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SBS Accountants & Advisors

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How do you Value a Business

Posted on March 10, 2021 at 5:10 PM


Valuing your business can be an important part of getting finance, attracting investors or selling.

Here are some suggested steps to help you through the process.

 1. Prepare your business information

 You’ll need a range of business information to value your business properly. If you’re selling, potential buyers may ask want to value your business independently. So it’s a good idea to have your business documents organised and up-to-date.

 You will need the following information.

Finances and assets

 Your financial statements (for the last 5 years if possible) such as cash flow statements, debts, annual turnover, and profit and loss statements, including BAS statements lodged for those years.

  • Details of physical assets such as machinery, buildings, equipment, and stock.
  • Details of other assets such as goodwill towards the business and intellectual property (any designs or ideas that you have protected through copyright).

 Legal information

 Legal documents such as leases and insurance policies.

  • Registration papers such as business name certificates, A
  • ustralian business number (ABN) registration papers, licenses, permits, and any other papers that demonstrate you comply with government requirements.

 Business profile, procedures and plans

  • Market conditions such as details of competitors, and how your business compares to them.
  • Sales information such as reports and forecasts.
  • Business history such as start date, ownership and location changes.
  • Business procedure documentation such as marketing, staff roster and customer service procedures.
  • Business plan such as marketing, emergency management and growth plans.
  • Other details such as opening hours and whether the business premises are owned or leased.

 Staff, supplier and customer information

  • Employee details such as job descriptions, skills and experience, work history, performance reviews, and pay rates.
  • Supplier details such as supply agreements and supply prices.
  • Customer details such as customer numbers, customer profiles and direct marketing activities.

 2. Decide whether to get professional advice

If you can afford to, consider getting professional advice on how to value your business through your accountant, a business adviser or a business broker.

 These professionals can help you:

  • analyse your finances
  • find trends in your industry's market
  • calculate the goodwill value of your business
  • estimate your business' future profit
  • work out a value for your business

 They might also have clients who would be interested in buying your business. This could save you the cost and hassle of advertising.

 3. Choose a valuation method

 Keep in mind that there is no one set valuation method. You could use a combination of methods to get your final value. You may also need to negotiate the method of valuation with a buyer or investor.

 If you use a professional, they can help you decide which method is best for your business.

Some common methods for calculating the value of a business include using:

  • current market values
  • return on investment
  • business asset value
  • cost of starting a business from scratch
  • future profit of a business

 Look at current marketplace value and your industry

How you value your business can depend heavily on the industry you're in, and the current marketplace value of similar businesses.

 Industries usually come up with their own rules and formulas to value a business. So, it's a good idea to get a good understanding for your particular industry.

Use the return on investment method to calculate value

 If you’re selling your business, the return on investment (ROI) method uses your business' net profit to work out its value. You can either calculate:

  • an ROI based on a selling price (value) you have in mind, or
  • a selling price based on an ROI that you set

Use your business' assets to calculate net worth

When calculating the value of your business assets, make sure you include both tangible and intangible assets of your business.

  • Tangible assets are physical things you can touch such as tools, equipment, and property.
  • Intangible assets are things that can't be touched but are still valuable, such as intellectual property, brands and business goodwill.

 After you've calculated the total asset value of your business, use this as an indication of how much you’d like to sell your business for.

 Assessing your business' assets value can be a complicated process. It's a good idea to ask your business advisor or accountant for help.

Calculating business goodwill

Goodwill can include:

  • customer loyalty and relations
  • brand recognition
  • staff performance
  • customer lists
  • reputation of your business
  • business operation procedures

 Calculating goodwill can be a complicated process. You’ll get different results depending on the method you use. You can use different methods to get a price range you’d like to set for your business goodwill. But in the end, the value is what the marketplace or buyer is willing to pay. Because it's difficult to calculate goodwill, it's a good idea consult a professional such as your accountant.

Account for depreciation

 If you use your business assets to calculate value, remember to account for depreciation. Depreciation is the loss of value for your assets over time. For example, you may have purchased a computer for your business 3 years ago for $1000. When calculating your business' asset value, the value of the computer will no longer be $1000.

 Talk to your accountant if you're unsure how to work out depreciation of assets.

