August 2010 Newsletter

Welcome to the latest newsletter from Stewart & Co Limited

In this newsletter:

Employment Agreements

Many businesses continue to offer candidates the job rather than an Employment Agreement. Business people are well advised to offer an Employment Agreement first and on the signing of it a job offer can be made.

Please bear in mind it is illegal to employ someone without an Agreement in place and if they are offered the job, they instantly become an employee. They then have full coverage of the Acts. This can (and often does) lead to difficulties in obtaining a signed Employment Agreement later.

While there are several steps one can take to obtain a signed agreement from an existing employee it is far easier to obtain one before employment starts.

Article courtesy of Employers Assistance Limited

Often, when a company is short of funds, the director will make preferential payments to some creditors. Often, those same creditors have some degree of commercial power and therefore, effectively, the creditors are paid in preference to the general creditors.

If the company subsequently goes in to liquidation, a liquidator has powers to unwind certain payments. For a transaction to count as being voidable, the liquidator must establish that the transaction enables one party to receive more towards satisfaction of a debt owed by the company than the party would receive, or would be likely to receive, in the company’s liquidation.

The government has introduced a continuing relationship or running account principle to calculate whether a creditor has received preference. In simple terms, if in the six months before the liquidation, goods and services are provided to say a value of $10,000 and the creditor receives more than say $10,000, then excess can be challenged. It does not matter that the payments received during that period were applied to earlier invoices.

A liquidator can in fact go back twenty-four months but normally six months is taken as the period.

If, you have received sums from a debtor and a liquidator later challenges those payments and requests a refund, please contact us for advice.

The government website has a very useful area for business statistics.

The reference is: www.stats.govt.nz.

Various graphs and tables are available showing businesses by region, populations etc. This can be very useful if you were considering purchasing a business.

For example, for a person interested in becoming a courier driver (an owner operator), you can use The Business Toolbox to see how the industry is performing. Using the industry profiler, you can then see that the industry is relatively steady in terms of numbers of business but business survival drops off very quickly. But it would appear that people join this type of business for a short time before exiting.

There are also interactive maps which show the density of population, compare areas and you can
even zoom them on various suburbs.

If you are interested in marketing your business or perhaps even purchasing a business, you should take a good look at this site. There is no cost to using it.

You have probably heard this many times but what do you do when your business is having cash flow problems? The problem is due to the lag in time between when you pay your employees and suppliers and when you collect money from your customers. At its simplest, you need to delay outlays of cash for as long as possible while encouraging anyone who owes you money to pay as soon as possible.

Managing Customers

•   Many business owners feel uncomfortable about debt collection. If that is the case, then get
    someone else to do it. While this may seem like an expensive option, it is much more expensive
    to have your business funding other people’s. You may be able to employ a part time Accounts
    Receivable clerk for as little as $20 an hour. Chances are they will put much more than that back
    into your bank account.
•   Consider the use of debt collection agencies to chase unpaid bad debts. Whilst agencies take a
    cut it may be better to lose say 25% of the debt as a commission than to collect nothing at all!
•   Offer discounts to customers who pay their bills rapidly
•   Ask customers to make deposits when orders are taken.
•   Require credit checks on all new on account customers
•   Issue invoices promptly and follow up immediately if payments are not made on time.

Managing Suppliers

•    If you are being offered discounted products then think carefully. Why are they discounting those
     particular items? Is a new product coming out soon which will make the discounted product
     obsolete? Think of stock as cash sitting in your stock room. Buy stock when it suits you and your
     needs and not those of your supplier (e.g. when the rep calls).
•    Use up all available terms with suppliers and negotiate better ones if you can. Look for 20th of the
     month following rather than 7 days.
•    If a payment is due in 30 days, don’t pay it in 15 days. Use internet banking to make payments on
     the last day that they are due to retain use of your funds for as long as possible.
•    Communicate your financial position with suppliers if you ever need to delay a payment, to obtain
     their trust and understanding

Surviving Shortfalls

In all cases it is good business practise to prepare cash flow projections, based on your educated guesses of customer’s payment histories etc. An accurate cash flow projection can alert you to trouble well before it strikes.

