Revenue vs. Profit

Any business owner needs to know how to maximize their profit and to demonstrate to investors that the company is heading in the right path since revenue can indicate a firm’s potential.

The most important difference between revenue and profit is that while any company can increase its revenue, it may well be registering a net loss of earrings at the same time.

 

Revenue

Revenue means the total amount of money that the company generated through its business activities (in other words, it is the total sales of the company).

 

Profit

  1. Gross profit

It is basically revenue minus cost of goods sold, on the income statement, gross profit appears directly after revenue, it is calculated by subtracting Cost of Goods Sold (COGS) from the total revenue.

As a metric, it is used by business owners to gain an idea of how much money they have with which to fund the business after their core product is produced and sold.

 

  1. Operating Profit

Operating Profit means Gross Profit minus all fixed expenses encountered when you run the business, such as rents, utility bills & payroll. It is used to demonstrate the earning power of any business in terms of its regular operations, removing external factors to show its potential profitability.

Some companies may choose to use Operating Profit over Net Profit to highlight the financial impact of external overheads. For example, investors can use Operating Profit to compare the business with a similar firm operating under a different tax structure.

 

  1. Net Profit

Whenever people start to talk about any firm’s profit, they usually refer to Net Profit which means the remaining income after all the operating costs, debts, expenses, interest and taxes are deducted.

Net Profit is the most important financial metric on the income statement, it is the most important figure to the investors and shareholders.

In terms of Operating Profit, Net Profit can be expressed as Operating Profit minus interest and taxes:

Net Profit = Operating Profit – Interest – Tax

 

  1. Net profit margin

The Net Profit Margin is the ratio of the company’s net income to its revenue, it is presented as a percentage.

 

Taking all of this into account, a business owner should always try to maximize his Gross, Net, and Operating Profits rather than just increasing sales revenue. Nevertheless, if operating expenses are kept under control, increasing sales revenue might well result in an increase in profits.

 

Inventory Valuation Methods Impact on VAT

Inventory Valuation and VAT

Inventory Valuation and VAT

Would changing the inventory valuation method from First In First Out (FIFO) to Weighted Average (WA) or vice versa reduce my VAT payments?

VAT is computed on the amount paid to purchase or sell an item. So, in case a retailer purchases stock for 1,000 BD from a distributor, the VAT amount would be 50 BD on top of the 1,000 BD that is to be paid for the stock.

Subsequently, when the retailer sells the stock for 2,000 BD, he would have to collect 100 BD on top of the 2,000 BD as output tax. The retailer would then deduct the 50 BD paid to the distributor from the 100 BD collected from the customer and give the difference (50 BD) to the government.

Inventory valuation on the other hand has to do with calculating the value of stock that a company has on hand in order to identify the value of the assets in stock and accordingly the Cost of Goods Sold when a sale is done.

To clarify this, let’s take an example of an item that a reseller purchases at one time for 10 BD and another time for 9 BD and then sells the items for 20 BD.

 

Weighted Average Method

If the reseller buys 100 items for 1,000 BD at 10 BD a piece and then another 100 of the same item for a discounted price of 9 BD a piece for a total of 900 BD, the value of each stock item would be (1000 + 900)/200 = 9.5 BD if the reseller was following the Weighted Average inventory valuation method. Therefore, for each sale of this item, the reseller would have to record COGS of 9.5 BD.

The reseller would have paid 5% on each purchase, hence, he would have paid 50 BD on the first purchase and 45 BD on the second purchase totalling 95 BD.

The reseller would then sell each of the 200 items for 20 BD and collected 5% VAT on each sale totalling 200 BD for all the items (200 x 20 BD x 0.05 = 200 BD).

Finally, the reseller would deduct the 95 BD VAT that he paid to his distributor from the 200 BD VAT that he received from his customers and pay the difference (200 – 95 = 105 BD) to the government.

