MASTERCLASS Investment – What is, and how do you read the Balance Sheet or Financial Position?

MASTERCLASS Investment – What is, and how do you read the Balance Sheet or Financial Position?

Investment – What is, and how do you read the Balance Sheet or Financial Position?

As previously explained in our post about Company Reports, the Balance Sheet (or Financial Position) is one of three reports or statements that a company or business produces which shows how the business has performed. The other two reports are Profit and Loss (or Income Statement) and Cash Flow Statement.

The balance sheet (also known as the statement of financial position, is a snapshot of a company’s health at a particular period or point of time, such as end of month or end of year. By reading it, we can learn how much a company owns (assets), and how much it owes (liabilities). The difference between what it owns and what it owes is called equity, or “net assets” or “shareholders equity”.

Another way to explain, the balance sheet tells a lot about a company’s fundamentals: how much debt the company has, how much it needs to collect from customers, how much cash and equivalents it possesses and what kinds of funds the company has generated over a period.

Assets, liability and equity are the three main sections of the balance sheet. They can tell investors a lot about a company’s fundamentals especially when ratios are performed on certain parts.

Here is a simple diagram of the Balance Sheet –

Balance sheetASSETS

There are two main types/groups of assets: current assets and non-current assets or long-term assets.

Current assets are likely to be used up or converted into cash within twelve months. Three important current asset items are: cash, inventories and accounts receivables.

Cash – Investors normally are attracted to companies with plenty of cash on their balance sheets. After all, cash offers protection against tough times, and it also gives companies more options for future growth. Growing cash, if watched from year to year, can signal strong company performance. A reducing cash pile could be a sign of trouble. So, if loads of cash are more or less a permanent feature of the company’s balance sheet, investors will ask why the money is not being put to use.

Inventory – Inventories are the finished product that hasn’t been yet sold. Investors want to know if a company has too much money tied up in its inventory. Companies have limited funds available to invest in inventory. To generate the cash to pay bills and return a profit, they must sell the product they have manufactured or purchased from suppliers.

Accounts Receivable – Are outstanding invoices owed by customers. The speed at which a company collects what it’s owed can tell a lot about its financial efficiency. If a company’s collection period is growing longer, it can indicate problems. The company may be letting customers stretch their credit in order to recognize greater top-line sales and that can bring trouble later on, especially if customers face a cash crunch. Getting paid sooner is preferable to waiting for it – since some of what is owed may never get paid. The quicker a company gets its customers to make payments, the sooner it has cash to pay for salaries, merchandise, equipment, loans, and most importantly, dividends and growth opportunities.

Non-Current assets – Non-current assets are all the rest that are not classified as a current asset. This includes items that are fixed assets, such as property, plant and equipment . Unless the company is in financial distress and is liquidating assets, investors need not pay too much attention to fixed assets. Since companies are often unable to sell their fixed assets within any reasonable amount of time they are carried on the balance sheet at cost regardless of their actual value. As a result, it is possible for a company to inflate this number.

LIABILITIES

There are current liabilities and non-current liabilities.

Current liabilities are obligations the firm must pay within a year, such as payments owing to suppliers, payroll taxes, superannuation, credit cards and other short-term loans.

Non-current liabilities, are what the company owes in a year or more time. Typically, non-current liabilities represent bank and bondholder debt.

We usually want to see a manageable amount of debt. When debt levels are falling, that’s a good sign. Generally speaking, if a company has more assets than liabilities, then it is in decent condition. By contrast, a company with a large amount of liabilities relative to assets ought to be examined with more diligence. Having too much debt is one way a company can go bankrupt.

EQUITY

Equity represents what shareholders own, so it is often called shareholder’s equity. As described above, equity is equal to total assets minus total liabilities. The two important equity items are shareholders’ funds or paid-in capital and retained earnings.

Shareholder Funds are the amount of money shareholders paid for their shares when the stock was first offered to the public. It represents how much money the firm received when it sold its shares.

Retained Earnings are profit or loss after tax accumulated over the years – it is money the company has chosen to reinvest in the business rather than pay to shareholders. Investors look closely at how a company puts retained earnings and borrowings/debt (together are called Capital) to use and how a company generates a return on it.

Want to learn the core issues of share investing?

