Houzit Pty Ltd: Regulations, Taxes, And Financial Management

Overview of Houzit Pty Ltd

Houzit Pty Ltd is the proprietary limited entity that is registered with Australian Securities and Investment Commission. Located in the area of Brisbane, it is involved in the business of running 15 stores retail chain. The main services provided by the company are home ware furnishing products to the entire Greater Brisbane area. The company has extended their business from 1 store to 15 stores over last 5 years.

Various expenses were incurred in the previous year like advertising, accountant’s fees, insurance, rent, were major among them and the total expenses amounted to $ 14,51,931. However, as the sales revenue amounted to $ 33,62,828, the net profit amounted to $ 56,362.

Good financial management assists the business to use the resources effectively. It further helps to prepare efficient budget that will minimize the gap between actual and budgeted expenses. In the given scenario the existing management have correctly used their management approaches with regard to preparation of budget as except few expenses like interest expenses, luxury car tax expenses, bank charges and advertising expenses big variances were not found among budgeted expenses and actual expenses. Therefore, the approaches of existing financial management will be considered as efficient.

• Assumptions made were –
• Sales growth will maintain the same rate as previous year
• Increase in inflation rate will be 4% per annum and all the costs will be adjusted for the inflation
• Gross profit will be reduced by 1% with the expectation that lower price will maintain sales growth

1. Budget shall be analysed on regular basis with the actual expenses to check whether the gap is widening or minimising. Further, while preparing the budget market demand, industry condition and economic scenario shall be considered.

There are certain regulations and rules that are applicable in Australia, which are implemented on the organizations for the collection of sufficient tax from the profit gained overall. In addition to this, Houzit Pty Ltd has fringe benefits, payroll tax, superannuation and luxury tax for the year ended 2015-16. With respect to the superannuation of the firm, they contribute of approximately 9% over the total wages that has been distributed to the workers. Sazonov, Lukyanova and Popkova (2013) explained that according to the Australian Taxation Office (ATO), the firm has to pay superannuation for his staff members to preserve the continuous flow of income during the time of retirement

The company is liable for paying 4.75% as payroll tax on total wages, if the amount is more than $ 850,000. Further, it is liable for paying the luxury car tax and FBT (fringe benefit tax). These taxes are applied by Australian Government for reducing the fraudulent activities carried out by the company. Te prescribed rate of tax on luxury car is 33% by Australian government (Ato.gov.au 2016).

The organization Houzit needs to pay a Fringe benefit tax and tax on the luxury car, which are implemented by the government of Australia to decrease all the unscrupulous measures undertaken by a firm. The tax on the luxury car is computed by looking at the threshold that has been provided by the ATO and is taxed at a rate of 33% (Ato.gov.au 2016). The government of Australia even imposes fringe benefit tax on the firms to decrease the fraudulent compensations and payments, which are given to the staff members.

Computation of tax

Companies registered in Australia must comply with the below mentioned regulations as per Corporation Act 2001 –

• The company’s capital shall be used in effective manner for paying the liabilities
• The company is liable to publish the actual records associated with the financial performances to debtors for enabling them to analyse the financial viability of the company.
• The company shall prepare its financial statements complying with the accounting standards (Legislation.gov.au 2018).

As the current software of the company is not able to provide revenues and expenses analyses and the profit estimation process difficult, the company is required to install better software like MYOB or XERO to manage the finance in better way.

Computation of Taxes and Regulations

MYOB – it is the simple software for accounting and generally used by the SMEs. This software is simple and powerful that focuses on the business processes and work flows. It is GST ready and compliant with GST (Curtis 2015).

XERO – it is the cloud based software and is able to reconcile, send quotes, send invoices, record receipts and create the expenses claims. It is easy to use and enables the user to extend the usefulness of the software from all the possible aspects. It can further be used regardless of the software history (King 2015).

Among the above mentioned 2 software, the company shall go for MYOB software as it is cheaper and easy to install as compared to XERO.  

1. Matching principle – it is associated with adjusting entries and accrual accounting method. It is the basic guideline in accounting and it directs the company for reporting the expenses in the income statement of the same period in which the revenue is related. It is important for budget preparation as if the cost is not determined the expenses cannot be charged (He and Shan 2014).
2. Account groups – it is the grouping or segregating of similar types of accounts into the single group. It helps to differentiate the accounting groups without which the budget cannot be prepared. The reason is that if the income items are included under expenses, it will change the entire budget (Andre, Lam and O’Donnell 2016).
3. Time periods – time period is the segregation of accounting into month, quarter or year. Without proper time periods, the budgets cannot be prepared as one period’s data will be included in another period (Cooper 2017).