 

First In – First Out (FIFO) Method

If the same reseller is following the FIFO inventory valuation method, the reseller would have to track the sales of the items to make sure that for the first 100 items sold, a COGS of 10 BD is recorded, and then the next 100 items a COGS of 9 BD is recorded. However, the reseller would still have paid 50 BD VAT for his first purchase and 45 BD VAT for his second purchase. Moreover, the reseller would still have collected 5% VAT for each of the items sold. Assuming that the selling price was maintained at 20 BD per item, the total VAT that he would have collected for all 200 items would still be 200 BD.

Again, the reseller would have to deduct the 95 BD that he paid on his purchases from the 200 BD that he collected from his customers and pay the difference (105 BD) to the government.

As we can see from the preceding example, the inventory valuation method has nothing to do with the amount of VAT that is going to be paid. Inventory valuation methods are concerned with the value of stock and COGS while VAT impacts the selling/purchasing price of the goods.

 

Advantages of using Accounting Software

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Accounting SW

Accounting SW

Advantages of using Accounting Software

Updated accounting data has many advantages for any establishment, and these advantages will be more valuable if you manage it through an accounting software. Through it you will know what happens in your business, reports will be generated automatically and without losing effort or time in them.

Accounting software or accounting systems are designed to organize, control and simplify accounting tasks within a company, whether a small, medium or multinational company. The implementation of accounting software in your company allows you to unify and automate the accounting and commercial operation, and to manage resources more efficiently.

All this will cause you to improve a lot in the management and planning of the company’s financial and accounting resources.

Therefore, let us discuss about the benefits of using accounting software:

  1. Savings.

Generally, a software transforms the operative tasks into automatic tasks. This allows users to save a lot of their company’s resources such as time and people; for instances, a company will need fewer people and less time to accomplish a task, as accounting software streamlines each task that you had to do manually before.

Accounting software allows you to save a lot of time, not only with the updated operational functions, but also with the ease of generating statistics and quality reports. In addition, having everything automated reduces the possibility of errors.

  1. Improvement of business management

Accounting software facilitate the management and decision making of the company, by having the ‘management of income and expenses accounts’ feature, in which the data are unified and stored in one place. Moreover, the data will be provided to keep the business running smoothly, to take it on the right path.

  1. Simplification

Keeping up to date accounting and doing it properly has been a big headache for many workers. However, accounting software allow users to simply automate the work and streamline the daily tasks; users will have time to focus on important tasks and free up from unnecessary manual activities and the stress they bring.

  1. Availability

Having the information unified and centralized all in one Accounting software, allows users to have the data always available, and to access it at all times and without any limitation. As before employees had to always access from the same computer or depend on the report, nowadays employees work with information stored in the cloud, allowing them to manage the information from any place and at any time.

 

  1. Confidentiality and security

Accounting software in the cloud gives you the peace of mind you need. Your information is available 24/7, at your fingertips when and where you require it, stored in fully reliable and secure systems, away from any computer attack or any accident. You can monitor your accounting movements from your preferred mobile device: cell phone, tablet, laptop, etc. With your updated information you have transparency and facility to make decisions. The benefits of accounting software in the cloud are mainly:

  • have the information updated;
  • access the information you require on time;
  • Keep all information secure.

There is no better way to ensure compliance with accounting standards than to use a solid accounting system. H.A. Consultancies provides a full range of accounting systems that can accommodate for the needs of any small, medium, or large companies operating in Bahrain. Our accounting experts will be able to provide guidance in choosing the best accounting software to meet your needs and help setup the system and migrate accounting data error-free.

Transitioning to ISO 9001-2015

Exempt vs. Zero Rated (VAT)

Moody’s Downgrades Bahrain’s Credit Rating Further into Junk Territory

Moody’s lowered the Bahrain’s long-term issuer rating to B2 from B1 and maintained a negative outlook. It has also lowered Bahrain’s long-term foreign-currency bond ceiling to Ba3 from Ba2 and long-term foreign-currency deposit ceiling to B3 from B2. The short-term foreign-currency bond and deposits ceiling remain unchanged at Not Prime. Bahrain’s long-term local currency country risk ceilings were lowered to Ba2 from Ba1.

