anderson tax & consulting · 2016-06-16 · taking care of business l debra anderson taking...

TAKING CAREof BUSINESSSmall

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How to take control of your small business

Debra Anderson

“Debra has a unique ability to practically assess the potential for technology or for new ideas to really improve the lives of small business people around the country.”

– Tim Reed, CEO of MYOB

Do you dread doing your bookkeeping? Are you missing out on tax deductions because you don’t have good systems in place? Would you like more time each month to spend with your friends and family instead of doing your accounts?

With the right structure, solid foundations and utilising cloud accounting you can easily reclaim 10 to 20 hours of your life back per month by having systems that do the boring, time-consuming work for you.

Taking Care of Small Business gives you simple,practical tools and advice that will make a huge difference to you, your business and your cash flow. From choosing the right business structure to setting up your accounting system, from bookkeeping through to taxation, this book covers them all.

Your accounting system is there for you to manage your business and understand how it is going – doing a BAS or tax return are secondary benefits. Setting up good accounting systems will boost your profitability, improve your knowledge of your business and its performance, and allow you to spend more time building the business rather than doing paperwork.

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BUSINESS

RRP $24.959 780994 563552 >

ISBN 978-0-99456-355-2

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Debra Anderson has anundeniable passion for smallbusiness and accounting.She spent the first 10years of her working lifein the corporate world. In2000, she joined an owneroperated business where shediscovered her calling: smallbusiness. Since 2006 shehas set up and cleaned uphundreds of accounting systems and helped put the businesses back on the right path by setting up solid foundations and implementing simple,easy-to-use processes.Debra is a thought-leader,award winning and one ofAustralia’s leading MYOBCertified Consultants. Debrais highly regarded withinthe tax profession andbookkeeping industry andsits on advisory boards oforganisations including theAustralian Taxation Office.

First published in 2016 by Debra Anderson

© Debra Anderson 2016 The moral rights of the author have been asserted

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the author.

National Library of Australia Cataloguing-in-Publication entry:Creator: Anderson, Debra, author. Title: Taking care of small business. ISBN: 9780994563552 (paperback) Subjects: Small business. Small business – Management. Success in business. Dewey number: 658.022

Printed in Australia by McPherson’s Printing Project management and text design by Michael Hanrahan Publishing Cover design by Peter Reardon

Disclaimer: The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

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CONTENTS

Foreword 1 Tim Reed, MYOB CEO

Introduction 3A dream come true 3

Who is this book for? 5

PART I: LAYING THE FOUNDATIONS

1. The foundations 9It’s a bit like building a house 10

Now what about starting a business … 11

2. What structures are there to choose from and what do they really mean? 15Why do business structures matter? 15

What options are there? 16

Can I set it up myself? 22

What registrations do I need and where do I go to get them? 23

3. Accounting systems 27Do I really need an accounting system? 27

So then what are my choices? 28

You’ve mentioned add-ons – what is an add-on and do I need one? 36

What’s this cloud thing everyone is talking about and is it safe? 37

Where do I go to get advice on what system I should use? 41

How much is this system going to cost me? 45

What do I need to do in preparation for setting up a system? 47

Everyone talks about a General Ledger – can you tell me what it actually is? 49

I hate filing – seriously, do I need to do this? 50

Keep your business and personal finances separate 53

TAKING CARE OF SMALL BUSINESS

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PART II: GETTING DOWN TO BUSINESS

4. Invoicing and paying the bills 59Let the games begin 59

Giving customers credit accounts 62

Make it easy for your customers to pay you 63

I’ve finished the job and I haven’t been paid. What do I do now? 68

Chasing money owed to you 69

I’ve been chasing the money but still I’m not getting paid. Where to now? What are my options? 73

Should I send statements? 74

Paying the bills 75

Managing supplier invoices 76

What about when I’m struggling to pay the bills? 77

5. Paying your staff – and yourself ! 79But they’ve got an ABN so I don’t need to worry about this stuff, right? 83

What is SuperStream? Where did that come from? 85

But what about me? How do I pay myself? 87

The real world … 90

How much should I pay myself? 91

Can I pay my spouse? 92

6. Automating the boring stuff 93Bank feeds are life changing 93

Bank rules are the bomb 95

If I use bank feeds do I still need to do bank reconciliations? 97

Contents

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PART III: BAS’S, TAX AND THE DREADED 30 JUNE

7. Congratulations, you’re in a relationship … with the ATO 101But I don’t want to pay tax … 101

But our tax system isn’t fair; big business isn’t paying their fair share of tax but us small businesses are expected to 102

The ATO scares me 102

Is an accountant the same thing as a tax agent? 103

Choosing an accountant 105

8. Okay … time to talk tax 113How many business taxes are there and what are they? 113

Am I paying too much income tax? 115

Tax deductions 119

When is my tax return due? 122

What is PAYGI and why am I paying it? 123

How much money should I be putting aside for tax? 125

What if I can’t pay my taxes? What should I do? 126

I’ve heard the ATO put businesses into liquidation all the time for paying their tax late. Is this true? 128

What about GST? 129

Why are there so many GST codes and what do they mean? 131

The dreaded BAS 133

This is starting to get complicated – should I get a bookkeeper? 136

So where is the line between tax agent and BAS agent? How do I know who does what or should being doing what? 143

Audits … arrrrgghhhhh 144

9. 30 June is not the end of the world 147What do I need to do, when and how? 147


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PART IV: TAKING CONTROL OF YOUR BUSINESS

10. Keeping an eye on how your business is tracking 153What reports should I be running and what do they mean? 154

How often should I run these reports? 159

Are there any other useful reports I should run? 159

The difference between profit and cash flow 160

Strategies for avoiding future cash flow headaches 166

You need a plan 170

Working out your break-even point 175

Conclusion 177

Key dates that every business owner needs to know 179

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FOREWORD

IN TODAY’S INCREASINGLY digital global economy, there has never been a better time for businesses of all sizes to become better connected and more competitive by using online technologies.

It’s important to build a solid foundation for your business – and this includes the right business processes and tools, such as cloud accounting solutions. All of this can play a vital role in your success. The benefits include increased efficiencies and productivity, and greater connectivity and mobility.

A strong commitment to making business life easier – something we do for more than 1.2 million businesses today – has been the cornerstone of MYOB’s philosophy since 1991. For a number of years now we have intro-duced cloud-based business management solutions, to the point where more than 60% of all our new clients are taking these up.

That is one big reason why we think Taking Care of Small Business is a must-read for every small business operator. I’ve known Debra Anderson for a long time – she is a highly-respected certified MYOB consultant and considered a thought leader in her industry. She has a strong passion for small business. Her clients, colleagues and extended network mean everything to her. Debra is also the owner and director of Anderson Tax & Consulting, a successful accounting and bookkeeping business. You’re in great hands.


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Whether you are new to business, new to technology or a savvy busi-ness operator, this book will give you greater confidence to set up your business for prosperity.

I wish you every success!

Tim ReedMYOB CEO

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INTRODUCTION

A DREAM COME TRUE

Starting a business is an exciting time. There’s never-ending, ridiculously fabulous ideas, grand plans of market domination, and dreams of success and wealth. Often businesses are conceived ‘on the side’ while we are still working for someone else, which means lots of late nights and weekends as we devote hours, days, even weeks to coming up with the perfect name for our dream business, tossing around ideas, and researching our products/services and our target market so we can start marketing and selling as soon as possible.

When we make that landmark first sale, the French Champagne that has been sitting in the cupboard just waiting for a special occasion is chilled and the cork is finally popped to celebrate this huge milestone – starting our very own business. It’s a dream come true – our very own business. No more working for someone else. No more making someone else rich with our ideas and hard work.

It’s a big thing. It’s a huge leap of faith, not just in your product or service but in yourself too. It’s not a decision that any of us make lightly. I mean, it’s huge, right? It’s life changing on so many levels – and yet so many of us just ‘wing it’. We Google how to do things, do most of it ourselves, call on friends for advice, and call in favours because we’re trying to keep our costs down until the sales start rolling in and we can afford to do it properly.


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The problem is, though, that by the time the money does start flow-ing in we’re so busy trying to keep up with business – and getting more business – that we never go back to the beginning and get the basics right. Instead of being money poor we become time poor, so we put in half-baked systems just to get us past today’s issues, which by default then become ‘our system’.

I think it’s fair to say most people don’t go into business because they enjoy paperwork, accounting systems or compliance, but unfortunately these are necessary evils required to ensure that market domination, infinite success and bottomless pots of money are not just achievable but sustainable. Every day I work with the most incredibly inspiring business people who have a kick-arse product or service but they’re struggling. They’re struggling because they love what they do but they don’t love the paperwork or compliance side of business. They’re struggling because they focused wholly on getting an amazing product or service out to market and ignored getting the financial side of their business in order first. They’re struggling because they’ve put their head in the sand for too long and ignored the books until they no longer even resemble the state of the business anymore. They’re struggling because they’re stressed, have no money in the bank, and this dream of owning their own business is slowly becoming a nightmare, keeping them up at night, and they don’t know where to turn for help.

This is why I wrote this book. I get it. Like you, I started my business because I love what I do. But unlike you I love paperwork and compliance, and it breaks my heart to see such wonderfully talented and passionate small business people doing the best you can (and you’re doing great work, by the way) but you’re struggling with the paperwork and the compliance is killing you. This is what keeps me up at night. Each day as I help another small business, my drive, my passion, my desire to help small businesses just increases. I have reached out to the likes of the Australian Taxation Office and MYOB to offer my day-to-day experiences with each of you to

Introduction

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help them simplify the systems you have to deal with every single day. It’s a long, slow battle, but for those of you who know me you know I just keep pushing until eventually someone listens and things start to change. This book is the culmination of all of those efforts, but it’s also my ultimate effort to help as many small businesses as I can. This is my effort to reach out and help those of you who can’t afford to have me come into your business and give you one-on-one help and those of you who maybe don’t even realise you could be doing things better, easier and quicker.

I sincerely hope that by reading this book you will get some ideas that you can implement in your business. Please keep your mind open, and I dare you to try something new. You don’t have to change everything at once: test strategies with one client, then another client, and see what works and what doesn’t. Tweak the suggestions to see how they can work for your business.

In the wise words of Henry Ford:

‘If you always do what you’ve always done, you’ll always get what you’ve always got.’

WHO IS THIS BOOK FOR?

If you’re about to start a new business, well done for recognising the importance of these issues early. In years to come you will be grateful you did, and you will also avoid many of the headaches small business people usually have as they start to grow because you’ll have your foundations right.

