Create a financial roadmap for 2015

As we bounce back after the Christmas break it’s timely to spend a few moments to think about how we can make sure 2015 is more financially rewarding than this year.

Everyone’s individual circumstances will be different and our goals will be affected by our particular life stage, be it an early 20s accumulator or a retiree. Nevertheless the opportunities that may be available to you in the fields of finance and investment are both varied and complex.

Like any project such as getting fit or learning a hobby, there is an important framework that is followed by those who get results.

Firstly, it’s important to start with the end in mind and understand your financial goals whatever they may be. They may be challenging longer term ones such as retiring debt free with $1 million in investable assets or equally worthwhile shorter term targets like reducing your mortgage by an extra $50k this year.

This isn’t novel advice but most Australians don’t follow it. Be as specific and realistic as possible.

The second important step is to get some assistance. Money management is now a team sport and some initial advice can ensure you have the right goals and understand the journey necessary to achieve them. Importantly, an adviser or a friend with similar financial goals can also act as an accountability partner and help you to measure and review your plan.

The third piece is to actually design your plan. It may be a complex set of professional recommendations or on a simpler level setting out an action list including the five most important things you need to do in the next year to move closer towards your stated financial goal. While the five things will all be important, identifying the top priority will help you maintain your focus.

Finally, it will be important to set up a review and measurement process with your adviser or accountability buddy that will not only keep you on track but will help you maintain your momentum by gaining a sense of progress.

Even professionals need to have a financial plan. For what it’s worth here are my top 5 for 2015.

  1. Reduce non deductible debt. I am undertaking some major renovations on a new home so after a long period of having only tax deductible debt, I now have a large ‘bad debt’ loan that needs attention.
  2.  Improve the returns in my SMSF. Due to inattention and some conservatism I have more cash on deposit in the fund than desirable. I am in the process of selecting some investments that will increase the yield at an acceptable risk level.
  3. Diversify my assets. I have some investments that it may be opportune to reduce or cash out of entirely to take advantage of some potentially higher growth opportunities.
  4. Structure my affairs for better tax efficiency. Tax laws are continually changing and I am aware of some opportunities that need examining that may legally reduce my overall tax impost.
  5. Improve the discipline in regularly reviewing and measuring results and progress. EVERYONE needs an accountability buddy or coach.

Getting the finance you need to ensure business success

Business lending is shrinking as banks continue to favour home loans over business loans in their short-term approach to capital use and returns. It is stifling the economy and it is a major frustration for businesses that are seeking capital to fund their growth. In their recent submission to David Murray’s financial system enquiry, Industry Super Australia confirmed that the amount of commercial lending for every dollar of residential property lending has plunged from $3.84 to $1.62 over the past 25 years. The land of opportunity has become the land of property.

How do borrowers navigate these changes? Communication between borrowers and lenders is the key to a successful banking relationship. Bankers do not like surprises. As a borrower, be proactive and provide financial information that is both timely and accurate. Prepare and deliver on financial forecasts and projected financial covenant ratios. These add to a borrower’s credibility and offer opportunities to negotiate during the loan renewal process. Additionally, business owners should stay focused on their core business and have a solid business plan with contingencies in place.

So businesses who are seeking funding need to carefully consider the way they frame their finance proposal to their banker, positioning it in the best possible light. A professional, well-thought out application with strong supporting documentation is critical. Understanding what banks are looking for will help you get it right first time and improve your chances of success.

Banks typically look for three major elements when they assess your business’ credit risk. These are commonly known as ‘The three Cs’.

The first critically is ‘character’.

Bankers will assess your character by reviewing a range of documents that provide information about your history, track record and experience in business. They are seeking to understand your commitment to a relationship with the bank. Considerations include:

  • Have you been able to meet your forecasts?
  • What is your repayment history like?
  • Do you do what you say you will do?

The bank will also want to see that you have plenty of ‘skin in the game’. Are you contributing enough to your own cash or equity to the purchase or new project?

The second thing a banker will look for is ‘collateral’.

Here the bank ‘credit department’ reigns supreme. They will be seeking all the first mortgage “bricks and mortar” security they can get their hands on supported by a mortgage over your equipment, other assets of the business and personal guarantees from directors. Think twice about pledging all of your assets if you can avoid it as it limits your borrowing options in the future.