This downgrade comes despite the announcement of a recently discovered large off-shore oil reservoir and the assumption that the kingdom’s Gulf Cooperation Council (GCC) neighbors will provide some financial support, consistent with a broad statement issued on 27 June and without which Bahrain’s creditworthiness would be significantly weaker.

The negative outlook reflects the risk that financial support from the GCC is not timely and comprehensive enough to maintain Bahrain’s credit profile at B2 through a series of forthcoming debt repayments, including a $750 million sovereign sukuk repayment due on 22 November 2018. Moreover, with regards to the off-shore oil reservoir, Moody’s cannot ascertain at the current stage of exploration with any degree of confidence how much of the announced 80 billion barrels of oil-in-place could be technically recoverable and at what cost. In any case, the government does not expect oil production from the new field that would materially improve Bahrain’s fiscal and external balance to start before early 2023.

A credit rating is an assessment of an entity’s ability to pay its financial obligations. the ability to pay financial obligations is referred to as “creditworthiness.” Credit ratings apply to debt securities like bonds, notes, and other debt instruments (such as certain asset-backed securities) and do not apply to equity securities like common stock. Credit ratings also are assigned to companies and governments.

When making investment decisions, credit ratings and any related rating and industry trend reports can be helpful tools, provided they are used appropriately. Credit ratings may offer an alternative point of view to your own financial analysis or that of your financial adviser.

A downgrade to junk status is associated with high risk. Therefore, high borrowing costs. For governments it means allocating more to debt servicing costs (interest payment). Less money will be available for social grants, investment priorities, creating jobs and ultimately reducing the GDP growth potential of the country. More interest payment also crowds out other critical spending. Social services is an example. This is the main reason why a sovereign has to avoid being downgraded into a junk, or sub-investment grade.

 

Bahrain was downgraded to junk status by Moody’s back in March 2016 and has been sliding down the scale ever since. With this most recent downgrade it needs to go up five positions before beings considered as investment grade.

The recent downgrade to B2 reflects Moody’s view that the credit profile of the Bahraini government will continue to weaken materially in the coming years. The rating agency expects Bahrain’s government debt burden and debt affordability to weaken further significantly over the coming two to three years.

Despite a rise in oil prices, the government’s budget deficit will oblige it to constrain spending, which will moderate growth in the non-oil economy. Higher borrowing costs due to rising interest rates, and reduced subsidies will weigh on corporate and household income, putting mild pressure on loan quality. In addition, rising government debt is reducing the government’s capacity to support the country’s banks in a crisis.

 

Moody’s expects economic growth to slow to 2.8% in 2018 from 3.9% in 2017 as the government constrains spending, due to its large budget deficit. As a result, credit growth will decelerate slightly to 5%-7% from 8% in 2017.

Moody’s downgraded Bahrain’s issuer rating two notches from Ba2 to B1 last year despite the government’s steps towards economic reforms, including lifting some subsidies from fuel and utility tariffs, government restructuring, and increasing fees on government services. According to Moody’s, these steps were not considered to be aggressive enough in light of the financial challenges.

Yet again, the Bahraini government has not announced any new significant policy measures and Moody’s believes that the lack of new policy announcements in the face of rising liquidity pressures underscores very limited policy flexibility and weaker institutional strength than previously assessed.

The implementation of the value-added tax, originally planned for 2018, has been postponed until next year. Meanwhile, in January all new fiscal austerity measures were suspended until parliament agrees on a new system to compensate citizens for the higher cost of living implied by the measures. The most significant fiscal measure implemented this year is the excise tax on soft drinks and tobacco products, which is expected to yield around 0.4% of GDP in extra revenue. By comparison, the government expects the overall spending to increase by close to 1% of GDP.