If you’ve been in business for a number of years and you are struggling with some of this stuff, please know you’re not alone, and the good news is it’s never too late to get your house in order. I promise you the information in these pages will help you do just that.

So what exactly am I going to cover in this book?


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Firstly, I am going to go through getting the foundations of your busi-ness right, foundations being both your business structure and business systems, because they need to be solid in order to grow and thrive.

But I can assure you I cover a whole lot more in this book. I also go through actually doing business: doing it better, quicker,

smarter, what’s important, what’s not, and who to go to for help when you need it. I spend a lot of time going through one of the biggest pain points of all – cash flow – and give you some insight into how to understand and manage it better, as well as explaining how to have the best possible relationship with the Australian Taxation Office, because – even if you haven’t realised it yet – when you started your business you entered into a lifelong relationship with the ATO.

I show you how to work out your break-even point, and tell you what reports you should be running and when, and more importantly I explain what they mean.

Throughout the book I make no assumptions. I explain everything from what Pty means through to GST and P&L. You may have been in business for 20 years but I know that doesn’t mean you understand what everything is, so I’ll go over the basics to make sure you have a solid under-standing.

If you’re new to business you may read this book from front to back, and that’s great. But for those of you already in business I expect you will go to the parts that you need help with now, and use this book as a practical reference to improve and refine how you are doing business.

So, I think that’s enough introduction. Now it’s time to get into it. Let’s go and help you to take care of your small business.

PART I LAYING THE FOUNDATIONS

I KNOW FOR most of you just the thought of reading about business foundations is enough to make you want to vacuum the house, mow the lawn or – worse still – do the ironing. It is the least exciting part of business, but it’s also the part that can, and will, have the biggest impact on you financially. This is the part that will determine how much tax you will have to pay, not just every quarter or every year, but also if you sell your business down the track.

All too often I see businesses paying more tax than they should just because they have the wrong legal business structure, or getting a nasty surprise at BAS time because they don’t have the right system in place that helps them see and understand what is coming up. Getting these essential foundations right can save you tens or hundreds of thousands of dollars – or potentially millions of dollars – during the lifetime of your business.

So let’s get stuck into it, and remember if you need to change some-thing in your foundations, it’s not too late – but please, please get some professional advice about your specific individual needs, as this advice is of a general nature and there may be other circumstances in your life and business that need to be taken into consideration. Do not go making changes on your own.

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1THE FOUNDATIONS

I LIKE TO use the analogy that starting a business is like building a house. When you start building a house you don’t just start laying bricks down on the bare ground because you know it wouldn’t be a matter of if the house fell over, it would be a matter of when. But let’s assume you do just start laying bricks and the house stays up, but a few years down the track you have a couple of kids and decide you want to extend the house and add another level. You’d be crazy, right? Crazy because the foundations, or lack thereof, of the house are not going to support another level. If you don’t have a solid foundation, it just isn’t going to be stable enough to support the expansion.

It is exactly the same with a business: if you don’t set it up correctly from the beginning, when it comes time to expand it will be exponentially trickier, more stressful and definitely more expensive than it would have otherwise been. And even if you have no plans for expansion, as you will see you may end up paying too much tax, struggle with cash flow, or just simply overcomplicate your life unnecessarily … and no-one needs a more complicated life.


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IT’S A BIT LIKE BUILDING A HOUSE

So, let’s start by thinking about building a house. What would be your first steps when building a house?

In big-picture terms it would go something like this:

Research, viability and costing

1. I’ve got a block of land and I want to build a house on it2. I’ll engage an architect and talk about what I have in mind: size, style,

materials and so on, considering the limiting factors such as budget and block size and shape

3. The architect designs a blueprint of the house, costs it out, and we discuss and tweak as required

Preparation

1. Apply to council for approval2. Engage a builder who prepares the site and lays the foundation3. Put up framework and build the house to lock-up stage, using

licensed electricians to do the electrical work, licensed plumbers to do the plumbing, and so on

4. Once at lock-up stage, fittings, appliances and so on are installed

The new house

1. Hand-over2. Minor defects fixed3. Move in4. Landscape5. Purchase of furniture

Down the track

1. Maintain property2. Renovate and/or extend

The foundations

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When building a house, do you just wing it? Do you just Google it and do it yourself? Do you draw up the plans yourself? Do you let the architect lay the foundation? Do you decide to save a few dollars and ask your mates to come around and help put up the framework or lay bricks?

I bet you’re shaking your head, laughing and thinking, ‘No, of course not’, because you’re not a builder. And you know even if you were the world’s best handyman, if you don’t do it properly the doors might not close, the shower could leak, or – even worse – the house could fall down from suspect carpentry or burn down from dodgy electrical work. You know that if you muck it up the cost of fixing the mess you’ve made is going to far outweigh the cost of getting it done right from the beginning.

Even if you were a licensed and highly experienced builder, would you draw up the plans yourself? No, of course you wouldn’t. You’re a builder, not an architect, so you would get an architect to do it because you know that if the basics – for example, the roof line – aren’t right then the rest of the plan isn’t going to work either.

So, we agree that any reasonable person wouldn’t just ‘wing it’ when building a house – yet most reasonable and highly intelligent people just ‘wing it’ when they start a business …

NOW WHAT ABOUT STARTING A BUSINESS …

So, what are the comparable steps when you decide to start a business?

Research, viability and costing

1. I’ve got an idea for a product or service and want to start a business2. I’ll engage an accountant and/or business advisor and talk about what

I have in mind and what my wants and needs are considering factors such as budget, market, economy and business structure

3. The advisor advises about a suitable structure for the business, costs it out and we discuss and adjust if required


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Preparation

1. Set up the business and obtain relevant registrations and licences, domain name, bank accounts, and so on

2. Advisor recommends and sets up an accounting system and assists with processes to support the business’s requirements and budget before marketing commences, so it’s all ready to go when needed

3. Additional systems researched and implemented, such as CRM, email and social media

4. Logo, website and business cards designed

The business

1. Advertising and marketing2. First sale done – crack open another bottle or three of

French Champagne and celebrate

Down the track

1. Tweaking of products/services and pricing according to market feedback

2. Implement additional systems, such as CRM or other processes, as the volume and complexity of the business changes and we need to manage things better

3. Day-to-day running of the business4. Expand business – hire staff

You can see from the above the complexity involved in starting a business, the different skills and knowledge required across a wide range of areas, and the huge potential for problems if you don’t do this correctly. Think about it like this:

• If you have the incorrect business structure to begin with you could be paying more tax than you should be. And changing the

The foundations

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structure later will be time consuming, complex and costly, as well as potentially having capital gains tax implications.

• If you have the wrong accounting system in place you won’t be able to monitor and understand exactly how your business is tracking, so you will be relying on ‘gut feel’ rather than using real data to make important business decisions.

• If you have a DIY logo, website or business cards, your business could look unprofessional as these are the first impressions of your business that prospective customers see.

So … should you just ‘wing’ setting up your business without professional advice? Absolutely not! What you do (or don’t do) at the start of your busi-ness will set the foundation for your future business, so it’s always wise to invest a few hundred dollars – or even a few thousand – and get everything set up properly by the right professional people. This can potentially save you tens of thousands of dollars down the track.

TIP: When you are thinking about starting a business, go see your accountant first. Yes, it will cost you money, but I can assure you it will save you money down the track.

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2WHAT STRUCTURES ARE

THERE TO CHOOSE FROM AND WHAT DO THEY REALLY MEAN?

WITHOUT A DOUBT the single most common and completely avoid-able mistake I see all the time is having the wrong business structure.

If you’ve already set up your business it’s worth reading this chapter so you can identify if your foundations are a little shaky, and then speak to your accountant about how to fix them – because they can be fixed, and the sooner the better.

If you’re new to business, this chapter will be one of the best chapters you will ever read because it will give you a solid understanding of the differences between structures, what you need to do, what you need to ask about and where to go to get help.

WHY DO BUSINESS STRUCTURES MATTER?

There are a lot reasons why structure matters:

• you could be paying too much tax• you could be accepting too much personal responsibility as a business

owner


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• your personal assets may be at risk• you could be paying too much for compliance and accounting• you could be paying too much in ongoing costs for your business• you need to consider your ability to bring in or get rid of business

partners or investors• you need to consider raising capital – now or in the future• you need to consider voting and decision making• you could be unnecessarily overcomplicating your life.

That’s just to mention a few … and trust me – there are many, many more.

WHAT OPTIONS ARE THERE?

So what are the options when it comes to structuring your business? Although business structures are extremely complex and could fill a book of their own, for the majority of small businesses there are basically four main structures to consider:

• sole trader• company• trust• partnership.

Each has advantages and disadvantages. Which one is right for you will depend on issues such as the size and revenue of your business, your plans for the future, your personal circumstances, your personal and business assets, and much more.

So, let’s have a closer look at each of these structures.

Sole trader

A sole trader means that you and your business are one and the same in both the legal and tax sense, and if you die your business dies too. You and your business have the same ABN and tax file number and you will most

What structures are there to choose from and what do they really mean?

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probably trade with a registered business name, though you are also able to trade with your own name if you wish. This is the simplest type of business to start, run and close down.

Sole trader pros Sole trader cons

• Cheapest business to start, run and close down.

• Only need to lodge one tax return.

• If your net income (profit not sales) is below $18,000 then it is below the tax-free threshold and no tax would be payable.

• Profits are taxed at personal income rates which, depending on the amount, could be lower than the flat company tax rate.

• You and your business are one and the same, therefore – depending on your industry – multiple registrations may not be required.

• You don’t need to pay yourself superannuation on money you take out of the business.

• If you use your name as your business name, it is free.

• There are some capital gains tax advantages.

• It is simpler for bookkeeping purposes.

• No asset protection as you are personally liable for all debts.

• Profits taxed at personal income rates which, depending on income, could be significantly higher than the company tax rate.

• If you die your business dies with you.

• Some larger businesses may only want to deal with companies.

• Doesn’t appear as professional as a company.

• Not conducive to taking on a business partner.


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Company

A company is a common structure, and it usually has ‘Pty Ltd’ at the end of the business name. The ‘Pty’ means it is an incorporated entity, not a sole trader, and ‘Ltd’ means that the company’s liability for its debts is limited up to the value of the shareholders’ shares or equity. A company is a separate legal and tax entity from the owners, and has its own identity completely separate to its owners. The key here is that a company is not you. If you die, the company lives on, as does its obligations.

Company pros Company cons

• More professional to the outside world.