Find the cost of creating your business from scratch

 The cost of creating your business from scratch can be used as a guide for valuing your business. This is the estimated cost to build a similar business in your industry in the current market. To calculate the cost, you'll need to include all costs involved when starting from scratch, like:

  • buying stock
  • buying equipment and tools
  • getting licenses and permits
  • recruiting, training and employing staff
  • developing products
  • marketing and promotion
  • buying or leasing premises
  • setting up online

 Estimate the future profit of your business

For a buyer or investor, the biggest value of your business will be its future profits. You're more likely to get finance or sell for a good price if you show your business will probably be profitable. Show this through your financial statements to give investors an idea of the returns they could expect from your business.

 Estimate the future profit of your business by looking at trends in your business finances from past years. You can also look at trends for similar businesses in your industry. This can show how your business compares and how the market is going. Use this information when negotiating finance or a selling price for your business.


Choosing a Business Structure

Posted on February 28, 2021 at 10:15 PM



If you are planning to start a business, there are certain factors you should consider before starting. The most crucial factor in choosing the type of business structure to conduct your business activity.

 There are four main types of business structures.

 

  • Sole Trader
  • Partnership
  • Company
  • Trust

 Your first goal should be to understand what characteristics each structure holds and whether it aligns to your business goals.

A business structure has various factors that can impact your decision in its selection. These factors are:

 Your Tax Liabilities

 Each structure has different tax liabilities to be fulfilled. Therefore, you must discuss this in detail with your accountant before deciding on which business structure you choose.

 Your Duties and Responsibilities as a Business Owner

 Each business structure assigns different kinds of responsibilities to its owners/ shareholders. If you choose a particular type of structure, you should review the details of the roles and responsibilities as the business owner.

 Administration Cost in Setting up a Business

 Each business structure has different cost factors associated with it. For example, a company structure has ongoing costs like yearly ASIC fees. Similarly, a business name has to get renewed after every 3 or 5 years depending on the yearly plan you chose at the time of business name registration.

 Your Personal Liability

 You must understand that every business structure has different kinds of liabilities involved. It means there are risks involved to affect your personal assets in case of losses incurred in your business.

 Profit Distribution

 There are different ratios of profit distribution in each structure depending on your stake in a business. However, as a sole trader, you are the only business owner, hence you will receive full profit made from the business.

 Legal Documentation

 Each business structure has various types of legal documents that govern the business activities. These legal documents provide a set of principles for businesses to operate according to the relevant law.

 For example, a trust is bound by a legal document of a Trust Deed. A company is bound by the constitution.

 However, as a sole trader, there are no specific requirements mentioned by ASIC to have a legal document. Though, it is advisable to keep track of all your financial records for at least 5 years.

 Changes in Business Structure

 

 Each business structure has some legal obligations so if you think about changing your existing business structure in the future, you must know how complicated it would be to do so.

 Each business structure comes with distinct levels of complexity about its legal status and the value it provides to its investors / owners.Each one has a unique set of goals when conducting a business, so it is essential to be mindful and aware of the technical details of each type of business structure.

 Itis always recommended to seek advice when planning to choose a business structure. CAll SBS Accountants and Advisors to analyse your circumstances and assist you in choosing the best business structure that would align with your goals.

How do you improve profit?

Posted on February 25, 2021 at 5:00 PM


 

So you want to improve the profitability of your business but don’t know where to start? Our aim is to explain the basics to you and let you know what you need to address in order to increase the profit generated by your business and the money your business puts in your pocket. So read on!

What is a Profit?

 Profit is whatever is left over after you have paid all of your expenses.

 Four things determine your business profit:

 

  • The price you charge for the products or services
  • The quantity (or volume), of products or services
  • The costs that you incur directly in producing or buying the products or services. These are known as variable costs as they can go up and down with your sales volume. A good example of this is the cost of raw material.
  • The costs that you incur whether or not you make any sales. These are known as fixed costs because they do not change with your sales volume. A good example of this is the rent expense.