•    Banks are wary of people who have to have money today (as this indicates a lack of planning) and
     would much rather lend you funds before you need them. If you assume that at some stage in the
     future that you will be short on cash then you can arrange a preset line of credit for when you need
     it.
•    If bankers can’t help the next step is to approach your suppliers. If you’ve been a good customer
     in the past and kept them informed of your financial situation then they may be more interested in
     helping to keep you in business. You may be able to negotiate extended credit terms (effectively a
     low cost loan) just by asking.
•    You could consider debt factoring. Factoring can pay you today for your receivables’ that you may
     otherwise not be able to collect for weeks or months. Again there is a cost involved, say 15%, but
     you will eliminate the hassle of collecting the debt and fund current operations without borrowing.
•    Ask your best customers to accelerate payments, and if necessary, offer a discount if they pay
     today.
•    Sell old or out of date stock for whatever you can get for it.
•    You may be able to raise cash by selling and leasing back assets such as machinery, computers
     or phone systems. However, this is not a cheap option and you could lose your assets if you miss
     lease payments.
•    Chose the bills to pay carefully. Don’t just pay the smallest ones and let the rest slide. Make
     payroll payments first, unpaid employees become ex-employees pretty fast. Pay crucial suppliers
     next. Ask others if you can skip a payment or make part payments.

Five things to check with your insurance policies;

1. Policy ownership

You want the monies to be in the correct hands in the shortest period of time. Who is the current owner of your policy? Is this the right party to receive the proceeds?

2. Business Structure

Has there been a change in the structure of the business, such as a shareholder selling out, a new shareholder buying in, or amendments to shareholdings to reflect a transfer of shares?

3. Tax deductibility of premiums

If you are claiming the tax deductibility of a premium, then it is usual that the payout is assessable in the hands of the policy owner. Have you determined the financial impact this will create and is the net amount going to meet your financial commitments?

4. Indemnity Income Protection

At claim time you are required to provide evidence of the income that you are earning. For a salary/wage earner this isn’t usually a problem. However for self employed people, if you have had changes in your business structure, significant reduction in income levels, or business has grown and you are less involved in the generation of the income, then you may find that your income benefit is amended to reflect your current situation. You could find yourself over insured, paying a premium for a benefit you cannot claim.

5. Non disclosure

It is critical that at the time of underwriting your application that your full and precise medical history was disclosed to the insurance company to allow them to issue the insurance on the correct terms and conditions. Failure to provide critical information could deem your insurance invalid.

Now is the time to confirm that you have your policies structured correctly and not be frustrated that failure to act causes you an avoidable dilemma.

This information was supplied by Barry Day of Financial Success Group (2008) Ltd. Barry has a self assessment tool available free of charge. If you want a copy, please contact us.

Bank Ratings

We frequently get asked our opinion on banks and investments. Under the new securities laws, we are unable to give investment advice and will generally refer clients to advisors who are qualified in that field.

However, recently, we received from “Global Finance Magazine” a copy of their assessment of the worlds 50 safest banks. For New Zealand tax residents, the relevant banks in that top 50 were:

Rank

Rabobank
National Australia Bank
Commonwealth Bank of Australia
ANZ Banking Group
Westpac Banking Corporation
ASB Bank

6
11
12
15
16
17

Shopping Mall Tax Refunds

You would all have seen advertisements on television and the booths in the shopping malls for companies such as NZ Tax Refunds and My Tax Refund where they offer a 'risk free no refund - no charge' service for filing tax returns for PAYE earners.

We have seen a growing number of cases where children (who are Beneficiaries of Trusts) have visited these agencies before we have completed the Trusts' financial statements. This makes it more difficult to allocate income to Beneficiaries without incurring additional costs in relation to requesting re-assessments for the Beneficiaries. Not allocating income to Beneficiaries results in the Trust facing a larger than necessary tax cost.

As well as the additional administration issues created and the cost involved (when NZ Tax Refunds prepare their tax returns, we are delinked as tax agents for the individual) distributing income to beneficiaries can save the trust significant amounts of tax due to much lower personal tax rates.

Please make sure your children and any other beneficiaries of your trusts are aware of the consequences of visiting these agencies.

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