The concept of the term probity is relative and it cannot be defined in managerial and economic framework. The requirement of probity protects community and puts their rights and interests of all the individuals and moreover the group over the individual person. Therefore, while preparing the budgets or revising the budget, it probity must be implied so that the users can analyse the actual financial status of the company. It will protect the user’s right as they are entitled to know the actual status of the company.

Most suitable time to prepare the next year’s budget is after previous year’s budget publication. The reason is that it will give the idea regarding expenses and incomes that can be taken place in next year. The proposal will be as follows –

• The accountants shall make the assumptions on more appropriate basis which in turn will minimize gap among budget and actual amount. It will further alter the unfavourable variance into favourable variance.
• Budget shall be prepared with new software installed by the company.

The total numbers of items that can be introduced in the next budget are given below:

• The implementation of an accounting system that will the process of budgeting to execute swiftly and accurately.
• Use of realistic and fair valuation for the prediction of the budget can be useful in decreasing the variances that are unfavourable
• Enhancement in the safety and privacy can be useful in decreasing the level of manipulation that might occur while constructing a budget.

Through audit trail the accounting records to which the items are associated can be traced. The recommendations for maintaining internal control are as follows –

• Proper authorization shall be there to access the financial records and for modifying or altering the records
• The financial records shall be reconciled on regular basis to minimize the errors, frauds or misstatements (De Simone, Ege and Stomberg 2014)
• All transactions shall be properly numbered and dated to have easy access
• The stocks and inventories shall be physically checked to minimise the fraud or theft

1. Significant issues from budget

The most crucial issues that confront the performance of the operations of Houzit consist of the financial maintenance and viability of the gross margin. As the economy is going through a phase of recession, the effect is extreme on the retail sector. It is due to this fact that the pwer of spending by the individuals have decreased, and thereby has had an impact on the retail industry (Hofstede 2012).

The margin of sales though increased over the years, the main issue is that the discounts offered by the company are encompassing the additional profit. The time allowed for the debtor payment has an adverse impact on the company’s cash flow (Hope and Fraser 2013). Moreover, the increasing interest rate of the bank is adversely impacting the company’s financial viability. The debtor payment term has restricted the cash inflow, which has decreased the working capital foundation of the firm (Sazonov,  Lukyanova and Popkova 2013).

1. Actual to budget variance report
2. Reasons for variance

The table above shows, the sales of the firm has been higher with respect to the forecasted budget. The main reason is the discount provided to the consumers to make up with the market conditions that are fluctuating. Although, the negative effect of the recession has led to increase in the price of the raw materials, which results to rise in cost of sales for the organization. Furthermore, the risk associated with the bank interest rates has led to the rise in the interest expenditure, thereby creating net profit position that is unfavourable (Aminbakhsh, Gunduz and Sonmez 2013).

Choosing Accounting Software

The variance hat is unfavourable in the supply of stores is mainly to the growing resource cost in the Australian market. The rise in the operating expenses is mainly due to the economic conditions that are unstable and severe global pressure. This has forced Houzit to raise their operational activities, which ahs eventually raised the entire cost. Therefore, the budgeted numbers for the first quarter of 2015 for Houzit have major variances with the real numbers.

1.     Comparison of financial performance

With respect to the income statement of the firm, the sales of the Houzit have raised significantly with respect to the sales cost. The promotional offers and the discounts generate an essential part for the rise in the gross income over the years. Furthermore, the rise in pressure from the competitors working globally and the lethargic economic growth has led to the firm with certain issues. One such case, is the payment of salaries and wages to the employees of the firm, which is significantly high with respect to the benchmark of the industry of 11% of the actual sales. In this respect, Droms and Wright (2015) explained that extra payments may decrease the cash availability, which may be utilized at any later point of time to finance capital projects. Furthermore, in respect to debt repayment, the firm is able to secure a stable rise in the net margin due to the increased profit from sales.

Due to decrease in demand in the market, the extra expenses have been generated from the activities of advertising to create awareness of the consumers. The rise in the rent value is due to downturn of the economy (Lee Jr, Johnson and Joyce 2012). Therefore, looking at the above evaluation, , it can be explained that despite the effects of inflation on the retail industry, Houzit is able to find rise in profit margins mainly due to the brand image and service quality.