• Increased asset protection.

• Profits distributed to shareholders can be franked, meaning that the shareholders can claim back the tax already paid on the profits in their personal tax returns.

• Losses can be carried forward indefinitely and offset against future profits, provided some basic rules are met such as the business must have the same owners and must be conducting the same sort of business; e.g. if you had losses from running a plumbing business you can’t offset those against profits now that you are running a graphic design business.

• All profits taxed at the company rate – there is no tax-free portion or threshold, meaning you pay tax on every dollar of profit.

• There are set-up costs and ongoing maintenance costs.

• There are annual fees payable to the Australian Securities & Investments Commission (ASIC).

• If you pay yourself wages you must pay yourself superannuation on top, even if you are the sole owner/shareholder of the business.

• If you provide personal services – e.g. consulting – you may not get any of the tax advantages of a company. This area of Personal Services Income (PSI) is particularly relevant to consultants and requires professional advice.


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Company pros Company cons

• Easy to bring in and exit partners or investors.

• You need to keep your personal and business finances completely separate – remember you and the business are separate legal entities.

• You may have to pay Fringe Benefits Tax; e.g. if the company owns your vehicle.

• You cannot take money out of a company as if it was your own. It must be correctly and accurately accounted for.

• You are not allowed to owe the business money without a formal loan agreement being in place.

• As a company Director you have responsibilities and obligations under the Corporations law for which you are legally liable.

Trust

Trusts come in various different types, but the common two are unit trusts and discretionary trusts, which are usually family trusts. Trusts are a com-plicated structure and have their own set of rules.

Trusts are often favoured because you can split income between bene-ficiaries, but there are some strict rules around this and I’ve found that the circumstances where this can be done legally aren’t as straightforward as people seem to think.

Another reason trusts are often used is for additional asset protection, however for some businesses trusts can be overkill and provide no benefit


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other than to increase your financial complexity, and hence by their very nature increase your compliance and accountant fees.

My pet hate of trusts is that profits must be distributed at the end of the year, which means that for many people they are paying personal income tax on profits that they haven’t actually received any money for yet.

Trust pros Trust cons

• If you have a family trust or discretionary trust you can choose – within the rules – how much and to whom you distribute profits.

• Trusts add an additional layer that increases asset protection.

• There are some capital gains tax advantages.

• Losses are trapped in the trust.

• They are expensive to set up and maintain.

• You will usually have a Pty Ltd or corporate trustee – therefore another cost.

• Much more complicated than other structures and often difficult to understand.

• Because profits must be distributed, quite often you will have to pay tax personally for income you haven’t received yet.

• All profits must be distributed – if they are held within the trust they are taxed at penalty tax rates.

Partnership

A partnership can be between individuals, companies or trusts, or any combination of those. The main difference with a partnership is that it is not actually a legal entity in its own right, but it does require its own ABN and tax file number, and although it doesn’t pay its own tax it still needs to lodge a tax return.


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Partnership pros Partnership cons

• Depending on the ‘partners’ it can be a simple structure; e.g. husband and wife.

• Simple to set up and exit.

• All profits must be distributed to the partners and taxed at the rate applicable to the partner; e.g. if the partner is an individual it will be charged at personal income tax rates, if the partner is a company it will be charged at company tax rates.

• Partnership agreements are essential documents to have drawn up. Always plan for the worst-case scenario – even if the partners are related.

So, which structure is right for me?

Unfortunately there is no real rule of thumb for business structures as there isn’t a ‘one size fits all’ option. Even asking your mate who is an account ant or lawyer for advice is useless unless they are fully aware of your whole situation – and I mean everything … the good, the bad and the ugly. And, let’s be honest, who tells their friends the really ugly financial stuff?

When choosing a structure, your individual personal and business circumstances – current and future – must be carefully considered along with the nature of your business, projected turnover and expected profit.

The cheapest and simplest structure is a sole trader, and with recent changes to legislation the ability for small businesses to move between structures has become easier, and implications such as capital gains tax may be deferred or disregarded.


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I’ve seen many small businesses over the years that have some rather impressive structures that are just way above and beyond their needs. Nor-mally this happens for one of two reasons:

• A client insists they are going to grow to be a mega-business and wants the megastructure in place now.

• An accountant takes an extremely conservative approach and over-engineers the structure.

Bigger and more elaborate is not always better, so make sure you tailor your structure to the needs of your business.

TIP: You can find more detail on the various business structures at www.andersontax.com.au/resources/.

CAN I SET IT UP MYSELF?

Depending on the structure, yes you can set it up yourself – but the real question you should be asking is should you set it up yourself? Unless you are an accountant or lawyer and set up business structures regularly, I strongly recommend you have your structure designed and set up by a professional who will make sure you have all the necessary documentation and have it set up correctly according to your situation.

All too frequently I meet with a new client and as I start looking at their accounts I notice things that have been missed or set up incorrectly. There are a few things that I believe you really shouldn’t DIY, and this is definitively one of them.

Remember, a company or a trust is a separate legal entity so there are a whole bunch of laws to adhere to and consequences if you set them up incorrectly, and they can be expensive and time consuming to fix or


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dissolve. A situation I had recently is a client set up a company with two share holders, but instead of having one share at $1 each when they set it up they decided they’d have 10,000 shares at $1 each. Neither of them actually paid the $10,000, and legally they didn’t need to, but a few years later after they brought in another shareholder, the new shareholder insisted they both pay the $10,000 owing – which they then had to do.

Although most ‘mistakes’ can be fixed, they can be costly if you need to get an accountant or – God forbid – a lawyer involved. But if you’re like me, it’s the pain in the butt factor that hurts most, and fixing these sorts of issues consumes a lot of brain space, stress and time that I’d rather spend on something else.

Please leave this one to the experts.

WHAT REGISTRATIONS DO I NEED AND WHERE DO I GO TO GET THEM?

Depending on the business structure you choose, there will be various registrations you need. Let’s take a look.

An Australian Business Number (ABN)

Regardless of what structure you decide on, you always, always, always need to get an ABN. You cannot do any business in Australia without an ABN. An ABN is a unique 11-digit number that identifies your business to government, other businesses and customers.

I often hear people say, ‘But I’m not charging GST’. An ABN is a separate registration, with separate consequences, and it is a legal require-ment for all businesses to have an ABN. You must have your ABN on all your invoices. If you don’t have an ABN, your customers are required to withhold 46.5% tax from all payments they make to you.

You can apply for an ABN via the Australian Business Register, www.abr.gov.au, and ABN applications are free.


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An Australian Company Number (ACN)

If you register a company you will be issued with an ACN once the com-pany registration is complete. At this point you will receive a Certificate of Registration from the Australian Securities & Investments Commission (ASIC).

If you are a Pty company there is an annual fee of $246, payable to ASIC. Along with this fee you will be sent an annual statement which you need to check, and the directors must also have an annual meeting to pass a solvency resolution which acknowledges that as the directors they believe the company can pay its debts when they become due.

If you register a company you will need an ACN before you can apply for an ABN – or anything else for that matter.

A business name

If you are operating as a sole trader, partnership or trust you will most likely need to register a business name. However, companies can also reg-ister for a business name if they don’t want to trade by their legal name. Business names are issued and administered by ASIC and are on a national business names register.

Regardless of your structure you can have multiple business names, which can be useful if you are wanting to use one legal entity but different brands; for example, I may want my company name to be Debra Anderson Pty Ltd but my business names could be Debra’s Tax, Debra’s Flowers, Debra’s Café … whatever!

You can apply for a business name via the Australian Business Register: www.abr.gov.au. There is an initial fee of $34 for one year or $79 for three years, and then an ongoing annual fee.


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Goods & Services Tax (GST)

Once you have an ABN you can then register for GST. Any business struc-ture can choose to register for GST, however whether or not you should is a topic in itself which I’ll cover in more detail in Part II. At this stage just know that you cannot register for GST unless you already have your ABN.

Registration for GST is done through the ATO.

A tax file number (TFN)

If you are trading as a partnership, a company or a trust you will need to apply for a TFN so it can lodge its own tax return. If you are trading as a sole trader your business tax return is done as part of your personal tax return because you and your business are the same entity, so you and your business have the same TFN.

Registration for a TFN is done through the ATO.

Domain name (emails and website)

A domain name is a fancy name for an address on the internet. Whether or not you choose to have a website I strongly suggest you consider getting a domain name, for a couple of reasons.

We are increasingly living in an online world and statistics show that the majority of purchasing decisions are made online. This could be in the form of online research about a product, service, your business or even about you. Given the overwhelming shift online I think you’d be mad if you didn’t have an online presence. But if you do choose not to have a website, at least owning a domain name which is the same as your business name means that you are keeping your options open for the future – you never know, you may like to sell your products or services online down the track. Domain names are usually less than $15, so it’s worth the investment early on. If you don’t secure a domain name now, trying to get one later on could be difficult because your business name


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may not be available and then your ability to leverage the website may be compromised.

The other benefit of owning a domain name is that you can have a professional email address such as [email protected], instead of using a generic and arguably unprofessional Hotmail or Gmail address.

Other industry-specific permits, licences, registrations and memberships

Many industries have specific registrations that you must have before you can trade. Examples of these are:

• lawyers: Law Society practising certificate• electricians: electrical licence • cafés: food business licence.

Make sure you do your homework and apply for any registrations or licences required for your industry.

TIP: To make sure you haven’t missed any licences, permits or registrations, check on www.andersontax.com.au/resources/.

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3ACCOUNTING SYSTEMS

THERE ARE LITERALLY hundreds of accounting systems on the mar-ket, so knowing which one you should use can be incredibly confusing. The key is understanding what an accounting system actually is, what you need it for, and who to go to for advice. In this chapter I will go through all those questions and many more.

Don’t panic – this chapter isn’t nearly as painful as it sounds, and by the end of it you will be much clearer about what you need and want, and – just as importantly – what you don’t need or want.

DO I REALLY NEED AN ACCOUNTING SYSTEM?

Yes, you really do need an accounting system. Just as the structure of your business is like the foundation of a house,

your accounting system is like the house frame. If the frame has a wall that’s too short or a window that’s too small, it will waste a lot of time and effort later. This is the same with an accounting system, as it is the accounting system that will define the integrity of the business informa-tion you will receive now and in the future.


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SO THEN WHAT ARE MY CHOICES?

The general rule is, the more complex your business the more sophisti-cated the accounting system will be. If you are a consultant who raises one or two invoices a month to customers, you have no employees and have minimal expenses, you can probably manage using a system as simple as Excel. However, add a tad more complexity within your business and Excel is just not going to cut it. Complexity can come in different forms – it could be employees, it could be inventory, it could simply be the sheer volume of transactions you are processing.

