Connect Spring 2016
Financial news for tomorrow’s lifestyle
It’s been an interesting year, in fact it’s been an interesting decade. The markets and the economy have been fairly lacklustre. Glenn Stevens delivered his last public address as Governor. While he was fairly subdued and diplomatic in his address, his address however was fairly forthright and was titled “An Accounting”.
He expressed serious reservations about the extent of reliance on monetary policy globally. He felt that while banks did what they could to help restore demand after a long period of recession, it could never be enough to restore demand after the recession creating a build up in debt.
Global growth has been lower over the past few years after the GFC, mainly due to advanced economies such as the US and the Eurozone suffering a downturn in their economies. Global growth would have been worse but for increased demand of emerging market economies which have experienced steady growth.
Considering the volatility of global economies and decreased demand in advanced economies, Australia has performed quite well and has managed to avoid a major downturn. In fact, we have not seen a recession in Australia for twenty years. However, Glenn Stevens warned that very low GDP growth would impact revenue growth and this would make it difficult to bring the budget balance back and reducing Australia’s debt would be a long path ahead.
Australia’s public debt is 40% of GDP and household debt is 125%. Glenn Stevens had suggested that the Government should issue Infrastructure Retirement Bonds (IRB’s). The issue of up to $200 billion in IRB’s with a coupon of 4% (tax free) available to Australian Superannuation and a 30 year maturity. This would provide an attractive alternative for savers and pensions. There appears now that 30 year bonds the Government is giving consideration to.
I would take this suggestion of Glenn Stevens one step further in that the Government should make it law that 5% to 10% of all Superannuation funds should be invested in Australian Government Bonds. This would give the Government funds to spend on major works and infrastructure and create jobs and would provide investors with a low risk alternative in their superannuation and retirement funds.
The Australian economy is entering its 26th consecutive year of economic growth and even though there is still continuing uncertainty internationally it is expected Australia will see a GDP of 2.5% in 2016/17 and strengthening to 3% in 2017/18.
The world economy continues to struggle. China is still seeing growth but has pulled back as it goes through a period of rebalancing and consolidation. India is expected to be the fastest growing major economy creating strong domestic demand.
The USA has seen strong labour market performance but GDP growth has slowed. Growth in the European area is expected to remain moderate and growth in Japan is expected to continue to be sluggish.
In Australia domestically, low interest rates are supporting growth creating lower borrowing costs for households and businesses. With the low exchange rates over the past year this has seen a shift of resources to the service sectors and moderate wage growth has underpinned strong employment growth. This will probably continue with the unemployment rate forecast to fall to 5.5% by 2017.
Household consumption is growing steadily supported by the growth in employment, lower interest rates and lower petrol prices has helped this. Investment in housing still remains positive and builders and developers are seeing a backlog of work yet to be done, however growth is expected to ease somewhat.
The Australian economy has seen a reduction in mining investment which is expected to fall by over 25% in 2016/17. This has created some uncertainty as to when there will be a move into non-mining investment.
We have seen growth over the last quarter in commodity prices especially iron ore, partly due to meeting China’s ongoing demand.
With the lower exchange rates, we are expecting stronger economic growth, however uncertainty around global economic growth could result in households becoming more cautious in their spending and saving more, we would then see less consumption. Also the slower growth in the mining industry and the transition to non-mining business is a key factor to future growth in the Australian economy.
REDUCE YOUR HOMELAND AND/OR INVEST
It is always wise to pay off your non tax deductible home loan, but are there opportunities to invest as well and receive tax benefits in doing so?
As you pay down your home loan (the non-tax deductible debt) you can use the equity in your home loan to invest. The interest now in the investment loan will be tax deductible.
What you need to consider using this scenario is the more debt you have the more risk you take on. You need to ask yourself what is my risk profile and what level of debt is appropriate and what am I comfortable with?
Australians generally are quite comfortable with debt, in some ways too much so, especially when it comes to buying property. Too often they buy a numerous number of properties as though they were buying lollies in a candy store and then find something untoward happens, they lose their job or have an accident or illness and find they now have an issue with their bank.