1. Performance questions raised by CEO

As seen above, the financial condition of the firm is stable even in case of rising pressure from the global rivals and economic ups and downs. This is because the firm has decided to decrease their burden of debt and rise its supply in stores to fight with any unexpected change in the market scenario (Henttu-Aho and Järvinen 2013). However, the discounts given to the customers to create extra sales can be useful point with the impact of inflation. However, looking at the present market case, Houzit us financially feasible due to their strategic plans that are long-term, which answrrs the performance question of the CEO.

Now looking at the gross margin, the average gross margin of the industry depends from 25% to 35%. With respect to Houzit, the firm maintains the margin well over the industrial benchmark, which is 42% in the first quarter of 2015. The change in the promotional activities and decrease in rate of discount is essential to maintain competitive advantage in the market. Therefore, it is estimated that the firm is able to cope up with the predicted fall by keeping the expected gross margins.

• Average debtor days and effect on cash flow

Maintaining Internal Control

In the words of Berk et al. (2013), the creditors often make estimations to have knowledge about the ways the accounts receivable improves the investment in these receivables. Therefore, the firms that invest smaller amount could develop their performance of cash outflow. In the provided case (Kelly 2015), Houzit has keep the same old debtor terms, which shows that significant amount of working capital is restricted with the debtors. Such restrictions of capital have blocked the capability of the firm to create adequate cash inflows from the activities of the organization. Therefore, the cash balance may get reduced in the near future.

Houzit needs to be analyzes both the past and present budgets to compute the spending operations undertaken in different times. For example, in order to decrease the mean surplus of raw materials of Houzit, a part of the above can be assigned to shipping.  Furthermore, involvement of the employees and the managers in the formulation of the budget would reduce the main variances of various items, as discovered in the variance report.

In addition, if the firm endows in the short term assignments, it requires revisions to the budget to reach its short-term objectives. In case, it thinks of introducing a new product, the revision of budgets is essential until the corroboration of the real figures of sales and production. Therefore, these emergency plans require to be maintained on Houzit’s part to maintain its current financial feasibility.

Houzit has expanded its terms of credit of their customers to a large extent and therefore needs to reduce it. Therefore, providing a proper and transparent invoice through an automated credit management system is essential to record the customer accounts. Furthermore, obtaining an insight on the everyday cost of business is essential for the management of Houzit. In this scenario, the firm can decrease the salaries and the wages of their employees with respect to the industrial mean, which can be useful in saving extra costs. At last, the maintenance of the accounting records by using the MYOB software is another process of saving cost, which could enhance the financial management process.

Reference 

Aminbakhsh, S., Gunduz, M. and Sonmez, R., 2013. Safety risk assessment using analytic hierarchy process (AHP) during planning and budgeting of construction projects. Journal of safety research, 46, pp.99-105.

Andre, S.M., Lam, M. and O’Donnell, M., 2016. Budgetary Slack: Exploring the Effect of Different Types, Directions, and Repeated Attempts of Influence Tactics on Padding a Budget. Academy of Accounting and Financial Studies Journal, 20(3), p.147.

Ato.gov.au., 2018. Working out the LCT on an import. [online] Available at: https://www.ato.gov.au/Business/Luxury-car-tax/Working-out-the-LCT-amount/Working-out-the-LCT-on-an-import/ [Accessed 08 August. 2018].

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Droms, W.G. and Wright, J.O., 2015. Finance and accounting for nonfinancial managers: All the basics you need to know. Basic Books.

HE, W. and SHAN, Y., 2014. International Evidence On the Matching Principle Between Revenues And Expenses. American Accounting Association. In Annual Meeting and Conference on teaching and Learning in Accounting. Atlanta, Georgia, August (pp. 2-6).

Henttu-Aho, T. and Järvinen, J., 2013. A field study of the emerging practice of beyond budgeting in industrial companies: an institutional perspective. European Accounting Review, 22(4), pp.765-785.

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King, A., 2015. Xero soothes auditors on automation.

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Sazonov, S.P., Lukyanova, A.V. and Popkova, E.G., 2013. Towards the Financial Budgeting Governance in Transitive Economies. World Applied Sciences Journal, 23(11), pp.1538-1547.