Let’s look at six different types of systems available and some pros and cons of each:

• the traditional ‘shoebox’• Excel• entry-level bookkeeping system• basic accounting system• mid-range accounting system• enterprise-level accounting system.

The traditional ‘shoebox’

At the most basic level we have the traditional ‘shoebox’. By shoebox I mean a box, a bag, a folder, a tray, a something that is so unsophisti-cated it is basically just a stash of receipts, invoices, statements or other financial-type paperwork you have no idea what to do with but know your accountant or bookkeeper may need. You know if you have this type of system because every time you add to ‘the stash’ you shudder when you think about what is actually inside it.

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Pros of a ‘shoebox’ system:

• At least you have a system and are keeping your paperwork – a lot of people don’t even do that so at least you’re one step ahead of them.

• It’s simple and easy to maintain.

• It’s cheap to run.

Cons of a ‘shoebox’ system:

• It’s hard to find something if you need to.

• You have no idea how your business is tracking other than using your bank balance as a guide.

• It might be cheap to run but it’s expensive to maintain. Because there is no order to anything your bookkeeper or accountant will need to physically go through every single piece of paper to determine what it is, is it relevant, and then collate it into categories and add it up. You are most probably being charged by the hour so all of a sudden this cheap and easy system becomes rather expensive.

• You are making important business decisions based solely on bank balance and gut feel.

So when is the shoebox a valid system?If you are really and truly not interested in doing it yourself, have a

really, really, really simple and low-volume business and you are not concerned with how much money you are spending to have your taxes prepared, you can get by like this. Preferably you would be a sole trader not registered for GST, so BAS’s aren’t an issue.


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Excel

Excel is in my opinion the most under-utilised program ever. The things this program can do are incredible, and therefore if you are a bit of an Excel guru it can be an excellent tool for managing the finances of your business.

Pros of an Excel system:

• It’s simple and easy to maintain.

• It’s cheap.

• You can set up all sorts of graphs and pivot tables to track how your business is performing.

Cons of an Excel system:

• It’s manual and therefore prone to errors and omissions.

• You still need to keep all your paperwork in some sort of orderly fashion – so don’t think you’re going to get out of it that easy, unfortunately.

• It can be time consuming to maintain.

• If one of your formulas is incorrect you may not realise it and could be making decisions based on inaccurate information.

• Often the spreadsheet takes on a life of its own and becomes overwhelming and overly complicated.

• You might know, understand and trust your spreadsheet but your accountant will still need to verify your figures. If your spreadsheet is too clever it might mean your accountant is having to spend a lot of time trying to understand what comes from where and where it flows through to, and checking formulas, and – as you know – you are paying them by the hour.

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So when can Excel work as a system?Excel is great if you have a simple business; for example, a sole trader,

one-person consulting business with about one to three invoices per month with minimal expenses. If you do decide Excel is the tool for you, make sure you really do know how to use it, and whatever you do do not over-complicate it. If you are using a really wiz-bang complicated set of spreadsheets, this is the alarm bell that you need a proper, grown-up accounting system.

Entry-level bookkeeping system

There are a number of entry-level accounting systems on the market. You can choose from either desktop or cloud systems. Now when I call them entry level they are actually reasonably sophisticated in that they can man-age your GST and they can connect to your bank accounts to reduce – and in some circumstances even eliminate – data entry. These are generally known as ‘cashbook systems’, and most are available through your accoun-tant for a low monthly fee. These systems don’t have invoicing, purchasing or payroll capabilities, but they can capture all your cash coming in and out of your business, classify transactions, and also produce basic reports such as a Profit & Loss and your basic GST reports.

Pros of an entry-level bookkeeping system:

• They are relatively cheap – usually under $20 per month, and often even cheaper than that.

• Simple and easy to use.

• Both you and your accountant can access the data from anywhere.

• It can link to most bank accounts and credit card accounts so it minimises manual data entry, saving hours and reducing errors.

• If for some reason you can’t link to your bank account, you can import your transactions from your bank into the cashbook system.


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Cons of an entry-level bookkeeping system:

• They don’t usually link to the smaller and more obscure banking institutions, such as some of the credit unions.

• You mostly can’t buy these off the shelf; you can usually only get one of these systems through your accountant and sometimes your bookkeeper.

• You still need to keep all your paperwork in some sort of orderly fashion.

So what sort of business works well with a cashbook-type system?A cashbook system is similar to Excel in that it is great if you have

a simple business that only needs to be accounted for on a cash basis, meaning recording transactions when money comes in or goes out. It also works well with volumes of transactions as it’s fairly automated and takes away the tedious task of data entry. Remember, a cashbook system doesn’t manage your customer or supplier accounts, so if you are raising lots of invoices and need to keep track of who owes you money it’s time to go to the next step up.

Basic accounting system

There are heaps of basic accounting systems on the market. You can choose from either desktop or cloud systems. Even though I have labelled this category ‘basic’, they are actually really great for most businesses, especially if you provide services. They have all the essentials such as invoicing and purchasing, and some even have some minimal payroll functionality. They link directly to your bank and credit card accounts – reducing boring and time-consuming data entry – and produce reports such as Profit & Loss, Balance Sheet, outstanding customer and supplier invoices and of course your GST reports.

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My absolute favourite in this category is MYOB’s web-based product Essentials, closely followed by Xero. But with Essentials being almost half the price, it’s hard to go past it – plus in the six years I’ve used it the bank feeds have always been 100% right, and it looks pretty funky too!

Pros of a basic accounting system:

• Simple and really easy to learn and use.

• They are mostly pay-by-the-month subscriptions, so there is no big upfront financial outlay.

• Saves you hours in boring data entry.

• If you are using a cloud system you don’t need to worry about installing or applying upgrades.

• You can use them on tablets or smartphones – all you need is internet access if you’re using a cloud product.

• You can raise invoices while out on a job, and even email them straight to clients while you’re there.

• You and your accountant/bookkeeper can access the data from anywhere, anytime.

• A basic accounting system links to most bank accounts and credit cards.

• If you can’t link to your bank account you can import your transactions from your bank into the system.

• There are a lot of add-ons you can link to these systems which can substantially enhance the functionality of the system. This can be very handy if there is an industry-specific add-on that can make your life even easier.

• You can attach pictures of receipts or documents to transactions and even put notes into transactions so you can refer back to them later. This also helps your accountant do their job more quickly and easily, which will end up saving you money as well.


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Cons of a basic accounting system:

• They don’t usually link to the smaller banking institutions such as some of the credit unions.

• They don’t manage stock control unless you purchase an add-on service, which can start getting quite expensive.

• Some claim to do auto bank reconciliations, which is really a fallacy and very misleading. My tip is always, always, always check that your bank balance in your accounting system matches the bank balance on your bank statement.

So what sort of business works well with a basic accounting system?Any business that issues invoices and needs to keep track of who owes

them what needs this sort of system at a bare minimum. These systems ideally suit service-based businesses, but can also work well if you are sell-ing items if you don’t need to keep track of stock on hand.

This type of system can also be really effective if your business is using a front-end system that manages your clients; for example, if you’re a chiropractor and use a system to manage bookings, payments and so on and you just need an accounting system to do your basic accounting and also manage payroll for you.

TIP: You can use the ‘items’ features in these systems to create a price list of your products (products can be either a service or goods), which saves time at invoicing – especially useful if you or your staff are invoicing while out on the road.

Mid-range accounting system

If you have inventory and payroll this really is the sort of system you should have. A good mid-range system will have a fully integrated inventory

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manage ment system so you can easily manage stock on hand, stocktakes, average stock, standard cost and multi-price levels.

Payroll is another area where these mid-range systems are important. If you have multiple staff, loadings, allowances, salary sacrifice or any other kind of complexity, you need a really sound, reliable and compliant payroll system.

As with the other systems above, you can get both cloud and desktop systems, or if you want the best of both worlds MYOB have a hybrid system called AccountRight which is definitely worth looking at.

There are quite a few players in this market but my favourite is still MYOB AccountRight (Plus or Premier). Inventory and payroll are both included and fully integrated so you don’t need to worry about paying for a third-party add-on or doing horrid journals moving information from one system to another.

Pros of a mid-range accounting system:

• They are mostly pay-by-the-month subscriptions so there is no big upfront financial outlay.

• You can raise invoices while out on a job and email them straight to clients while you’re there.

• You and your accountant/bookkeeper can access the data from anywhere, anytime.

• They link to most bank accounts and credit card accounts which minimises data entry.

• There are a lot of add-ons you can link to these systems which can substantially enhance the functionality of the system. This can be very handy if there is an industry-specific add-on that can make your life even easier.

• You can attach pictures of receipts or documents to transactions and even put notes into transactions so you can refer back to them later. This also helps your accountant do their job more quickly and easily, which will end up saving you money as well.


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Cons of a mid-range accounting system:

• If you get a basic system and then get add-ons it can become quite expensive.

• They don’t usually link to the smaller banking institutions such as some of the credit unions.

TIP: Always make sure your payroll and inventory are fully integrated with your accounting software. This will make your life and accounts significantly simpler and less stressful.

Enterprise-level accounting system

If you have a much larger or very complicated business – such as multi-ple locations or manufacturing – you may find that none of the systems mentioned above, even with an add-on, are sufficient for your needs. I won’t be covering enterprise-level systems in this book, but most of the fundamentals are the same.

YOU’VE MENTIONED ADD-ONS – WHAT IS AN ADD-ON AND DO I NEED ONE?

According to Wikipedia, add-ons are ‘a piece of software which enhances another software application and usually cannot be run independently’. For you that means an additional piece of software or an app that seam-lessly talks to your accounting system and makes it smarter and more usable, with increased functionality and versatility, and in many cases can extend the life you can get from using a particular system.

The type of software you use and the functionality you require will dic-tate whether or not you need an add-on. For example, if you have MYOB’s AccountRight and you require inventory functionality it is already part of the program, but if you are using Xero and you need inventory tracking

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you will need to purchase an additional subscription to an add-on such as Unleashed.

Add-ons are a great way to get more out of your accounting system, especially if you want your accounting system to be more industry specific. For example, there are lots of add-ons that can help tradespeople manage projects or jobs using their phone or tablet that just push all the account-ing-related information back into the accounting system without you even knowing it.

Another great use of add-ons is if you are pushing your accounting system to its limits but you need more time and capital before you can implement an enterprise-level system.