Our slides SMSF & Shares Overview give a quick session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596 Paul

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Pensions Centrelink – Am I eligible for pension?

Pensions Centrelink – Am I eligible for pension?

Pensions Centrelink – Am I eligible for pension?

Wondering if you may be eligible for Government Pension?

These are the criteria for eligibility for Age Pension at the Department of Human Services website at August 2018 – HERE

Pensions Centrelink – Am I eligible for pension?

Check to see if you’re eligible for other support:

which has theses links –

Get your FREE 5 Easy Steps to Plan Retirement One-Page planner from the Resources

Got questions? If you want experts who have years of helping others, without the hype –

then call for a FREE strategy session today

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Basics Superannuation – Basics 1-5 to know about super in Australia

Basics Superannuation – Basics 1-5 to know about super in Australia

Basics Superannuation – Basics 1-5 to know about super in Australia

  1. Superannuation Guarantee (SG) – All Employers must pay at least the value of 9.5% of your wages/salary (not FROM your pay, but another expense of the employer) to your member account in a super fund (including a self-managed super fund). This is a compulsory legal requirement under superannuation guarantee (SG) laws, usually for any employee earning over $450 per month and over 18 years old. These are known as Concessional SG Contributions (the employer gets a tax concession/deduction as a business expense). (Formerly Deductible Contributions)
  2. Choice of Fund – Except for employment agreements and some industrial awards, you can choose the super fund you want your employer to pay super into. If you don’t choose your super fund, your employer chooses for you.
  3. Salary Sacrifice – This is when you tell your employer to deduct some money BEFORE TAX from your pay and send that to your super fund with the SG they need to pay. This is also called a Concessional Contribution.
  4. Save Tax on Concessional Contributions – Your employer’s compulsory SG contributions and any before-tax contributions that you choose to make are both taxed at a maximum rate of 15 per cent on entry to the super fund. Compare a person earning $37 000 a year – any $ earned over this will pay over at least 32.5% on income above the $37,000 (at 2018-19 rates). Put some wage direct into super, instead of taking it home, she/he will only pay 15% tax.
  5. Tax rate on investment earnings  Earnings on your super fund’s investments are also taxed at no more than 15 per cent.

Get our FREE Expert Guide – Self-Managed Super and You – it has all the info you need to know, with bonus TIPS and CHECKLISTS  to determine if SMSF is for you and what steps are needed to set up. It also gives you ALL the Aust Tax Office publications about SMSF. Get your copy now – click “FREE Download” top right hand side above. You’ll also get monthly SMSF news, investment teaching and upcoming seminar and workshop briefs! Download your FREE Guide now!

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Masterclass SMSF – How to buy property with super fund – the steps for SMSF Property purchasing

Masterclass SMSF – How to buy property with super fund – the steps for SMSF Property purchasing

SMSF – How to buy property with super fund – the steps for SMSF Property purchasing

The legislation for Self-Managed Super Fund (SMSF) allows for borrowing to acquire properties when specific criteria are met. There are 2 main ways self managed super funds are buying property:

  1. Outright – If there is enough money to cover the purchase price and legals and costs by the SMSF, there is no special structure and the property can be owned directly;
  2. Borrowing – A special structure (Custodian) is required where the property title must be held in a Custodian or Bare trust whose trustee must be different to the SMSF trustee.

The borrowing must be non-recourse, that is, the lender has no recourse for compensation (should the loan be defaulted or called in) to any other assets or money in the SMSF. The only security is the property asset itself (but the truth is they get the trustees or directors to sign Guarantees! Be aware). A Custodian/Bare Trust is a trust where the title holder, holds the property for a specified beneficial owner in this case the SMSF trustee, and has NO other role. Then the SMSF trustee is the operator of the property and receives the rent and meets the expenses as if it was the title holder.

What is involved in setting up the gearing structure that is accepted by both the banks and the regulator (auditor!)?

A.     Step-by-Step Property in SMSF (The best set I have found is the following) –

The summary –

  • 1-3 SMSF, Strategy ready –           To complete and sign
  • 4 – Finance Pre-Approval –          Broker to advise
  • 5-7 Custodian Structure –             To complete
  • 8 – Qld SA NT (not apply Vic) –  Sign at correct time
  • 9-15 Purchase Property –              When you find one

A typical borrowing by an SMSF has the following steps and the order of these steps is important to minimise any difficulties in completing the transaction.