Country Moody’s Long-Term Credit Rating
Kuwait Aa2
UAE Aa2
Qatar Aa3
Saudi Arabia A1
Oman Baa2
Morocco Ba1
Jordan B1
Tunisia B1
Bahrain B2
Lebanon B2
Egypt B3
Iraq Caa1

Comparison of Moody’s Rating for Arab Countries

 

While Moody’s acknowledges the fact that Bahrain’s economy is fairly diversified, with non-oil sectors contributing close to 80% of nominal GDP on average since 2010, it is wary that the government shows no indication that it will use this economic base to materially diversify its revenue base to reduce its reliance on oil-related income which will continue to suffer from weak oil prices in the coming years. Non-oil economic performance will be supported by access to funding under the Gulf Development Fund. While these funds are not part of the Bahraini government’s budget, they will support the government in reducing investment expenditure without unduly harming growth.

 

Bahrain’s net asset international investment position, its stock of foreign assets minus foreign liabilities, which stood at 74.5% of GDP in 2016 and 87% of GDP in 2017, provides some form of external buffer. However, Moody’s expects it to decline significantly because external liabilities will increase at a much faster rate than the country’s assets. More importantly, foreign exchange reserves at the Central Bank of Bahrain are low and very volatile, covering only around one month of goods and services imports. Following a pause in the dissemination of this data in 2015, the time series disclosed by the central bank more recently shows a material decline in foreign exchange reserves over the last two years, averaging only around $2.5 billion in the first quarter of 2017.

 

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects continued downside risks to the B2 rating, which manifest themselves in heightened government and external liquidity risks. Given the expected large fiscal deficits and sizable amortization payments falling due over the coming years, Bahrain’s government gross financing needs will reach more than 30% of GDP over the next two years.

The further deterioration in the government’s balance sheet, combined with continued external debt issuance from other countries in the region, will lower the supply of external funding. In addition, in light of rising global interest rates, the cost of funding will go up.

Moody’s expects that the combination of these two factors heightens the risk that finance is obtainable only at much less affordable rates for Bahrain, or potentially reduced amounts. Despite the 27 June announcement stating that an “integrated program … will soon be announced”, there has been no further communication to date, either from the Bahraini authorities or from Saudi Arabia (A1 stable), the UAE (Aa2 stable) and Kuwait (Aa2 stable).

As a result, there is a risk that such support may not be sufficient to stabilize Bahrain’s credit metrics and in particular allow the government to meet its debt obligations while avoiding prohibitively expensive costs.

WHAT COULD MOVE THE RATING UP/DOWN

Given the negative rating outlook, any upward movement in the rating in the foreseeable future is highly unlikely. Moody’s would likely change the outlook to stable if a detailed and credible announcement of GCC financial support was made and if such support raised the probability that the government would undertake comprehensive fiscal consolidation which would materially narrow non-oil fiscal deficits and stabilize its debt burden. Such a policy announcement would probably enable Bahrain to regain access to the international capital markets, diversifying its financing sources. Combined, the availability of GCC financial support and regained market access would provide some scope to rebuild the central bank’s foreign exchange reserves.

Moody’s would likely downgrade Bahrain’s rating in the event of continued deterioration in fiscal and external metrics amid a prolonged absence of a detailed announcement from the GCC countries about the group’s commitment to support Bahrain’s government and external financing needs. Possibly related, a downgrade would also likely occur if the sustainability of Bahrain’s pegged exchange rate regime was increasingly threatened.

WHY HIRE A BUSINESS CONSULTANT?

 

Pondering the idea of whether or not it’s time to ask for professional help for your business. Well, here are the top 5 reasons why you should hire a business consultant.

  1. Consultants are the leading experts

Consultants are often the leading experts in the fields they work in, so they will provide you with the best teaching and implementing practices. They have academic and theoretical expertise, and they’ve also worked directly with leading organizations to implement change. For example, if you want best practices in areas such as marketing and IT, then consultants are the best source available. Why try to invent a best practice when consultants have already implemented some with multiple clients.

  1. Handle critical changes

Consultants are experts at fostering change in organizations, so if your company is diffused with internal spar concerning imminent changes, hiring in a consultant can break the impasse. Consultants know that they’re often brought in for political cover and will shoulder blame for unpopular changes such as reducing head count and other cost-cutting measures.