There are other types of add-ons that don’t add accounting functional-ity but they can assist with managing your business better – I’ll talk more about those later.

WHAT’S THIS CLOUD THING EVERYONE IS TALKING ABOUT AND IS IT SAFE?

I’ve mentioned cloud systems a few times so it’s probably a good time to talk about what the cloud actually is.

‘The cloud’ is simply another name for the internet. Apparently it’s because when people first started drawing the internet it looked like a cloud … who knows. Anyway, all you need to know is the cloud is just the internet and nothing scary.

When we talk about a ‘cloud accounting system’ we are talking about an accounting system you access just like you would your online banking through a web browser or an app on your smartphone or tablet. Just like online banking, you need internet access, a username and password, and you can also give access to others such as your accountant, your book-keeper, your business partner, your staff – because it’s using the internet you can have many people all using the system at the same time.


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As with all things internet related, security is always a concern. At a bare minimum, if you are ever going to use your computer for internet banking or email make sure you have reputable anti-virus and anti-malware protection. If you have no idea what I’m talking about you need to get some IT support and get it set up.

The great thing about cloud software is that they actually force you to have a password before you can even use it. Make sure you use a difficult password; don’t use 1234 or the name of your pet. And it’s always a good idea to change your password regularly.

To help keep your data safe, never share a login. Every user should have their own unique login and password – and I mean everyone: your part-ner, accountant, bookkeeper, staff members. That way, if the relationship goes pear-shaped you can easily remove access for that user and your data is secure.

TIP: Change your password at the beginning of each year. Set yourself a theme for the year such as ‘abundance’ and make it into a password like Abundance20!6 – it has all the merits of a super-strong password, plus because you’re going to type it a number of times each day you are reinforcing your goal.

What are the pros and cons of using the cloud?

Let’s have a look …

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Pros of using the cloud:

• Pay-by-the-month subscription so no large upfront costs.

• No major hardware costs such as servers to purchase or maintain.

• No more large, clunky upgrades as it’s all done for you.

• Software bug fixes and functionality enhancements are being continuously released so you don’t have to wait for annual software upgrades to take advantage of them.

• No need to do backups as it’s already being backed up for you.

• Anywhere, anytime access – you can use it on multiple devices.

• Cross platform: it doesn’t matter if you’re using a PC or Mac – cloud works on both.

• It has some super-cool functionality that is only available because of the cloud technology; e.g. bank feeds, ability to see whether clients have viewed your invoices, online payment, automatic allocation of transactions … the list goes on, but more importantly keeps growing.

• Support is much easier to get as consultants, accountants and bookkeepers can log in to your account from anywhere.

• You can use add-on software to increase the functionality of your software and really tailor it more towards your business needs.

• No more excuses that your accountant doesn’t know how your business is tracking or can’t be proactive – they have 24/7 access to your data.

• If your computer explodes then you just buy a new one and you’re up and running again in minutes not days, because all you need is the internet and you have access to all your data.

• The software insists you have passwords, and some software even gives you the option to have a double layer of access protection, whereas desktop software usually doesn’t require you to have a password.


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Cons of using the cloud:

• It can become more expensive than traditional desktop software because of the ongoing monthly fees.

• If you cancel your subscription you have a limited time to export your data before your access is denied.

• If you do cancel your subscription, often the format the data is exported into is not very usable to the business owner; e.g. you can’t reprint customer invoices.

• Depending on what country your data is stored in, your data ownership can be subject to overseas laws.

• The cloud can be more vulnerable to hackers.

• Requires reliable internet connectivity.

• It’s still early days, so not all accountants or bookkeepers are comfortable with the technology as yet. However, I strongly recommend this is not a reason to not go cloud – it’s actually a great reason to change advisors.

• Using different browsers can give you different experiences; e.g. Google Chrome is easier for developers to work with so it usually works better with cloud software.

• Technical issues are always a concern – if the internet is down then so are your systems. You need to have a fall-back plan.

TIP: If you’re using a cloud system that is essential for your business to operate, it’s a good idea to have a backup plan such as a prepaid SIM from another internet provider in case your internet provider goes down for a few hours.

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WHERE DO I GO TO GET ADVICE ON WHAT SYSTEM I SHOULD USE?

Good question … and I’ll be honest, it’s not the easiest to answer as there are a few things to take into consideration.

If you are looking at a cloud system they are still relatively new, and at the time of writing, research showed that only 20% of businesses were using cloud accounting software. So, it’s only in the very early stages of being mainstream, and as such not all systems advisors are competent with cloud products yet.

I’ll start with where not to go for advice.

Don’t rely on Google or salespeople

Researching different systems online is a good start but remember software companies will always only tell you the good stuff, and if you speak with their salespeople there’s a fair chance the salesperson will be talking from a sales script and won’t have actually ever even used the system in a real-life business. It’s one thing to know the theory and a completely different story to actually use it in the real world. Compare it to doing your driving test. It’s one thing to pass your learner permit theory test but at that stage you couldn’t hop into a manual car and safely drive yourself home.

Don’t phone a friend

This isn’t Who Wants to be a Millionaire, although I know it’s only natural to ask friends for advice. The important thing to remember is just because one system is good for one person’s business doesn’t mean it’s good for your business. In fact, with the recent very aggressive marketing between MYOB and Xero I have noticed an almost PC vs Mac mentality in the market. Remember about 10 years ago (and to a lesser extent today) com-puter users were absolutely either a PC or Mac user but neither could see the other side? Well, it’s a bit like that with accounting software at the moment, with some users adamant Xero is the best thing in the whole


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wide world and others preferring the reliability of MYOB. Remember, as with PC vs Mac, sometimes it just comes down to personal preference.

Don’t go to your accountant

‘What?’ I hear you scream. I know, I know … but seriously, many accoun-tants will give you the wrong advice for a variety of reasons. Now, although I am generalising here, it is important you are aware of the reasons why, so you can make sure you ask the right questions and you can make sure you are getting the right system for you:

• Many accountants only use or work with one system, so if your accountant tells you that you must change systems to work with them that is an alarm bell right there. Your accounting system is there for you to manage your business, not to make your accountant’s practice more efficient.

• Many accountants are getting huge kickbacks from software providers that are dependent purely on the number of clients they have signed up to a particular software system. Accountants are also given free software to help manage their practice and also tax preparation software; again, this is all dependent on the number of clients the accountant has using the system. Can you see the problem here? There are huge incentives being thrown around to encourage accountants to use and promote particular software packages. Just to put this into perspective, the ‘free software’ for accountants I am talking about means the average accounting practice can save themselves at least $25,000 in cold hard cash per year.

So … where do I go then?

So where should you go to for advice then – is there anyone left? Let’s see:

• You can phone and ask your competitors what they use and why. Most people are more than happy to share their knowledge and experience,

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even if they are competitors. Why? Because it’s human nature to want to help others, and also it shows you respect them and admire what they do. When you speak with them, ask them these questions:

– What system do you use? – How long have you used it for? – Do you use any other systems with it? – Are you happy with it? – If so, why? – If not, why not? – What do you love most about it? – What don’t you like about it? – How much does it cost you each month or per year? – Are you locked into a contract? – Did you have it set up professionally or did you do it yourself? – Which consultant did you use and would you recommend them?

Now keep in mind every business is different, and they may or may not be using their current system to its full potential, and more impor-tantly if they set it up themselves there’s a very good chance it’s not set up right and they’re most probably not using it properly or efficiently.

• Ask a professional bookkeeper. Bookkeepers are the worker bees of the accounting industry. They do the day-to-day work. They use different systems in different environments, different systems in similar environments, and the same systems in different environments. They are a good litmus test to determine what might work well for your business. My only warning here is that software companies have also been ‘courting’ bookkeepers, albeit to a lesser degree, so if they only use one piece of software they could be unduly influenced.

According to industry research the average professional bookkeeper has 22 clients, so speaking to a bookkeeper can give you a pretty good idea of what is out there and what would be a good fit for


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you. I would strongly suggest you speak to two or three professional bookkeepers to get a good feel of the market.

• Talk to an accounting software consultant. All the major accounting software houses have accredited consultant programs so look on their websites for a list and call a few. They may only deal with that specific software program but they are the experts in that software, and if they are really good at what they do they will be super clear about what the software can – and more importantly what it can’t – do. As an MYOB and Xero software consultant myself I am adamant about matching the client with the right software, because not only is it bad for the client if I recommend the wrong software it’s also bad for my reputation in the industry, and more importantly I would have a very unhappy client – and we all know there is nothing worse than an unhappy client.

A software consultant will also look at the whole picture, including your current computer hardware and operating system, as well as additional equipment requirements such as printers, tablets, smartphones and mobile payment devices.

What questions should I ask the software consultant?

These are my top 10 questions to ask to help you find the right accounting system:

1. What accounting systems do you work with?2. Is it desktop or cloud or both?3. Can it be used on a PC, Mac or both?4. Can I do point-in-time backups?5. Is it subscription only or can I buy a copy outright?6. Based on the functionality I need (for example, inventory

management, payroll) will I need to use an add-on or will this system do everything I need?

7. Can it talk to other systems such as online shopping carts, retail point of sale systems or cash flow forecasting tools?

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8. Who owns my data?9. How easy is it to change bookkeepers/accountants if I need to?10. What if I don’t want to use it anymore – can I still access my data?

If so, for how long? If not, how do I get my information out of the system and will it be in a useable format?

TIP: Software consultants are accredited and listed on the software provider’s website.

HOW MUCH IS THIS SYSTEM GOING TO COST ME?

That really does depend. There are two parts to getting an accounting system. The first part is the software, and the second part is getting it set up and implemented properly.

The software

These days the majority of software is charged via an ongoing subscription fee. At the time of writing, subscriptions started from $5 per month and went upwards from there depending on the brand and functionality.

If you are a micro business with, say, one employee you will probably be looking at about $30 to $40 per month depending on how many trans-actions you process per month. If you have more than one employee the prices then start at about $40 and go up from there, and vary considerably depending on brand, functionality and number of employees.

Most of the products on the market these days are cloud systems and only offer subscriptions, however I know that with MYOB you can still choose to purchase their AccountRight package outright and therefore you will own it forever regardless of whether or not you continue to pay the subscription. Although this isn’t an option that I’d recommend, for some people there are valid reasons to consider this; for example, if you have a simple micro business, no employees, and have very few transactions so


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data entry isn’t an issue. The great thing about this scenario is if things change you can always start a subscription at any time and get the bells and whistles, and when you don’t want them anymore you can stop paying the subscription as you own the software outright.