Make sure you are insured to cover your income. Using your equity you have created by paying down your home loan can be a sensible strategy provided you have taken into account all the things that could go wrong and have allowed a buffer account, which could be an offset account attached to your mortgage.
As your home loan is paid down borrow against your home as a tax deductible investment loan to invest.
At present when mortgage rates are so low it is a good time to pay down extra on your home loan, and a good time to borrow for investment. It is possible to use the income from your investment to pay down your non-taxable home loan.
THINKING OF STARTING A BUSINESS
With the downturn in the mining and associated businesses we are seeing a number of clients considering setting up or buying a business.
Starting up in business can be an exciting time, it is important to consider what is involved in starting a new business venture. You need to ask yourself some important questions:
• What skills do I need to start a business?
• Do I start my own business or buy a business?
• How much income will I require from my new business?
• What are the advantages and disadvantages of my own business?
• Have you sat down and written a business and marketing plan?
• What are your business goals, objectives and skills?
Are You Considering Buying a Business?
In buying a business look at the advantages and disadvantages. Look at the history of the business and what could impact on the future of the business. A good business history can increase the potential for a successful ongoing operation and ensure that finance is easier to obtain. Banks look at the history of a business.
Disadvantages could be overestimating the goodwill of the business.Does the previous owner of the business have a good record with his banks and a good public image?
What You Need to Consider in Buying an Existing
You need to consider the current worth of the business and its future prospects. See professional advice from an Accountant or Business Adviser.
Some things to Consider When Buying
• Why is the business up for sale?
• What is the business customer base? How strong is it?
• Who are the current suppliers? Are they happy to continue with the business?
• Is the business profitable? A good guide is to look at the bank statements and cash flow of the business.
• What assets does the business have? Does it have leasing agreements and intellectual property?
• Are there outstanding liabilities and debts to consider?
• Is the current stock and inventory being managed well and included in the price?
• Have you had an Accountant look at the Purchase Agreement and Financials and established a value for the business?
• Check with your Accountant on what kinds of tax you will incur, will there be GST, Payroll Tax, Capital Gains tax etc?
• Are there any binding legal agreements or leases in the business?
• Do you have the past experience and qualifications to run this business?
• Have an open discussion with the owner on what has worked and hasn’t worked in the business.
• What sort of business structure are you setting up for this business? If you are going to have a partner, be sure to have a Partnership Agreement and a Partnership Insurance.
• If the business is a Franchise, seek good advice from a professional as to the Franchise Agreement and speak to other Franchisees in the business.
• Finally set up a business and marketing plan.
KEEP CONTROL OF YOUR CASH FLOW IN YOUR BUSINESS
Opportunities open up when your Company or business has a positive cash flow. Opportunities to spend, save or invest further in your business.
Cash is the lifeblood of any business without a positive cash flow a growing company will struggle to pay creditors and wages and could eventually create problems with your bank.
In the case of a negative cash flow it may mean an injection of personal cash or short term loans or bringing in equity through new business partners.
Don’t rush out and borrow:
Explore your possibilities:
• Your accounts receivable should be given a high priority. Invoice on a regular basis, don’t leave it until the end of the month. This will cut into your working capital. Invoice immediately on the day you deliver or finalise the work.
• Offer discounts to customers who pay promptly.
• Invoice progress payments for work done.
• Make payments easier for your customers. Accept Eftpos, EFT, credit cards and create Direct Debits.
Look at Alternative Funding Ideas for your Business:
There are a number of grants to small businesses. If you need extra staff, there are a number of schemes for small businesses that will help to contribute to the cost of additional staff.
This is a scheme to encourage businesses to employ mature job seekers which pays up to $10,000 to a business that employs someone older than 50 years for at least 30 hours a week and employs them for at least 12 months.
NSW Small Business Grant:
Again this grant also pays businesses that take on a full time employee if they stay on the books for 12 months. Also pro-rata payments for part time or casual employees.
Venture Capital or Partner:
Another alternative for a business experiencing cash flow problems due to extra ordinary growth is to consider venture capital or take on a partner to inject funds for working capital and allow growth to continue in the business.
Finally, getting a better grip and understanding of your business cash flow will not only give you greater control over your finances but will create opportunities for growth going forward in your business.