available). But the key to avoiding business cash flow issues is never to use your working capital to acquire long term assets unless you’re absolutely sure you have significant excess and know that you won’t need it in the near future.

3. The third reason for business cash flow problems is that they grow too fast

Yes, businesses can grow too fast and it is a situation we see all too often. Make no mistake, a fast growing business is potentially in danger territory, particularly if it doesn’t have access to an endless supply of funds – and which businesses have that luxury?

For many fast growing businesses, this means holding more and more inventory. As the business (and sales) grows, more of the profits are required to be used to invest in more and more inventory to stock more and more stores. If you’re in a business where margins are tight – whammo! – you have lower profits to fund ever increasing inventory. Should inventory turnover slow you could also be in serious trouble.

If you also happen to have a business where you give credit terms to your customers, then not only do you have a build-up of inventory, but you also have a build-up of debtors. These have to be funded from somewhere. Unless the business is highly profitable, the profit alone may not be enough to fund that growth. This invariably means going to your friendly banker but at some point there will be a limit to which banks will be prepared to fund your growth.

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How to avoid running into a business cash flow problem?

There are three key measures every business should be checking on a regular basis, but particularly fast growing businesses, to make sure that they have a sound cash position. If you don’t currently know these you’re flying blind. Make sure you ask your accounts team for more information.

Your Free Cash Flow
Your Free Cash Flow (or available cash) is simply that. It is the amount of cash you have left out of profit after funding the increase in size of your business. If you’re not measuring and monitoring this then you’re flying blind.

Your Working Capital Burn Rate
This is simply the amount of working capital (debtors plus stock less creditors) as a percentage of sales. If this is (say) 25%, then you know that for every additional $1m in sales, you’re going to need $250k in working capital to fund that growth.

Your Sustainable Growth Rate
This is simply the rate of growth the company can sustain without adversely affecting its proportion of debt to equity funding. It’s called “sustainable growth rate” for a reason.

There is a saying that goes ‘turnover is vanity, profit is sanity but cash flow is reality.’ We have worked with countless high growth businesses who have been stunned to learn that their financial position is unsound despite their growing sales.

It might sound crazy but at times it is essential to reign in your growth to ensure a sustainable journey in the long run. It might be painful to turn down opportunities at the time but trust me, you will be thankful when you come out with a sound business in the end.

At MGI South Queensland our specialist business growth advisors in Brisbane and on the Gold Coast can help you avoid many of the pitfalls of growing your business and ensure you maintain a healthy business cash flow.

We’re also able to offer outsourced CFO services which can be completely tailored to the needs of your organisation. From cash flow planning and management to helping you reduce the risks your business is exposed to, talk to one of our CFO consulting partners today.

The famous Sun Tzu once said ‘weak leadership will destroy the finest strategy while forceful execution of even a poor strategy can often bring about victory’. Sun Tzu is a legendary military strategist. He is the author of The Art of War a masterpiece that continues to be cited by generals, political and business leaders worldwide. Clearly Sun Tzu knew something about how to create a winning strategy. And yet in Sun Tzu’s mind the focus is definitely on implementation. For me, there’s a lot to be learnt in this approach when developing business strategy.

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Developing Business Strategy That Works

If you’ve ever researched business strategy you will know that there are dozens of different models you can use – from Business Model Canvas, Porter’s 5 forces, BCG Matrix and more. In our opinion these strategies while definitely thorough and clever, miss one crucial element. For many businesses the time that it takes to create the strategy means that it either never gets completed or once it’s done it is not easy for everyone to follow and so you fall into the trap of putting it away for another day.

Choosing not to develop a business plan at all also won’t cut it. After all, if you don’t have a plan how on earth do you know which road to take or where you are headed.

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Steps To Creating A Strategic Plan

If you’re developing business strategy, you want to know that your effort won’t be wasted.  At MGI we instead advocate the simple one page plan. It helps you translate your vision into your business strategy by looking at:

• Where are we now?
• Where do we want to be in 6 months, 12 months, 2 years – however far out you want to work
• How are we going to get there?

From here you need to detail the key actions the business needs to undertake and capture this in a one page plan.