Set up and implementation

Accounting software is not plug and play, despite what software companies might suggest. You see, using software is very different to setting it up. Setting up an accounting system is a very specialised area, so I am going to implore you not to let your accountant set it up for you and do not do it yourself.

There are two reasons not to have your accountant set up your system. Firstly, they usually set it up to suit their requirements and ‘forget’ that accounting systems are actually for you, the business owner, to understand and manage your business – compatibility with their system is only an added bonus. Secondly, and arguably more importantly, accountants are generally not trained in the ‘behind the scenes’ parts of the program that can make a huge difference to the way you will actually use the software on a daily basis, and this is where it is important to get it right. If the back-end of the system isn’t set up properly you could be either inadvertently making mistakes simply because the system was set up incorrectly, or just doing things the long way, whereas if it was configured properly it would just do it for you.

The only person who should ever set up your software is a software consultant; not a bookkeeper, not an accountant and definitely not you.

If you hire a professional consultant to do it they will have done hun-dreds, if not thousands, of setups and implementations and they will know the idiosyncrasies of the software and will cover all the major bases. It will be a much quicker, cleaner, smoother and less stressful implementation.

As far as how much a professional software consultant will charge, well that depends on location, experience and of course the software package,

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as well as the complexity of your business. What I do recommend is not to choose your consultant on price but rather on experience. Ask them lots of questions, such as the questions I suggested above, and go with the one who you feel most comfortable with. If you’re still unsure, ask for references.

Do I need to buy a new computer?

Your software consultant will look at your hardware requirements before advising which software is compatible and will be able to advise if new equipment or upgrades are required. ‘Required’ can mean a couple of things: it can mean essential or simply recommended. This is where your software consultant can give you some good, practical advice and make sure you are getting the right software for your needs and budget. If your current computer is only a couple of years old it should be more than okay to keep using.

WHAT DO I NEED TO DO IN PREPARATION FOR SETTING UP A SYSTEM?

As with most things, preparation will go a long way to making sure your system is set up properly, the process goes smoothly, and the system func-tions as it should when it’s up and running. The things you need to have before you have your system set up are:

• A software setup specialist lined up – do not do it yourself.• A subscription – your consultant can arrange this for you so you can

be sure you are getting the right package for your needs.• Your ABN.• Your bank account details, including electronic bank file codes if you

plan on preparing electronic payments straight from your accounting system.

• Your logo.


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• Your GST information – do you report on a cash or accruals basis, and how often? Is it monthly, quarterly or annually?

• A changeover date – work out what time is best to do the changeover. If you have been using another system I strongly recommend you choose a new financial year to start your new system. Should you choose a financial year changeover you should set up the new system in early June so that you can have it all up and ready to roll on 1 July. If you can’t do a financial year, for ease of reporting and bringing forward prior information the beginning of a quarter is the next best option.

• Opening balances – if you are an existing business you will need your latest set of accounts so that your account balances can be transferred to your new system. This is why changing over at the end of a financial year is a good idea because it means that the numbers you bring over will have been verified by your accountant so you know they are right.

• Details of all your unpaid customer and supplier invoices as at changeover date, so they can be entered into the new system.

• If you have staff you need all their information as well, such as:

– full name – address – email address – phone number – date of birth – a copy of their tax file number declaration form so the correct

amount of tax will be taken out – start date – job classification and award – employment basis – full time, part time or casual

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– salary or wages details – superannuation fund Unique Superannuation Identifier (USI)

number and member number – how many hours a week they work – details of entitlements, overtime, bonuses or commission – bank account details.

Now that’s a lot of information to have up front, but if you want the best possible system from the beginning you will need it. The only thing you may not have is the verified opening balances for your accounts because your accountant will probably not do your tax return for a few months. That’s okay, because your consultant will be able to put in the preliminary numbers, and then once you have the final figures your accountant (yes, I give my blessing for them to do this part), your bookkeeper or your consultant can update them once they are finalised and available.

EVERYONE TALKS ABOUT A GENERAL LEDGER – CAN YOU TELL ME WHAT IT ACTUALLY IS?

The term ‘General Ledger’ sounds a lot scarier than it actually is. Have you ever seen the list of all your assets, liabilities, income and expenses in your accounting system? Well, that is your General Ledger. It’s the fancy name given to the master list (or Chart of Accounts) containing all the different categories you have to manage your business. There is a General Ledger account for every type of asset, liability, income or expense you have in your business. Tracking these categories helps you manage your business and also helps your accountant prepare your tax return. There is no real right or wrong Chart of Accounts, however there is definitely a better way of setting it up that will make it easier for you to use and harder for you to make mistakes. My advice here is always get the experts to set it up.


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I HATE FILING – SERIOUSLY, DO I NEED TO DO THIS?

I admit I hate filing too, so I get it; however, let’s first understand why it is we even need to file.

We file for a simple purpose: so we can find something again if we need it. Understanding that will help us decide whether or not filing is import-ant. If you are trading as a company you need to keep all tax invoices from suppliers and to customers for five years, just in case of an audit.

On the face of it that means printing everything out and filing it in folders, but that’s not actually necessary because, remember, you only need to find an item and produce it if you are asked to by the ATO (or another authority).

Customer invoices are usually done in your accounting system, so – for example – in my business I don’t print out any customer invoices because I can produce them from my MYOB file at any time.

Supplier invoices are a little trickier and are usually referred to more frequently by your business, not necessarily by the ATO. I recommend one of the following four systems to keep this simple yet effective:

• For every financial year get a lever arch folder, get some A to Z dividers, and just file each supplier invoice behind the divider; for example, an invoice from Bunnings goes under B. Don’t stress about putting it in strict alphabetical or chronological order; remember, the purpose is just so you can find an invoice quickly and easily if you need to – there’s no need to go over the top with an elaborate filing system.

• If you’re using an accounting program, many of them allow you to store an electronic copy of an invoice actually within the transaction. This is not just super cool but also really useful. The way they work is that you can email, drag and drop, or import the PDF of the invoice and then either create a transaction from that or just link it to a transaction already in the system. This is great because if there is an

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issue with the transaction you can just view the invoice there and then without having to search for the original paperwork … oh, and no more filing!

TIP: For new asset purchases you can attach the entire finance paperwork, including the tax invoice and finance payment schedule, to the purchase transaction. This will save you having to provide the information separately to your accountant when they’re doing your tax return.

• You can also choose to keep your records in an electronic format such as PDF and on your computer or in a cloud storage system such as Dropbox. This is easy to do and saves you having lots of bulky files lying around. The ATO are more than happy with you storing your paperwork electronically.

• If you’re like me and still like to keep everything but don’t want to file at all, you can use an electronic filing system such as www.shoeboxed.com.au. The Shoeboxed system scans all your documents so they are fully searchable. So if you are looking for a Bunnings invoice and you know it was for $66.00, you can do a search for ‘Bunnings’ or ‘$66.00’, or you can search by date, by invoice number, or even for the text inside the invoice – for example, you might search ‘Dulux’ if you bought paint – and all documents containing whatever you’ve searched for will appear. You can add notes to the document too, such as if it’s a client expense you can enter the client’s name or even put notes in for your accountant or bookkeeper.

The other cool thing is that they usually have a phone app so you can just take pictures of your receipts or invoices as you go and then throw them out straight away. No more receipts lying around everywhere, fading and getting lost.


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Very quick, very clever, very simple, and best of all it’s cost effective and ATO compliant.

Another awesome feature I love about Shoeboxed is that you can store non-invoice documents there too, such as contracts, timesheets and business cards, and again they’re fully searchable. I recently had an issue with an old iPhone that I got years ago on a plan with Optus. I had to prove the purchase to Apple, but because it was part of a plan I had no actual invoice for the phone purchase. Within seconds I was able to search for and find the original Optus contract including the phone, and as a bonus because it was already in a PDF I was able to just email it to Apple – problem solved! Interestingly, because it was an old phone and I was no longer with Optus, I probably would have thrown out that contract had it been sitting in a file in my office, but because it was electronic I could just keep everything because it didn’t take up any more space or cost me any extra.

In my business I use a combination of Shoeboxed and attaching invoices to transactions within the MYOB AccountRight system as – at the time of writing – only purchase transactions have the ability to attach documents. However, I know they are looking at extending that to spend money trans-actions soon too, which along with bank feeds will make the entire process very slick indeed.

Payroll is another tricky area because you need to keep copies of timesheets, contracts and so on, and in some industries you may need to keep some payroll/HR records for up to about 20 years. Again, using an electronic filing system is a good alternative to paper here.

In summary, you can choose either good old-fashioned paper filing or electronic filing.

If you choose paper, my tip is once the end of the financial year is fin-ished and your tax returns are lodged, box up the year’s paperwork and put a label on it that says the year it relates to, the information contained in

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the box, and a date you can destroy the box. That way you can just look at the outside of the box and throw it out once the destroy date comes along.

If you choose to go down the electronic route, just make sure that whatever electronic system you use is quick, easy and searchable. And of course make sure it is secure and thoroughly backed up. If your data is not well backed up, a single computer failure can bring enormous problems.

TIP: Always have a separate backup. I had a client recently who got a ransom virus, and because her external hard drive that she used as her backup was connected to the computer at the time she lost everything: 15 years worth of resources and work gone in less than a minute. It’s worth investing in a system like Dropbox or a cloud backup system to make sure you’re protected.

KEEP YOUR BUSINESS AND PERSONAL FINANCES SEPARATE

And finally, I’ve kept the most important piece of foundation advice until the very end. I promise you this will be the biggest single best piece of advice I can possibly give you. That’s a big call I know, but after 26 years in this game I am telling you this will save you hours of time, thousands of dollars and many, many headaches during your time in business: keep your business and personal finances separate.

As a small business owner, the lines between us and our business are often blurred. Even though my business is actually a company and is therefore legally not the same entity as me, I feel that I am always ‘on’ – ‘on’ meaning I am always happy to talk about business, accounting, book-keeping and tax. And I am definitely guilty of working way too many hours and not socialising outside of work functions. Not to mention I have been totally obsessed with anything and everything pink since starting Legally BAS in 2006. This is true for many small business owners.


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So if we find it hard to separate our identity from our business, it’s not surprising that all too often we don’t keep our finances separate.

Regardless of whether you are operating as a sole trader or company, I strongly suggest, advise, beg, plead, even order you to keep your business and personal finances completely separate. By separate I mean separate bank accounts, separate credit cards – keep anything financial completely separate.

