Looking forward to another interesting Financial Year in my practice
Edward Huntingford
Chartered Accountant advising Australia's leading private businesses
Many private business owners are uncertain about what the Economy holds for them in the 2025 Financial Year.
I tell private business owners to run their businesses as if they are always for sale.
That adage could be adapted to: private business owners should run their businesses as if a challenge is always around the corner.
Let us look forward to the 2025 Financial Year with reference to the points along the Fordham Group Wealth Journey.
Owner Objectives Plan
Advocates often refer me private business owners who need to improve the way they run their businesses and manage their wealth.
All those new clients will do a Fordham Group Business Owner Plan with me.
In the Business Owner Plan, these private business owners will:
Accounting Advice and Tax Management
It will shock you to learn that businesses (even large ones) will be referred to me in the 2025 Financial Year that do not regularly reconcile the balances in their Balance Sheets.
A business's profit (or loss) equals the movement in its Balance Sheet.
The timing of the movement in the Balance Sheet dictates the business's cash flow.
Maximizing profit and return on equity, and extracting cash, are the fundamentals of being a private business owner.
If you cannot measure those, it is not possible to manage those variables effectively.
It should be the New Financial Year's resolution of any business who is not regularly reconciling the balances in its Balance Sheet to do so.
Furthermore, if it does not maintain a three-way cash flow forecast, the reconciliation of its Balance Sheet is the time to build one.
In the 2025 Financial Year, the Australian Taxation Office (ATO) will undertake more streamline assurance reviews.
My assumption is that there will be a lot more activity in the medium and emerging private groups tax performance program (effecting private groups which control wealth between $5 million and $50 million, and private businesses with an annual turnover of more than $10 million).
The best way for private business owners to avoid ATO activity having a negative impact on them is to maintain good tax governance.
The additional benefit of maintaining good tax governance is that it institutes the discipline that leads to a stronger and more profitable business.
The ATO’s seven principles of effective tax governance are:
Business Plan
First and foremost, I advise private business owners.
There is more to private business owners than their businesses.
In fact, you will hear me continuously preach the virtues of private business owners extracting wealth from their businesses and investing it passively to protect their assets.
That is why my clients engage me to facilitate planning for their businesses (with them and their key management personnel) separately from their Business Owner Plans.
The way that the Business Owner Plan informs the Business Plan (e.g. with the context of the business owner’s long-term plans) is valuable.
I follow the same planning methodology as for the Business Owner Plan but through the lens of the business instead of the business owner.
Wealth Plan
Whether a private business owner plans to invest the passive wealth they extract from their business directly or into financial products, they should consult a licensed financial adviser.
Just as extracting wealth from the business is prudent asset protection, risk diversification and astute portfolio construction is essential to preserving and accumulating wealth.
I collaborate with my clients and our Perpetual Limited Financial Advisers to help them plan how wealth will be invested once it is extracted.
I consider this relationship between private business owner, business adviser and financial adviser as critical.
Profit Improvement
When the Economy gives you lemons, make lemonade.
Undertaking a Profit Improvement Program can be valuable to a private business at any time.
However, when profit margins are under pressure (like in times of high inflation), Profit Improvement Programs are essential to ensuring that private businesses stay competitive whilst continuing to maximize profits for their owners.
Many of my clients are facing higher costs of inputs whilst also feeling pressure from customers to not increase prices.
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I expect to be busy facilitating Profit Improvement Programs this year.
Key Employee Development Plan
To varying degrees, products, services, intellectual property, human capital, and customers are the essential ingredients of a private business.
To the extent that their people are an essential ingredient, I shall also be facilitating similar planning to the above with the key employees of my clients’ businesses at the start of the Financial Year.
Employee Remuneration
When inflation (including wage inflation) is putting pressure on their profit margins, private businesses need to look to more strategic ways of incentivizing their key employees.
I expect to be helping clients develop short-term incentive, long-term incentive and phantom equity plans more in the 2025 Financial Year.
The critical elements of these plans will be:
Business Acquisition
Businesses become distressed because of:
If you cannot fix the critical issues that caused the business to become distressed, why consider acquiring it.
If you can, a distressed business presents an opportunity.
Economic headwinds are making business more challenging now but ironically inflation also indicates that Government, businesses, and consumers continue to spend.
Poor management is a leading cause of businesses not being able to withstand the challenges and keep up with their competitors.
I expect to continue to be busy undertaking due diligence on acquisition opportunities for my clients to interrogate all aspects that contribute to maintaining future earnings.
Where my clients can do well what the previous business owner did poorly, an opportunity exists.
Business Succession Plan
There will always be private business owners who are one Economic cycle or less away from retiring from their business.
I am increasingly being engaged to run Succession Plans with private business owners who are bringing-forward their retirement because they are tired after experiencing challenging Economic times immediately preceded by a Global Pandemic.
There will be plenty of work to do this year:
Business Valuation
Beyond its net tangible assets, pivotal to a business’s value is its future earnings and the risk associated with its ability to maintain those earnings.
Therefore, the best way for a private business owner to increase the value of their business is to:
Some of the ways I shall be helping my clients do that in the 2025 Financial Year are:
Management and Equity
Critical to Succession Plans for some private business owners will be key management personnel acquiring equity in the business.
This can be challenging because of the need for the key management to fund their acquisition and the timing of the private business owner’s exit and payment for their sale of equity.
Given my comments above about the number of them looking to exit their businesses, I expect to be busy in the 2025 Financial Year helping private business owners structure the way management acquires equity.
This will involve maximizing the exit price achieved by my client whilst choosing the financial instruments and payment terms that will allow management to meet that price.
Sale of Business
As I said at the top of this article, private business owners should run their businesses as if they are always for sale.
That was never more helpful advice than in challenging Economic times.
Notwithstanding higher costs of capital and increased Economic risks, good businesses always sell.
Good businesses are those with desirable future earnings that are highly likely to be maintained (when compared to the next best opportunity).
It will be possible to achieve a premium for a good business in the 2025 Financial Year, but it will be especially important to address the points on the Fordham Wealth Journey that I have discussed above.