Suppose you sell one product called a widget for $100. You pay $60 for producing each widget. What you sell the widget for is the price and what you pay to have it available for sale is the variable cost. If you sell 100 widgets, your total variable costs are $6000 ($100 x $60). If you sell 50 widgets, your total variable costs are $3000 (50 x $60). So, as you can see, your variable costs change with your sales volume. If you sell a widget for $100 and it costs you $60 you have made a profit of $40 on each sale. This is called your gross profit or gross margin. Your gross profit gives you the resources to pay your fixed costs such as rent, wages, insurance

 

Gross Profit – Fixed Costs = Net Profit

 When you look at a set of financial statements, they tell the story of your business performance over the designated period. If you are in sales or manufacturing, the first item shown is sales less your variable costs (purchases, cost of sales), resulting in your gross profit. (Trading Statement). Fixed costs and general expenses are then listed and calculated. The fixed cost total is then subtracted from the gross/ trading profit to give your net profit amount. This is the profit from your business that is cash available for you to spend on business assets or for personal use. Other deductible items such as depreciation and amortised borrowing costs are deducted to reduce your net profit to what is known as a taxable profit. This is then what you pay tax on.

How to Increase Profit

 If you are looking for ways to increase your profit, you need to focus your attention on the four profit-determining factors: price, volume, variable costs and fixed costs. You can focus on one or more of these factors in order to enact change. Before taking any action, you should have a good look at your business and see which of these four profit-determining factors you need to focus on. Do not skip this step and jump into random actions like reducing your prices, spending money on advertising, reducing or increasing stock levels, until you have worked out which factor/s you need to focus on. If you cannot work this out yourself, or need a fresh set of eyes to consider your circumstances, a good accountant can help you :). It is important to note that you can improve business profit by increasing or decreasing any of the four profit-determining factors; however, some conditions need to be met.

Factor Action Required Conditions

Price
  • Increase -  You increase the price to increase gross profit. Sales volume will either remain unchanged or could decline. If it does decline, then the reduction needs to be less than the extra profit you expected in order to benefit from this action.
  • Decrease -  You decrease the price to increase sales volume. Sales volume has to grow sufficiently to compensate for the price decline. As sales volume increases, fixed and variable costs per unit should decrease due to increased economies of scale as the same level of costs are spread over more units.
Sales Volume
  • Increase -  To achieve this price may remain unchanged or be decreased. Advertising or marketing may have been undertaken. More attentive and focused service to customers may have been implemented. If prices were decreased, then it is important that the resulting reduction in gross profit is less than the increase made from increasing sales volume. As sales volume increases, fixed and variable costs per unit should decrease due to increased economies of scale as the same level of costs are spread over more units.
  • Decrease -  Savings in fixed costs would have to be achieved by reducing the size of the business turnover. Services and products offered or production levels would need to be evaluated to also look for ways to reduce variable costs. Economies of scale may decrease. It is crucial that savings made are greater than any reduction in gross profit due to decreased sales volume.

Variable Costs

  •  Increase - An increase in variable costs should lead to an improved product or service quality. Your market must accept a higher price to cover the increased costs, or the better service quality must attract new buyers and increase sales enough to offset the higher variable costs.
  • Decrease -  Any decrease in variable costs should be worked out carefully, so it does not affect product and service quality and sales volume. If sales volume did decrease the resulting fall in gross profit would need to be less than the savings achieved.

Fixed Costs

  •  Increase -  An increase in fixed costs should lead to an improved product or service quality. Your market must accept a higher price to cover the increased costs, or the better service quality must attract new buyers and increase sales enough to offset the higher fixed costs.
  • Decrease -  Any decrease in fixed costs should be worked out carefully, so it does not affect product and service quality and sales volume. If sales volume did decrease the resulting fall in gross profit would need to be less than the savings achieved.


It can be seen from the above that action on any one of those four profit-determining factors can impact on the other three factors. A profit improvement strategy will involve more than one factor and may result in an increase or decrease in each.

 There is no standard formula for improving your profit. You need to look at your business’ strengths and weaknesses and tailor your strategy to your business circumstances. Too many people make the mistake of copying other business strategies that they consider successful without looking carefully at whether someone else’s fixes are right for their business. Planning and review is the key.

 Once you have decided what actions to take, the results of these actions need to be monitored regularly and carefully. If the profit improvement strategy is not working as planned, then adjustments need to be made quickly before damage is done.


 In summary:

 A favourable change in price and/or your variable costs improves your gross profit margin per dollar of sales.

A favourable change in your sales volume and/or your fixed costs indicates greater productivity. Therefore, the overhead costs you incur in running your business involve lower costs per dollar of sales as a result of your profit improvement strategy.

 

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from your accountants. Or call us at SBS Accountants & Advisors




 



 




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