Why? Firstly, your accountant and bookkeeper need to look through every

trans action for your business, so if you are mixing them all in together they will be going through a hell of a lot of transactions they don’t need to. From experience I generally find that if you are guilty of this the majority of transactions are usually personal, which means you are probably paying your bookkeeper or accountant on average 70% more than you need to – remember you are paying them by the hour.

Secondly, it gets messy. Very messy. By messy I mean that business and personal are completely different, so if you’ve got no money you have no idea if it is the business that’s sucking up all your cash, or are you simply living beyond your means? By keeping things separate you can work out where the real problem is.

I made this mistake myself many years ago when I started my first com pany. I decided that I would use the same credit card for both business and personal so I could rack up the frequent flyer points – valid reason, I thought. Besides, I’m an accountant – I can manage the accounting side of it so no issue … right? Wrong! Because I was mixing all my expenses in the one pot I couldn’t see where my cash flow issues were coming from. It turned out that after hours of analysis – which was very eye opening I might add – I concluded I had champagne taste on a beer budget. Yes, I was living way beyond my means, but didn’t really notice because my poor business was cash-flowing a lifestyle that I couldn’t really afford.

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To fix the problem, what I did was:

• I opened another credit card account just for business expenses. It turned out that Westpac have a system where you can pool all the frequent flyer points, so I still get all the perks of the points but everything is kept completely separate.

• I started paying myself a set wage each and every week, and that is what I have to live off. I made sure I paid my wages once a week instead of doing the whole ‘I need $100 today and $50 tomorrow’ rollercoaster.

A couple of things changed for me when I started doing this. My cash flow got better almost all by itself, and because I knew I had to pay myself a set amount every week I was better able to budget my personal life and my business accounts. I also got back hours per month doing my bookkeeping because I wasn’t having to process seven or more transactions per week just transferring money between my business and personal accounts.

So I have experienced firsthand how out of control mixing the two can get, very quickly – and I’m an accountant! My number one rule for clients these days is to always keep their business and personal finances separate, because sorting through personal transactions to find the business ones doesn’t add any value to their accounts and I feel guilty that I’m charging them without adding any value.

PART II GETTING DOWN TO BUSINESS

SO WE’VE GOT the sexy stuff under control: logo, website, business cards. We’ve done the boring stuff: the business structure, legal registra-tions, and set up our accounting system. Now we’re doing the fun stuff: ideas galore, products/services, potential customers, advertising, network-ing – and it’s all happening. But … now what?

When you started your business you probably thought it was all about what you do – all about selling your products or services. Say you’re a plumber. I bet you thought all you had to do was get yourself a van, some tools, a few customers and start fixing stuff. Well, I’m sorry to break it to you but that’s only part of running a business. The rest is all about admin-istration, and when I say administration I’m talking about paperwork, invoicing customers, chasing customers for money, paying bills, managing staff – and that’s just some of it.

It’s about here that I realise just how lucky I am. I really empathise with you because I went into business because I really love doing this stuff, but I can bet anything you didn’t go into business because you love doing this stuff.

Well, the good news is if you’ve nailed Part I you’ve got the foundations right, so the rest is going to be a lot easier now than if you had just ‘winged it’. The bad news is there’s more of this administration stuff to this whole small business caper than you probably realised when you had that initial brilliant idea to start your own business.

Now I’m going to go through how you actually can use the systems you implemented in Part I so you can make life easier for yourself and take control of this business before it takes control of you. If you’re already in business and want to take back control, this will be just as important for you to implement – it’s never too late to get control.

Let’s start with the basics, and where better to start than with my favou-rite part: invoicing customers.

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4INVOICING AND PAYING THE BILLS

LET THE GAMES BEGIN

Invoicing is the life blood of your business. It is the culmination of all your hard work and it’s what keeps the cash rolling in. For many new business owners it is around the time when they need to send out their first invoice to a customer that I usually hear from them because all of a sudden they realise they haven’t thought about their financial systems. Some people go to Officeworks and buy a carbonated invoice book, some find an invoice template within Microsoft Office somewhere and use that, and some just decide to type one up themselves. All seem like good ideas at the time, but there is a fundamental thing that hasn’t been considered: are their invoices legally compliant?

Getting the invoices right

In Australia there are strict but relatively simple regulations about what an invoice must have on it, and unfortunately using a Microsoft Office template is probably fine if you live in America but here in Australia it’s a different story. Back in 2000 when GST was introduced a number of requirements around invoices were also introduced.


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Since 2000 all Australian businesses – meaning sole traders, companies, partnerships and trusts – must have an ABN. Having an ABN does not mean that you can now charge GST, it simply means that now you can do business.

It is a requirement that all invoices have at least these five things:

1. What type of document it is – if the seller is registered for GST then the document must clearly display the words ‘Tax Invoice’. If the seller is not registered for GST then the word ‘Invoice’ is used.

2. The seller’s name/identity.3. The seller’s Australian Business Number (ABN) – regardless of

whether or not the seller is registered for GST.4. The issue date of the invoice. 5. A brief description of the items sold, including the quantity

(if applicable) and the price.

If the seller is registered for GST then the tax invoices must also have the following:

6. The GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, a statement such as ‘Total price includes GST’ is sufficient.

7. The extent to which each item on the invoice is a taxable sale (that is, the extent to which each item includes GST, as not everything is subject to GST).

And just when you thought that was all … there’s more. If the sale value is more than $1,000 then the invoice must also have:

8. The buyer’s name and address or ABN.

To make sure you will always comply, I recommend that you have all eight of the above on all your invoices.

Here is an example that meets the ATO instructions.

Invoicing and paying the bills

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TAX INVOICEFixit Mechanics 321 Jones StreetABN: 32 123 456 789 Jonesville NSW 2000

Date: 2 May 2016

To: Joe Smith 123 Smith Street Smithsville NSW 2000

Qty Description of supply Unit price GST Total 4 Tyres $150 $15 $660 2 Light globes $30 $3 $66

TOTAL PAYABLE $726

Total price includes GST

1

2

4

5

6

7

3

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To ensure your invoices are compliant, I strongly suggest you use an Aus-tralian accounting software system. These systems will not only ensure your invoice forms (and credit note forms) are correct but they will also help you easily track sales and manage who owes you money, how much and by when.

Now the important part …

So once you’ve got the invoice form under control, the key is you then actually need to raise the invoices and send them to customers. The num-ber one rule in business is ‘Cash is King’, and guess what? If you don’t invoice you won’t get paid – it’s quite simple really.

When I first started Legally BAS in 2006 and it was just me, I didn’t have a process for raising invoices – I mean, I had an accounting system


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and I’m an accountant, so I didn’t really need a process per se because I knew how to invoice … right? Wrong!

I had a client for whom I did her quarterly BAS and so I would only invoice her once every three months. When it got to my second quarter of trading and I went to invoice her and found she wasn’t even in my MYOB system I realised that I hadn’t invoiced her for the work I did last quarter. I learnt a valuable lesson then and there, and that was it doesn’t matter how good you are at managing your work you also need to have a process for actually doing the invoicing. Now my process is that I must do my invoices every day or I can’t go to bed, and then every Friday I go through the work I’ve done that week to double-check that everything is invoiced. There is always going to be the odd exception, but as a general rule it works well for me.

TIP: Always invoice as soon as the job is finished and the customer is happy and still feeling warm and fuzzy. If you’re using an online accounting system and you’re on site with the client, you can email the client invoice while you’re there. And if you need an additional incentive to invoice quickly then know this – happy clients usually pay faster.

GIVING CUSTOMERS CREDIT ACCOUNTS

If you are in a business where you need to give customers credit accounts, before you get all excited about the sale you just made you need to get them to complete an application for credit form with at least three refer-ences for you to check.

If they need the goods right now and don’t have time for the application to be processed, insist on doing the credit application process properly, but in the meantime offer them COD terms. (COD simply means cash on delivery or payment at time of service.)


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TIP: Once you’ve handed over the goods or provided the service there’s much less incentive for the customer to pay you because they’ve already got what they needed from you.

Beware of these warning signs:

• If you get a new customer and they’ve always bought stock from another supplier but now all of a sudden they are changing to you and need goods now, this is an alarm bell. There’s a good chance they could be on credit hold with their usual supplier, and because they can’t pay them they are looking for an alternate sucker – sorry, I mean supplier – to get their stock from.

• They’re asking you for a $10,000 per month credit limit but all of their references on their application form are suppliers that they purchase from irregularly and for minimal amounts, like Officeworks: $100. Make sure all their references are for similar amounts of credit that they are asking you for.

TIP: If you can’t obtain comparable referees the simple solution is to request a director’s guarantee, which simply means that the directors sign a document whereby they agree to personally pay the debt if the business can’t. That will sort out the dodgy players very quickly.

Remember, prevention is better than cure.

MAKE IT EASY FOR YOUR CUSTOMERS TO PAY YOU

There are a few tricks to getting paid, but the absolute biggest and best tip I can ever give you is to make it easy for customers to pay you. Sounds too simple to be a real tip I know, but this is pure gold.


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Earlier we examined the legal requirements for invoices, but there are a few other things all invoices need to have to make them functional rather than just legal.

The number one thing all invoices need to have on them is how cus-tomers can pay you. If you don’t specify how you want to be paid you are actually making it hard for them because they are left to guess how they can pay you. Do you want them to send you a cheque, can they transfer the funds directly into your bank account, do you accept credit card?

At a bare minimum, you should have on your invoice that you accept EFT (Electronic Funds Transfer) and give your bank details, including your BSB, account number and the entity name the bank account is held in. I know many business owners think that in putting your bank details on your invoices someone can hack into your account, but trust me – they can’t take any money out, they can only put money in.

If you’re thinking about only accepting cash, you might want to con-sider the following. I was at an industry conference recently and heard a mind-blowing statistic that the majority of lost retail sales happen because the shop only accepts cash. The following diagram is the result of research done by MYOB.

64%64% OF AUSTRALIANSPREFER TO PAY BY CARD

5.1MILLIONPEOPLE

EACH MONTH 5.1 MILLIONAUSTRALIANS WALK AWAY FROM A SALE BECAUSETHEY CAN’T PAY BY CARD


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Let’s think about that for a moment: 5.1 million Australians per month walked away from buying something from a business for the sole reason that they couldn’t pay by card – that is a phenomenal number of lost sales.

If you haven’t considered accepting cards before surely this statistic alone must be making you seriously reconsider. It is the way of the future. Even the board game Monopoly comes in a credit card version these days – scary but true.