The steps are as follows:

  1. Determine (often with the help of the fund’s accountant or financial planner) that borrowing would be an appropriate strategy to leverage investment;
  2. Check the SMSF Trust Deed to ensure trustee has power to borrow, grant security and allow assets to be held by Custodians/Nominees for the trustee (if not, amend the Trust Deed);
  3. Check the SMSF investment strategy to ensure it allows for the acquisition of the investment asset and permits borrowing for that purpose (if not, amend the investment strategy);
  4. Investigate borrowing arrangements with the lender including in-principle loan approval;
  5. Determine who is to be the Custodian – if a new company, purchase the new company;
  6. Custodian (Property Company) resolves in writing (Custodian/Bare Trust Deed) to act as Custodian for the super fund trustee in the purchase of the asset;
  7. SMSF trustee resolves in writing to purchase the asset and to appoint the Custodian to act for the super fund trustee as Bare Trustee of the Bare Trust;
  8. Sign the Bare Trust Deed (Qld, SA, NT need to sign BEFORE the Contract);
  9. Source the asset for purchase, negotiate the price and reach agreement with the vendor;
  10. Signing of the purchase contract by the Custodian/Bare Trustee is Purchaser (Note: Not SMSF trustee) eg Custodian Company required by most lenders;
  11. SMSF trustee provides all the deposit money for the purchase (should come directly from the super fund’s account) – if the deposit initially comes from the pocket of the SMSF trustee, then this deposit amount should be paid into the SMSF as a superannuation contribution within several weeks and notation made to that effect in the SMSF’s records;
  12. Custodian and SMSF trustee sign the Bare Trust Deed (NSW, ACT, Vic, Tas, WA);
  13. SMSF trustee signs all loan documents with the lender (Note: SMSF trustee is the Borrower);
  14. Purchase of the asset is completed using only money coming from the SMSF’s account or from the loan by the lender;
  15. The Bare Trust Deed is submitted to the Office of State Revenue for payment of stamp duty (if required by applicable State) – Conveyancer;
  16. When the loan is eventually repaid the asset can be transferred from the Custodian to the super fund trustee for no stamp duty provided the Bare Trust Deed has been stamped already. 

Want to know the options and how property works in SMSF? See our FREE slides SMSF & Property Overview 

Call for free education, or to speak to an advisor about your specific situation. SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is FREE.

If you have any questions, why not give us a call – it’s FREE! No obligation. 0407 361 596, Paul

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NEWS – Is your SMSF worse off due to poor advice?

NEWS – Is your SMSF worse off due to poor advice?

Is your SMSF worse off due to poor advice?

ASIC has found that 10% of SMSF set up advice is likely to leave people significantly worse off, with 91% of SMSF set up advice files not complying with the law.

The regulator reviewed 250 client files randomly selected from ATO data and assessed them for compliance with the ‘best interest’ duty and other obligations in the Corporations Act. It found that 91% didn’t comply, in part due to failings in record-keeping. In 19% of files ASIC found clients were at increased risk of financial detriment due to a lack of diversification and in 10% the client was “likely to be significantly worse off in retirement due to the advice”. ASIC said it will be taking “follow up” regulatory action.

ASIC Deputy Chair Peter Kell said the standard of SMSF advice must improve.

“A healthy and robust SMSF sector is an important part of our super system. However, it is clear lots of people are setting up self-managed super funds without knowing whether this is the best option. The financial advice sector has significant work to do to lift their performance on this issue.”

Market research conducted by ASIC found that many SMSF trustees do not fully understand their obligations as SMSF trustees, or the risks of SMSFs.

The online survey found 33% of SMSF trustees didn’t know an SMSF was required to have an investment strategy and 29% believed SMSFs have the same protection from fraud as prudentially regulated super funds.

Read More Here

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MASTERCLASS Investment – How to Understand Profit & Loss (or Income) Statements

MASTERCLASS Investment – How to Understand Profit & Loss (or Income) Statements

Investment – How to Understand Profit & Loss (or Income) Statements

As previously explained Company Reports and the Profit & Loss (or Income Statement) is one of three reports or statements that a company or business produces which shows how the business has performed. The other two reports are Balance Sheet (Financial Position) and Cash Flow Statement.