Thirdly, a banker wants to look at your ‘capacity’.

They need to know that your earnings are sufficient to pay the loan back without creating distress. When you apply for the loan, you will be asked to outline all of your income, and provide comprehensive financial data on the business. These will include cash flow and profit and loss forecasts and a robust business plan.

Once you have satisfied the ‘three Cs’ there remains much devil in the detail. Your ranking in this area will determine how much negotiation leverage you have around some very important final points namely:

Covenants – These are the ratios and conditions that the bank will monitor to ensure satisfactory performance of your loan. They may include the ageing of your debtor’s maximum, stock levels and interest cover (the number of times your net profit exceeds your interest bill). Breaking these covenants give the bank the power to charge penalty interest rates and even call in your loan. So it is sensible to ensure they are achievable. While it is important to monitor them once in place, practically they are usually regarded as a guideline by the bank and a lever to deal with relationships that have deteriorated beyond repair.

Security – We live in difficult and uncertain financial times. While it is necessary to ensure the bank has ‘sufficient’ security, do not be overly generous. Look to exclude the home and personal assets where possible. Maintaining separate banking relationships for business and personal loans can give you options and keep each bank on their toes.

Repayment terms – Interest only terms take the cash flow pressure off your business by excluding the additional burden of the extra loan portion payment particularly in the early period of the loan. Banks however are keen to see a start to the repayment of their loan and are reluctant to extend interest only beyond two to three years.

Even if you satisfy the three ‘Cs’ and all other lending criteria you may experience variations between banks so it’s important to get some advice. Some banks have particular industry focuses (and usually specialised products to match) and others will seek to reduce their exposure to a type of business purely because the bank has a high total exposure to that area they are seeking to reduce on a pure risk balance basis.

In a challenging borrowing environment a thorough understanding of how banks assess your position; a well thought out finance proposal; and careful consideration of the terms will give you the best chance to obtain the finance you need to ensure business success.

New financial year cost savings

A challenging economy requires careful cash management to sustain your business.

Tough decisions are necessary which tend to involve workforce reduction and increased productivity from existing employees, both crucial to examine. However, if businesses look beyond labour, they can often find additional ways to drive meaningful long-term cost reductions. Here are a few areas to consider –

1.  Product lines and customer segments
Many businesses have product lines or customers that fail to generate meaningful profitability, or worse, generate losses. The Pareto Principle — the 80/20 rule — often applies; many find that the majority of their profits are generated by a relatively small number of products or customers. By simply shifting energy from less profitable products or customers to more profitable ones, companies can dramatically improve profitability.

2.  Outsourcing
Outsourcing Many businesses are gaining significant cost and operational efficiencies from outsourcing non core activities. Careful analysis including the proper allocation of on costs and overheads will reveal these functions usually cost much more in dollar terms and distraction that perhaps thought. Areas such as payroll, HR, IT, bookkeeping and even entire finance functions may be better performed by specialists who can deliver volume and expertise benefits to your business allowing your team to concentrate on strategy and execution.

3.  Inventory
Many manufacturers and distributors are still dealing with excess inventory levels, which can lead to unnecessary carrying costs and negative cash flows. The most profitable companies effectively use material requirement planning systems (MRPs) and/or enterprise resource planning systems (ERPs) to reduce inventory levels without running the risk of exhausting supplies.

4.  Suppliers
Businesses can often reduce general and administrative costs through techniques such as supplier consolidation and/or the implementation of formal tender processes. Think about the number of departments or locations using different suppliers for routine products such as office supplies. Then, think about how often purchases of such items are made on an ad-hoc basis without pre-negotiated pricing terms. By consolidating vendors and negotiating terms with selected suppliers, companies can leverage purchasing power to reduce general and administrative costs.

5. Employees
Whether your business has 20 employees or 2,000, it never hurts to engage them in cost-reduction initiatives. Because they are in the trenches, they often have first-hand knowledge of areas of waste. By soliciting their feedback and implementing an incentive system to reward them for cost savings, businesses often decrease costs and increase employee retention.

While there is no single solution for cost reductions that applies to all businesses, learning more about what other businesses have done can spur innovative strategies that lead to long-term improvements in profitability. By tackling these issues now, you can drive near-term increases in profitability and ensure you are prepared for any future economic difficulties.