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Too simple?

That’s the point. A one page plan is easy to develop and is easy to read, meaning that everyone knows who needs to do what, by when.

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It’s not strategy that will win the war it’s execution

Remember what Sun Tzu said about execution being critical to winning the war? If you want execution you need accountability. The difficult part in this process is making sure no one in your team puts the plan into their bottom draw.

The way to do this is to integrate your one page plan into regular team meetings and performance reviews. Each week you review who was supposed to have done what, whether it has been achieved and what the outcome was.

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Why your plan shouldn’t be a static document

Gone are the days when you spend the month of January developing business strategy that sets out what you will do for the rest of the year. The reality is that the landscape that we are operating in is changing fast and you need to be able to pivot (change your strategy without changing your vision) to be able to keep up. For this reason your one-page plan is a constantly evolving list of actions that you tick off and update as new opportunities arise or changes are required.

So in summary if you haven’t got a business plan don’t wait till a slow time of year to get cracking. Set aside a few hours this week to reflect on where your business is now and where you want it to be and start capturing this in a one page plan.

The team at MGI South Queensland have worked with many businesses throughout the region to help them in developing business strategy approaches that are practical and that don’t languish in a drawer! Our business growth strategies will help you to not only develop your plan but to keep you accountable and on track to achieving your business goals.

With a number of highly experienced small business mentors in Brisbane and on the Gold Coast, we are perfectly placed to support your growing business. Call the team now on 07 3002 4800 or book an appointment online.

A question that I often get asked by founders of high growth businesses is if they have to step away from operating in their business, how can they build a team that will hold true to their vision and will operate the business to the standard that they would.

It’s a good question. After all when you hire in support you are hiring human beings and it’s very hard to get human beings to do what you want.

A while back I had the pleasure of attending an event by Dan Barnett where he discussed just this.  The below blog shares the points raised at this conference.

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Why is it that some leaders achieve results while other don’t?

Why is it that certain leaders like Steve Jobs and Richard Branson were able to create high performing teams that can achieve results that the rest of us could only dream of.

Branson and Jobs focused on working on their business (not in it) and yet somehow they managed to ensure that their customer got the same exceptional service as if it were delivered by themselves time and time again, team after team, in country after country.

How?

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The results force

Just like Simon Sinek’s theory of the golden circle that we have discussed in previous blogs (if you haven’t read this blog click here), the Results Force identifies that it is beliefs that drive behaviours, which in turn drive results.

The problem is as business owners and CEOs we tend to talk about results because that’s what we care about.

However according to Barnett effective leadership begins with focusing on your company’s beliefs and where the company is going.

A great leader will then make it exceptionally clear what behaviours the company and its people need to follow to get there.

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The Apple Example

If you look at Steve Jobs’ leadership this is exactly how he operated. At Apple, Steve Jobs said we believe that we are going to put a dent in the world and we are going to change the way the world operates in amazing ways.

Jobs said we will do this by following these key behaviours:

We focus on design
We simplify, we humanise technology
We build extraordinary products
We don’t sell cheap
We are family orientated

He then went on to say if you don’t believe this or if you don’t want to follow these directives that’s ok; just don’t come to work for Apple.

Of course Apple has gone on to produce one of the most high-performing teams ever. Based on accounts from people who worked at Apple with Steve Jobs they say ‘we did what we did not because we wanted to please Steve Jobs but because we wanted to put a dent in the world and we believed that Job’s key behaviours would achieve that’.

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Leadership is about leading culture

Another word for a company’s beliefs and values is its culture. Put into action, culture is ‘the way we do things around here’. So if culture is so fundamentally important to the development of successful organisational teams how do you lead culture?

Step one – Find out what your customers value

There is no point building your culture around something that your customers don’t value. If you don’t know what it is that your customers value find out.

Step two – Develop your culture

Define what you believe and what are the behaviours that will help you achieve these beliefs.

Barnett also challenges leaders to understand their make or break, which is the one thing that must be done extraordinarily well to achieve your vision, and to take the lead on this.

(In the Apple example above the make or break was a focus on design).

Once you have defined these behaviours make sure they are reflected in how you hire as well as how you reward and promote your people.

