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Ratio analysis methods for your business

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Financial ratios are useful tools for business owners to monitor, analyse and improve their business performance. By using ratio analysis methods, you can gain insight into a company’s liquidity, efficiency and profitability by comparing the information contained in its financial statements.

Solvency:
Solvency ratios measure the company’s capacity to fulfil long-term financial commitments. Debtor days is one of the key measures of this ratio analysis method. It shows the average number of days that a business takes to collect invoices from their customers. The longer it takes to collect, the greater the number of debtor days. When debtor days increase beyond normal trading terms, it indicates that the business is not collecting debts from customers as efficiently as it should be. The formula for working out debtor days is:

(Trade receivables ÷ Annual credit sales) x 365 days

Profitability:
Profitability ratios help measure and evaluate the ability of a company to generate income relative to revenue, balance sheet assets, operating costs and shareholders’ equity during a specific period of time. The net profit margin measures what percentage of each dollar earned by a business ends up as profit at the end of the year, the formula is:

Net income ÷ Total revenue = Net profit margin

Liquidity:
Liquidity ratios measure a company’s ability to pay off its short-term debt obligations. This is done by comparing a company’s most liquid assets, those that can be easily converted to cash, with its short-term liabilities. Current ratio indicates whether a company has the liquidity to meet its short-term obligations. The formula is:

Current assets ÷ Current liabilities = Current ratio

Activity:
Activity ratios measure the efficiency in which management runs the company. Inventory turnover is an important activity ratio, showing how effectively a business is using its inventory. This ratio measures how many times the company’s inventory has been turned over or sold during a specified period. The formula is:

Cost of goods sold ÷ Average inventory = Inventory turnover

Tax time changes

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The ATO will start processing 2018-19 tax returns on 5 July 2019 and are expected to start paying refunds from 16 July 2019, with the majority of electronically-lodged current year tax returns completed within 12 business days of receipt. There a few changes to tax returns that individuals should take note of going into this end of financial year.

Private health insurance statements:
From 1 July 2019, health insurers are no longer required to send private health insurance statements, it is now optional to send this information. Private health insurance information will be available in the pre-fill report, expected by mid-August. If it is not populated by then, taxpayers may need to request a statement from their health insurer.

Low and middle-income tax offset:
Taxpayers may be eligible for an income tax offset if they are an Australian resident for income tax purposes or their taxable income is in the appropriate income range. It is not compulsory to claim this offset, the ATO will work it out when their tax return is lodged.

In the event the changes proposed in the 2019-20 Budget become law after 1 July 2019, the ATO will automatically amend assessments. The offset can only reduce the amount of tax paid to zero and it does not reduce Medicare levy.

Income statement:
Employers reporting through Single Touch Payroll are not required to provide a payment summary to their employees as income statements will replace them. Employees can access their income statements through ATO online services at any time. Employees will receive a notification through myGov when their income statement is ‘Tax ready’, so they can complete their tax return. Employees will be able to contact the ATO for a copy of their income statement if they do not have access to myGov.

Building the right team for your business

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While hiring the right staff is a key element when running a business, to be successful you will need to build a strong team. Here are some tips on turning a group of individuals into a cohesive, collaborative team that will help your business to reach its full potential.

Have a vision:
When starting a new business, defining what your motivations are can help you to visualise the type of organisation you want to create. This can help your staff to know what you are aiming for and understand the goals of the business. Don’t just focus on your products or services, outline the principles and characteristics you wish to build in your organisation. For example, some of your core goals may be to have outstanding customer service or to create a supportive workplace. Once you have outlined your vision, you can use it as a guideline for both you and your employees.

Involve your staff:
By getting your employees involved in the day-to-day operations of your organisation, it will allow them to use their strengths to integrate and develop into the business. Challenge your staff by giving them timelines or specific goals to strive for. If they have achieved these, acknowledge their success. This will motivate them to work hard if they know they are being recognised for their efforts. Consider team-building exercises or activities outside of work as a way to foster a friendly and positive environment. When your employees are happy and enjoy coming to work, this will reflect in your business.

Define roles:
Hiring from a broad range of backgrounds will mean that each of your employees will bring different strengths and talents to your workplace. Each individual will have different personalities and offer a unique perspective on how to do their job. Recognising this as an employer can help you to enable each employee to utilise their strengths. This will improve the strength of the team and benefit your business. Clearly define what the role of each worker is, as vague instructions will affect progress and efficiency. Updated task lists may help, as each employee will know exactly what needs to be done and the work will be completed in a productive, cohesive manner.

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