Is your staff productivity reduced by financial stress?

What can you do to turn it around?

Recent statistics have shown that when your staff face personal financial stress, your business could suffer from poor productivity.

A recent survey reviewed over 450 organisations and found that employees under financial stress can spend up to 20 hours per month of their working time trying to resolve their personal financial problems.

It is a terrifying statistic for employers hoping for increases in staff productivity in these challenging economic times.

By bringing clarity and simplicity to your employees financial life, you can accelerate their financial success and assist them to obtain that extra measure of freedom that smart financial advice and wealth building deliver.

What can you do as an employer to reduce this drain on your business?

1.  Seek out financial education.  As an employer you could offer financial education to your employees, providing training to help them understand topics such as budgeting, the importance of saving, the difference between ‘good’ and ‘bad’ debt, insurance and superannuation.  There are a handful of firms nationwide that will come into your office and run tailored education programs.  These short courses provide education in financial literacy helping staff to understand their finances better and make improved financial decisions.

2.  Put in place a benefits package.  Depending on your industry, there are a range of benefits staff can access ‘before tax’, or in a way that can be supported by the employer.  If you put in place an Employee Benefits Package, staff might be able to access significant savings on superannuation fees, motor vehicle expenses, computers, life insurance and even meal expenses. In a corporate super plan as part of an Employee Benefits package, the fees and insurance premiums are often lower.

3.  Promote the benefits available to staff.  Many staff of companies with benefits programs are often unaware of the benefits scheme on offer.  But you can change this, helping your staff and increasing morale and productivity simply by promoting the benefits available.

Offering a structured financial Employee Benefits package to your staff will reduce their financial stress, make life transitions easier and help you to achieve a more productive, creative and effective work environment.

Article by Mark Sablatnig, Manager, Prosperity Wealth Advisers Pty Ltd.  Mark provides solutions about corporate super, group insurance and employee benefits to our clients from offices in Brisbane, Sydney and Newcastle.


Super tax to be doubled for high income earners

If the Government raises the super contribution tax to 30% for high income earners in the budget next week, will you be affected?The Government announced to the major media over the weekend that Wayne Swan is going to double the 15% tax on concessional superannuation contributions to 30% for those with adjusted income over $300,000 per annum in his budget speech on 8th May 2012.  


For these purposes, adjusted income is expected to include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, some foreign income, tax-free pensions and benefits, less child support.

As a result of the adjusted income definition, a taxpayer with salary income of say $250,000 but with significant negative gearing into property or shares might still be caught by these measures.

The start date for this change is expected to be 1 July 2012 (although it is conceivable that this could be brought forward to budget night – 8 May 2012 – if budget surplus pressures are strong enough).

The 30% tax rate will apply to all concessional superannuation contributions with one exception.  The exception is where the adjusted income threshold of $300,000 is breached by an amount less than your concessional superannuation contributions amount.  In that case, the 30% tax rate will only apply to the concessional superannuation contributions that exceeds the adjusted income threshold.

Whilst it is said this change will affect just 128,000 people nationwide, it is clearly something that, if it impacts you, you may want to consider preparing for now.

Under certain circumstances, those who may not ordinarily have an adjusted income of $300,000 or more may have to be alert to this change.  For example, this could impact investors selling assets such as property or shares which might throw their adjusted income above the threshold (in the year they enter contracts to sell).

The measure will increase the tax on a standard $25,000 contribution by $3,750 per person in a move that is estimated to bring in more than $1 billion in revenue over the period forecast in the budget.
What can you do?  What should you do? 

If you are unsure whether you might be impacted by these measures, contact your Prosperity Adviser for advice, or speak to one of our leading wealth advisers, John Manuel or Gavin Fernando, who work across our Newcastle, Sydney and Brisbane offices.

If you would be affected by these measures, you should consider:

  • Maximising your concessional superannuation contributions for the 2012 year whilst the tax rate is still 15% (if possible, it would be ideal if this could be done prior to the budget announcement on 8 May 2012 in case the expected start date is brought forward); and
  • Other ways to build wealth in superannuation, including property ownership in a self managed superannuation fund.