Hiring

Only hire people who fit your culture and share the beliefs of your organisation.

One strategy to help you determine this is to use behavioural based interview questions that reflect the key behaviours of your organisation.

Click here to find out typical behavioural based interview questions.

Reward

Make sure your desired behaviours are reflected in your bonus system and other reward systems. For instance if you say that you value integrity but you reward your people only based on their financial performance you are unlikely to see integrity embraced in the culture of your organisation.

When looking at your rewards system consider how you can reward the desired behaviours through offering autonomy, mastery and purpose. If you haven’t watched Dan Pink’s The Puzzle of Motivation TED talk you might like to watch it here.

Termination

Finally people will not take your culture seriously if you make exceptions. Even if someone is great at their job, if they don’t fit your culture you need to show them the door.

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Step three – communicate important goals

While the focus of your internal communications is on beliefs and behaviours you still need to share your important business goals and engage your team in achieving this. So if your business plan is to increase your market share by 20% over the next 12 months make sure everyone in your team knows this, understands their role in achieving this and is informed of progress.

Remember there is a real difference between a business owner and a leader (and just because you are a business owner doesn’t mean you are a leader). Leaders inspire people to perform at their best and work together to achieve a common goal. Keep this in mind if you are struggling to ignite your team.

According to a survey by the Australian Institute of Company Directors, financial sustainability is the top issue keeping board members of not-for-profit (NFP) entities awake at night. Funding for not for profit organisations has always been a challenge but in an era of change, reduced government assistance and growing competition for each charitable dollar, it’s no surprise that it is now top of mind for NFPs.

Furthermore, returns on cash reserves held in traditional term deposits are barely yielding higher than inflation. Buildings that house core social and community services are becoming tired and in need of repair and the need to invest in IT, marketing and social media has never been greater.

NFPs are facing increasing costs and reduced income – not the perfect scenario for any organisation trying to achieve financial sustainability. In the face of this challenge, NFP Boards must think more broadly about what they can do to improve their financial sustainability.

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Traditional funding options

To help this situation, NFPs could adopt the following:

1. Selling Assets

The sale of assets is a relatively easy strategy to release liquidity that can be invested in core operations. However, if funds are not used efficiently, or are just used to fund working capital, then they will be consumed and the organisation will go back to square one.

2. Diversifying Revenue Streams

Many charities are looking to diversify their revenue streams to reduce their reliance on government funding or other major income streams. Reducing your reliance on a specific funding source is a good strategy to reduce risk. However some NFPs are restricted in what they can do by their constitution. Another challenge, which is often overlooked, is that additional revenue activities can draw management away from the core competency and ultimately reduce their focus on strategic goals.

3. Mergers

Mergers and acquisitions offer the opportunity to share corporate overheads and improve margins. However in any merger it can be difficult to merge differing strategies and goals.

4. Attracting Diverse and Skilled Board Members

Introducing skilled experts on to your Board can improve the NFP’s efficiency in generating returns on capital employed, which should improve the organisations reserves. Specialists could be assigned to sub-committees that make recommendations to the Board. However, appointing too many non-executive Board Members may result in challenges in the decision-making process.

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New options for funding for not for profit organisations

The challenges facing the industry have led to the emergence of new options for funding for not for profit organisations. These are relatively new to the Australian market but have proved successful in overseas markets (with experts predicting they will grow in popularity at home) and are therefore worth considering as part of your strategy to improve financial sustainability:

1. Social Benefit Bonds

Social benefit bonds (SBB) are a type of ‘payment by outcomes’ funding mechanism that engages private capital. Typically, instead of a government paying directly for the provision of a social service, private investors provide capital to a service provider to achieve agreed-upon social outcomes. If these outcomes are achieved, the Government pays the upfront investment along with a financial return.

The attractiveness for Government is risk mitigation, cash flow management and the potential to promote innovation in service delivery via public-private partnerships. The benefit for NFPs is that the Government is more comfortable putting forward new and additional funding when the outcome of the investment is guaranteed.