  1. Different perspective

Consultants have a different perspective on your company, so having an outsider come in and bring new ideas can be extremely helpful. Sometimes your in-house people are too close to your business and don’t have the perspective to examine the larger picture within your market, at the other hand consultants can share valuable insights that enhance your internal creative thinking.

  1. Get high quality training

Consultants are born trainers, so they’re the best choice to do a training course or presentation for your organization. Consultant combine practice and theory, and this can deliver high value to your organization. You can hire a consultant to share knowledge about almost anything.

  1. You don’t have the brains resources

If you don’t have enough brain resources, then you should rent a brain, so hiring a consultant for a project or on a temporary basis can fill the gap until a full-time internal person is hired. Hiring a business consultant won’t make him a full-time employee, so breaking off the relationship is going to be very easy and cost-effective.

We are a leading business consultancy based in Bahrain and providing professional business consultancy services to clients all over the GCC. If after reading this article you discover that you may need help with your business, it would be our pleasure to assist you.

Business Plan

 

Some people believe that business plans are merely guesses made about the future of a business that we know little or nothing about. However, statistics indicate that businesses, activities, and even individual actions have a better chance of succeeding if they start out with a plan.

Each business should have a starting point and a destination through its journey, putting in mind that even the best planned route may require some changes regularly. A business plan is the itinerary.

So let’s start out with the basics and work our way from there.

 

First of all, what is a Business Plan?

A business plan is a document that includes details about the product/service, all the business objectives, milestones, individual responsibilities, dates and deadlines, and budgets to achieve the business’s goals in terms of growth and profit.

A business plan is extremely important for every business whether it’s new or old. It assists the business owner to take informed decisions and paves the way to success while providing interested parties with insights about all aspects of the business. A business plan should include information such as:

  • A detailed description of the product or service,
  • Financial projections or forecasts for the next three to five years,
  • Detailed information about employees, processes, materials, and tools,
  • and a market study covering customer perceptions and preference, competitors’ analysis, threats and opportunities…etc.

 

Why do we need a Business Plan?

Many businesses have shut down because they have jumped directly to starting up their operations without having a proper business plan. Having a business plan is crucial for every business whether they are big or small, new or old. It ensures that business owners do not spend money, time, or resources unnecessarily on businesses or projects by initially checking their viability.

As aforementioned, a business plan is not just for startup businesses, it can also be used by existing businesses. An existing business should update its business plan regularly to increase growth and benefit from anticipated opportunities in the market. Since the only constant in life is change, markets inevitably change as well. Therefore, it is important to have a robust business plan and conduct regularly management meetings to adjust it according to market needs.

 

What does a Business Plan include?

At a minimum, a Business Plan should include the following:

  • Company Overview
  • Product/Service Description
  • Market Analysis
  • Competitive Analysis
  • Marketing Plan
  • Technical Plan (Operating)
  • Tactical Plan (Management)
  • Financial Plan

 

What are the main benefits of a Business Plan?

A Business Plan can provide numerous benefits to a business. These benefits can be summarized as follows:

  • A Business Plan helps business owners to remain focused on business goals, objectives, issues, and opportunities along with resources.
  • It permits business owners to be more adaptive to the market in which they operate as it forces them to research and analyze industry trends, identify current and future challenges, weight competitors, and understand where their business stands in the market.
  • Regularly updating a Business Plan allows a business to become more efficient by eliminating non-value-adding processes.
  • A Business Plan is also crucial to estimate the amount of capital or funds needed to start the business and where the money will be allocated.
  • Finally, a Business Plan ultimately helps mitigate risks of failure.

 

Is a Feasibility Study the same as a Business Plan?

Although a Business Plan might be mistakenly confused with a Feasibility Study, there are subtle differences between the two.

The following table explains the main difference between a Feasibility Study and a Business Plan:

Business Plan

Feasibility Study

It is created after the success of a Feasibility Study.

It is established first to find the workability & profitability of a business.
More of tactics and strategies. More of calculations, analysis and estimations.
Deals with growth plan and sustainability of a business.

Deals with viability of a business.

For more help on developing your Business Plan for your next big venture, feel free to contact us at any time.