A conversation about purchases can help clients avoid costly mistakes, save money, and plan for taxes. Bookkeeping and accounting experts weigh in on having purchasing discussions with their clients and the impact purchases have on profitability, tax savings, cash flow, and storage.
Profitability
When it comes to purchasing inventory, Kim Sadler, Principal at Ellipse Accounting, says, “Profitability is obviously the first objective. The business needs to ensure the sale price at your required gross profit is acceptable to the market. The worst outcome is to have stock on your shelf or in the warehouse tying up cash. Or, having to sell at a loss to move them on.” Kim adds that bulk purchases at a discount “must be considered in terms of turnover and available cash reserves”. Upcoming tax obligations need to be included when considering cash reserves. Rather than trying to grab a good discount, purchases should be aligned with the mission and vision of the business. “Control allows you to manifest your vision and direction of the business.” Says Kim Sheppard, Business Solutions Advisor at Knoward.Tax Savings
Michele Grisdale, Director of Rainforest Bookkeeping, says a purchasing discussion can help “reduce tax by utilising government incentives.” She cautions this isn’t a strategy for every business. Although the incentives are enticing, “many small and micro businesses don't look at the overall cost to the business long term. A blanket approach is not practical.” The consequences of purchases on a business must be considered based on the return on the investment, the constraints of its industry, the amount of cash the business has available, and predictions for future industry trends.Cash Flow
The effect of purchasing decisions on cash flow isn’t just the obvious cash outflow. It’s important to consider other things that can impact cash flow like a downturn in the market or training new staff. “Ask a lot of questions about what will happen if the market slows or if they lose staff.” Says Grisdale. When it comes to fixed assets, “generally cost and useful life are key considerations.” Says Matt Kennedy-Climpton, Senior Accountant at Mahar Accounting.Storage
It costs money to store excess inventory and equipment that’s not being fully utilized. Consider purchases carefully, taking into account shelf-life and available storage space. By having purchasing discussions with their clients, business advisors get a much better picture of the business. “General improvement in this area can be coached, and skills passed from advisor to client over time,” says Kennedy-Climpton. Sadler states that “it's too easy as a business owner to get caught up in the day-to-day work and not spend time on managing the business unless your advisor helps you make time and has the data available to make it worthwhile.”For accountants and bookkeepers seeking to grow closer advisory relationships with their clients, regular purchasing discussions is one of those low hanging fruit topics. It is an easy discussion to have and can have a profound impact on several key areas of business.
This month's guest blog feature is written by host of 'Cloud Stories' podcast and author of a multitude of Cloud Accounting books, Heather Smith. Subscribe to her Accounting Apps Newsletter.