Whilst SBBs have been popular in the US and UK, they are still in their relative infancy in Australia. In the past few years we have seen a successful $7m pilot programme in New South Wales to assist foster care families as well as three SBBs in Queensland in reoffending, homelessness and issues facing Aboriginal and Torres Strait Islander People. The Australian Government just released a discussion paper on Social Impact Investing in January 2017 to explore options to expand the number of affordable housing options in Australia, based on the UK model.

To be successful in pursuing this type of funding you need to be able to demonstrate confidence to private investors. This starts with transparent and accurate financial records.

2. Crowdfunding

Crowdfunding allows NFPs to set up an online fundraising campaign based on a specific project or program; this allows people to make a secure donation to the organisation via a third party website.

In Australia, crowdfunding has seen growth in donations per annum in excess of 300% in the past two years. This growth is attributed to the shift in fundraising through digital, mobile and social media, as oppose to the traditional method of ‘shaking the tin’ on street corners. NFPs can spread their message to the public much wider than before (even internationally), in order to expand their fundraising scope for the benefit of their programs.

Industry commentators highlight that the rise of crowdfunding is a reflection of the innovation currently being experienced in the NFP sector. Whilst this method may not suit all NFPs, it certainly is an option for additional fundraising sources that should be considered by NFPs to improve their organisation’s ability to attract income.

Achieving financial sustainability is no easy task for NFP entities which is probably why it is the top issue concerning today’s NFP leaders. Each of the above strategies has opportunities and drawbacks. To make sure that you are informed on the best options for funding for not for profit organisations like yours, it is important to engage your accountant in any funding decisions.

The team at MGI South Queensland in have a specialist interest in supporting the needs of not for profit organisations. Give Steve Greene or Graeme Kent a call on 07 3002 4800 to find out how we can help your NFP navigate these challenges.

This may have been a line out of Lewis Carroll’s, Alice’s Adventure in Wonderland but it applies equally to business.

“Would you tell me, please, which way I ought to go from here” said Alice.
“That depends a good deal on where you want to get to”, said the Cat.
“I don’t much care where”, said Alice.
“Then it doesn’t matter which way you go”, said the Cat.

How many businesses follow Alice’s approach, wondering aimlessly without any clear direction?

Quite a few it seems, if the results of  our new online business benchmarking tool, My Catalyst, are anything to go by.

The free online tool asks business owners a series of questions to better understand where their businesses are at. It provides real time feedback in fundamental areas such as growth, innovation, exit and succession planning as well as financial performance.

The preliminary findings of My Catalyst indicate that nearly 90% of businesses with a growth rate of less than 5%, have no documented and communicated vision for their business. In contrast, over half of all businesses that do have a plan (even if in their head) have a growth rate of higher than 5%. It is clear that those businesses that have a clear documented vision for their business and an action plan as to how that vision will be implemented are more successful. In other words, underperforming businesses don’t plan.

To most people this fact might seem somewhat unremarkable, but it begs the question – why? It seems, according to My Catalyst, that business owners have mixed reasons for this:

• Nearly one quarter don’t have an action plan because they simply don’t know where to start.
• A further 22% don’t perceive value in planning, and
• A whopping 46% aren’t prepared to invest the time to develop a plan.
• Around 8% consider it to be too daunting.

Generally speaking, most businesses undertake some form of marketing (or other growth related activity), even if this is as basic as having a website, placing some advertisements and having some promotions. Some businesses do significantly more than this and invest tens, or even hundreds, of thousands of dollars.

Tactics versus strategy

These are tactics, not strategy.

Sun Tzu, in his book Art of War, detailed his strategy lesson number one – “tactics without strategy is the noise before defeat”.  This is not unlike Alice wandering aimlessly in Wonderland –doing something for the sake of it but not knowing what she wants or where she wants to go.

Conversely, as Sun Tzu said – “strategy without tactics is the slowest route to victory.”  Clearly you need both strategy and tactics to maximise your chance of success so why do nearly half of all Australian businesses not have a plan?

Furthermore, the fact that around one quarter of business owners don’t know where to start with their planning process is damning.

How to set a vision for your business?

A simple framework can be built around the basic premise of “Now, Where, How” – where is the business now, where does it want to be and then a detailed action plan of how it is going to get there.