The Profit & Loss Statement reports on a particular prior period eg month, quarter, year, and shows the sales or revenue, less cost of the goods sold (if selling product), then takes away the operating expenses or overheads to show either a gain/profit, or loss.

After that, there may be unusual other income or expenses (non-operating) that are then claimable, and added or taken away after that. For example, sale of assets or events that are not part of the regular operations of the company.

The Components of the Profit and loss Statement

Revenue or sales are compared to prior years – ideally we want to see growth in sales.

The Cost of Sales will usually include raw material, labour and manufacturing costs to produce goods that are sold. If the business is a service business eg accounting, there are no products, just service.

Gross Profit is Revenue/Sales less Cost of sales and if costs can be reduced or kept stable while sales grow, the business is healthier and seen as an ideal management process.

Operating Expenses or overheads include selling and general administration costs – office expenses, stationary, office and sales staff wages.

Operating Income/profit/revenue will be the Gross Profit less the Operating Expenses, often also known as Earnings Before Interest, Depreciation and Amortisation (EBITDA)

Next Depreciation and Amortisation are listed and deducted, leaving EBIT.

Then Interest and tax (company tax – Australia is 30%) are listed and deducted.

Net Profit or Net Income is the final amount left.

profit-loss-diagram

For the investor

From the investor view point, it is important to gain an understanding of what the company sells, how that compares to similar companies, what costs are involved and whether unnecessary costs are being paid, what gross profit is achieved (often expressed as a percentage so it can easily be compared to similar companies for comparison) and what operating profit at EBITDA and EBIT levels.

Then comparisons with prior years of the Profit and Loss statement is also important, by looking at what changes in sales, Gross Profit and Net Profit – growth or decline, helps the investor determine the efficiency and competency of the management.

Our slides SMSF & Shares Overview give a quick session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

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Masterclass SMSF – How the downsizer contribution works from sale of your home near retirement

MASTERCLASS SMSF – How the downsizer contribution works from sale of your home near retirement

SMSF – How the downsizer contribution works from sale of your home near retirement

The 2017 federal budget brought in a new allowance for a new type of superannuation contribution for individuals looking to downsize their principal residence. Michael Hallinan at smsmagazine.com.au explains some of the rules around these new contributions.

The downsizer contributions proposal was announced in the May 2017 budget to address the housing affordability crisis. The policy justification for downsizer contributions is to remove a hurdle for older taxpayers from selling their current homes for smaller homes, thereby freeing up the housing market by increasing supply.

The legislation to implement downsizer contributions has now been introduced in bill form: Namely Schedule 2 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Bill 2017. This bill was introduced into Parliament on 7 September 2017. 

In broad terms, the proposal is that from 1 July 2018 a taxpayer can apply up to $300,000 of the capital proceeds from the disposal of their principal residence as a superannuation contribution for themselves or for their spouse. The contribution will only qualify as a downsizer contribution if the beneficiary of the contribution is aged 65 or over at the time the contribution is made. This contribution will be considered as a non-concessional contribution (NCC).

The contribution can be made despite the beneficiary of the contribution not satisfying the age work test and despite having no or insufficient NCC cap space.

However, downsizer contributions will form part of the total superannuation balance of the beneficiary and will also be counted for the purposes of the transfer balance cap of the beneficiary if and when the downsizer contribution is used to commence an income stream. Consequently, downsizer contributions will have a similar treatment to capital gains tax (CGT) NCCs.

In order to make a downsizer contribution, the taxpayer must dispose of a property that satisfies two requirements.

The first is that there must be a disposal of an ownership interest in relation to the property, which must have been continuously held for 10 years or more prior to its disposal.

The other requirement is that the interest relates to property that must have had the benefit of Division 118 treatment (in whole or in part) or would have been entitled to Division 118 treatment but for the fact the property is a pre-CGT asset. In order to satisfy the second requirement, the property must have a dwelling that was used as the principal place of residence of the taxpayer.

See the slides SMSF Roadmap Overview.

If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to find the right expert to answer your question – it’s FREE also!

No obligation. 0407 361 596, Paul.

Also get your FREE Expert Guide – Self-Managed Super and You Top right hand side above.

SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is FREE.

If you have any questions, why not give us a call – it’s FREE!

No obligation. 0407 361 596, Paul

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