Having a vision and a plan is about change – change from where you are now, to where you want to be. Just like the GPS in your car which takes you from A to B. It knows where you are now, you program in where you want to go and the GPS develops the plan to get your there. It’s exactly the same with a business – but you need to develop the plan.

More often than not, our inability to plan and create a vision is one of attitude.

In order to bring about successful change you need at least three basic ingredients. Firstly, you need to be sufficiently unhappy with the status quo. There needs to be a reason to change (the why). If you want to lose weight, you need to be sufficiently unhappy with your current weight in order to be motivated to lose weight. If there is not sufficient dissatisfaction with where the business is now, then change will be hard to achieve.

Secondly, just like when you focus the lens of a camera on a subject, you need to have clarity on where you want to take the business – your vision (the where).

Finally, a vision without a plan is just a daydream. You need to have a documented action plan of who has to do what by when, in order for the vision to be achieved (the how). And just as importantly, you need someone (preferably an outsider) to regularly hold you to account to ensure the actions are implemented.

It’s not rocket science, but allocating time to the “important, but not urgent” task of strategic planning is the key to ensuring, that unlike Alice in Wonderland, you travel down the road that takes you to where you want to go.

If you didn’t keep to your New Year’s resolutions last year, you’re not alone. A national survey conducted by finder.com.au found that 58% of Australians – an estimated 11 million people – broke their New Year’s resolutions in 2015 . But, the good thing about setting yourself New Year’s resolutions is that we all get the opportunity to have a fresh start each year and try again.
The survey also detailed that 21 percent of Australians failed because they made too many resolutions. Did you make any New Year’s resolutions for your business this time last year? Did you attain your financial goals, and ready yourself for the New Year? If not, incorporating a business goal into a resolution is a great way to maintain good financial health.
Despite the longstanding tradition of making New Year’s resolutions (born from Roman mythology and a god named Janus in 153 B.C), many fall off the radar after just two weeks. This year we’ve come up with five easy and effective New Year’s resolutions that every business owner should focus on for a prosperous 2017.

Resolution #1:

Realise that your business is just a pot of money – your money.

Fundamentally, every business is the same. They use capital to produce a profit. In our “pot” we usually put equity capital (money belonging to the owner and reinvested profits) and debt funding (obtained from the bank, leases, HPs, etc.) – the inputs of the business. Out the bottom of the “pot” drops sales, less expenses to leave a profit – or the outputs of the business. The key is to maximise outputs and minimise inputs.

Resolution #2:

Decide what rate of return you want from your business.

Think about how you have arrived at that rate. After all, you can get around 4% in ten year, risk-free government bonds. On a broad portfolio of publicity traded blue chip stocks you should expect a long term average of around 12 per cent. Therefore, you should generally expect a higher rate of return on the capital invested in your business, which is not publicly traded (i.e. easily sold) and usually in one industry, not a broad portfolio of companies. As a guide, we recommend you start with a minimum expected rate of return of 20 per cent, but this will vary depending on the riskiness of the business.

Resolution #3:

Get to know the financial “drivers” of your business.

Is your business volume driven? Is it margin driven? Is working capital a key driver or are you in a capital intensive industry with large investment in plant and equipment? It’s no use selling more if it is at the expense of margin and you end up making less profit. Either way, you need to know in what area, changes will give you more “bang for buck”.

Resolution #4:

Many small changes can make a big difference.

Some business owners think their panacea can be achieved by simply increasing prices or increasing sales. Based on my experiences, small changes made to a handful of areas can have a multiplied effect on return on capital employed (ROCE). Focus on the key driver for your business but also look at other areas including working capital management, under-utilised assets and margins.

Resolution #5:

Understand what your free cash flow is.

Finally, profit is opinion—cash is fact. You can still make a profit but have no (or negative) cash flow. This is because management decisions and accounting policies have an impact on how profit is reported. Assumptions are also made regarding depreciation rates for plant and equipment and these also impact on profit. Businesses are also growing, which means more and more cash is chewed up in more and more stock, debtors and plant. Many fast growing businesses have gone broke through lack of cash flow.