I don’t know about you but I rarely have much cash on me these days, so if a shop doesn’t have the facility to take credit cards or at least EFTPOS they will lose my sale to one that does. Recently when I was picking up some takeaway from a Thai restaurant on the way home from work, I stopped at a restaurant a couple of suburbs away rather than the one walk-ing distance from my house specifically because they took credit card and the local one doesn’t. As I waited out the front for my order I realised I needed some cough medicine for my daughter, so I popped into the chemist next door. As I was getting the medicine I thought I’d better buy two bottles so I have a spare, and then both kids were nagging they wanted throat lozenges, so as any mother knows if you want peace and quiet just say okay, and I put them all on the counter. The pharmacy assistant then says, ‘Sorry, I have closed off the terminal for the night so you’ll have to pay cash’. Guess what? I didn’t have enough cash on me, so instead of spending about $30 at that chemist I ended up spending $9.50 because that’s all the cash I had on me.

This story isn’t just relevant to retailers, it’s applicable to all types of businesses.

For those of you who give credit to their customers, did you know that currently the average time for customers to pay is 56 days? Fifty-six days is an extraordinarily long time to wait to be paid, especially if you’ve had to pay for stock (maybe you’ve even imported it and you’ve had to pay prior to your supplier even shipping the stock), you’ve paid shop or office rent, storage costs, plus let’s not forget wages on top of that. Now think about


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the financial stress that puts your business under and how that means that you end up stretching out payments to your suppliers.

The reality is, just like you would love to pay your suppliers on time, your customers actually want to pay you too, but if you only accept cheque or Electronic Funds Transfer you are limiting the ways they can pay you.

What if you gave your clients a couple of other methods to pay, such as BPAY or credit or debit card? This all of a sudden gives your custom-ers options. They may be going through a short-term cash problem but because you take credit card they can actually pay you instead of making you wait for cleared funds. This could also be the differentiator between why a customer chooses to buy from your rather than your competitor, just like my example above where I chose to go to a particular Thai restau-rant for takeaway simply because they accepted credit card when my local has a big sign out the front that says ‘cash only’.

People use credit or debit cards for various reasons, and in business it’s surprising how often the reasons are totally unrelated to cash flow:

• they want frequent flyer or rewards points • they don’t use cheques but all their staff have credit or debit cards so

they can purchase things as they need them• they can pay over the phone and get someone to run down and pick

an item up or even get a courier to pick it up• they don’t need to keep receipts for tax purposes for purchases under

$82.50 if their credit card statement itemises it• it reduces data entry because if it appears on the bank statement then

bank feeds will automatically enter it into their accounting system and allocate it for them (wait until I tell you about bank feeds later because you’re going to absolutely love them).

The list goes on, but whatever the reason is, if you make it easy for your customers to pay you there’s a higher probability that they will pay you quicker.


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Thanks to technology there are a stack of options out there. In my business I use MYOB’s M-Powered service, which means my clients can pay by BPAY or credit card over the phone or internet. Of course I still give them the option of EFT direct into my account or cheque, but it’s surprising just how many people take up the BPAY option even though I think it’s actually easier to use EFT.

An example of when this has really made a difference is a long-term client of mine who maintains tennis courts. The majority of their clients were mums and dads having a tennis court service. Although they always did a great job, they struggled to get paid. You see, they sent their invoices out a couple of days after the service was completed, and then they only accepted cheques and EFT – seriously, who has a personal cheque book these days? Their outstanding debtors were well in excess of 75 days, and their poor admin person spent a great part of her day chasing money. After much nagging, I finally got them to implement MYOB’s M-Powered invoices, and now the vast majority of their clients pay via BPAY or credit or debit card because that is the way consumers like to pay their bills. No-one wants to write cheques anymore, but give them easy options such as BPAY or credit card and they’re comfortable and willing to pay.

Another product I use is MYOB’s PayDirect, which is a credit and debit card reader that connects via Bluetooth to a mobile phone, so I can take credit cards on the spot when I do one-off consultations. Remember, if a client doesn’t transact with you frequently or if they are a one-off client, once they have received your product or service there is absolutely no incentive for that customer to prioritise paying you over their regular suppliers who they need to keep paying in order to keep receiving their products or services.

My current project with the above tennis court maintenance company is trying to get them to issue invoices at the time of the service, when clients are happy with the good job, and then use a facility such as MYOB’s PayDirect to take payment there and then. Implementing this very small


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but significant change would be a game changer for these guys, yet surpris-ingly it’s proving to be a tough sell.

I’VE FINISHED THE JOB AND I HAVEN’T BEEN PAID. WHAT DO I DO NOW?

Firstly, what were your payment terms? I ask that because many entrepre-neurs have come from the corporate world and they sometimes still think like a corporate employee.

Corporate and government worlds are basically parallel universes to small business. In the corporate world, payment terms are 30 days from end of month. It’s always been that way and maybe always will. However we are not a corporate, we are small businesses, and the rules are slightly different in our world. My second biggest tip is that your payment terms be no more than seven days from date of invoice, with the only exceptions being:

• one-off jobs, especially where you should be getting paid there and then before you let them leave, such as motor vehicle repairs

• larger jobs where you ask for an upfront deposit or progress payments.

Now I can hear you from here saying but my clients are corporates and they won’t pay in seven days, and I get that. But let me tell you from experience that in a prior business life when I used to work in corporate accounting departments we had two piles for supplier invoices: the seven-day pile (which included COD) and the other pile. The seven-day/COD pile usu-ally got paid weekly, fortnightly or at worst monthly, but the 30-day pile got paid at best at the end of the next month.

Which one of those two piles would you like your invoice to be in?The other reason you shouldn’t give 30-day terms is because – and

let’s be honest – it’s a bit rude to start chasing money before an invoice is actually due. And imagine how devastating it is to call chasing money a


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month after you delivered a product or service, only to have the accounts person say, ‘Sorry, we haven’t received your invoice – could you please resend it?’ And then it goes back into the 30-day pile, and if you’re lucky and the accounts person liked you you’ll go to the top of the pile and get paid next month.

But if you have seven-day terms, on the eighth day you can phone or send a friendly reminder email that your invoice remains unpaid and would they please arrange payment. If at that point they say they haven’t received the invoice you haven’t lost one or two months, you’ve only lost a week, and you can easily resend it and hopefully you’ll get payment within the next few days.

If you send your invoices directly from your accounting system, some systems such as MYOB and Xero can track when the invoice was sent, see when it is opened by your client, and also give your client the option to pay the invoice then and there directly via a link in the email – very clever and very easy for you and your customer.

CHASING MONEY OWED TO YOU

For those of you in retail or where you get paid straight away – doctors and chiropractors, for example – you really have no idea how lucky you are because collecting overdue money is up there with being one of the worst jobs in business, and I honestly don’t know how people can do it as a full-time job because it really can be horrible.

Regardless of the amounts involved, ASIC and the Australian Com-petition and Consumer Commission (ACCC) have guidelines about how you can actually chase customers for payment which you should be aware of. These include:

• you are not allowed to contact the customer at unreasonable hours, such as on the weekend, on public holidays or late at night or early in the morning


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• you should not contact the client beyond what would be considered necessary; for example, contacting a customer by telephone more than three times per week

• don’t visit the customer at their workplace uninvited, potentially putting pressure on them by embarrassing or threatening to embarrass them in front of colleagues

• you cannot subject a customer to humiliating or intimidating conduct, such as: – using abusive, offensive, obscene or discriminatory language – embarrassment or shaming – adopting an aggressive, threatening or intimidating manner – threatening to use, or using, violence or physical force against

them, a third party or against property – misleading a customer about the nature or extent of a debt, or the

consequences of non-payment.

For more information about these guidelines, go to my resources page at www.andersontax.com.au/resources/.

The six keys to success

There are six keys to successful money collections:

• State your terms clearly up front. No-one likes surprises, unless of course it’s a surprise birthday party, so it’s paramount that you let your customers clearly know what your terms are before they sign up to buy from you. I always use a confirmation letter before I start working with a client that covers all the important points of what’s included and what’s not included, and also what the payment terms are.

• Follow up. Have you ever heard the saying ‘the squeaky wheel gets the grease’? Well, it’s like that with collecting money too. If someone is tight for cash they are going to pay the person who is asking for it before they pay someone who isn’t asking.


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A while ago I had a client who was just starting out and had a new website set up. They were asked to pay 50% up front and 50% upon completion – no problem. My client paid the deposit, the website was built and went live, and my client received an invoice for the remaining 50%. But guess what? No-one ever asked for the remaining 50% to be paid, so my client – who was in start-up mode (and hence poor) – just waited for someone to call, but no-one ever did. It’s been well over two years now and no-one chased the money. Remember, it’s all good and well to send your invoice, but if you don’t follow up you will keep being put to the bottom of the pile. To finish that story, my client has since closed down their business so that web designer never got paid the remaining 50% because they never followed up.

A great solution for this is to use an automated service such as ezyCollect or Debtor Daddy. They are cloud-based debt collection programs that you can tailor to automatically chase your customers’ overdue accounts. They’re quick to set up, easy to use, inexpensive, and best of all they link seamlessly to your MYOB or Xero files, and then they do all the chasing of overdue invoices for you. A pretty cool feature is that you can tailor different messages for different clients, and even choose between whether they should receive emails or SMSs. Definitely worth looking into and worth every dollar – prices start from about $29 per month.

• Be consistent. You need to train your customers to pay you promptly. If your terms are seven days and you consistently let it go for three or four weeks before you follow up, you are teaching them not to pay you until you start chasing payment as you are not serious about your payment terms.

• Be nice about it. Although chasing money isn’t a fun job, you can still be nice about it because – as they say – ‘you attract more bees with honey than you do with vinegar’. So I always start with an email subject line like, ‘Sorry for nagging … ’ instead of ‘Overdue invoice’,


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as often they are embarrassed they haven’t paid your invoice because they don’t have the money, are waiting for some funds to come in themselves or maybe they simply forgot.

• Keep the lines of communication open. Even if a customer can’t pay right now, it’s important that you keep the communication channels open and do things like offer to enter them into a payment plan, even if it’s just $100 a week. This does a couple of things. Firstly, it is slowly reducing the amount outstanding and therefore your risk is reduced. Secondly, and arguably more importantly, by entering into a payment arrangement with you they are agreeing that they owe you that money so that reduces the risk of them disputing the bill at a later stage.

• Try to separate yourself from the collecting of money if you can. If you have the relationship with the client, let someone else play the bad cop so you can keep the warm, fuzzy relationship. The only time you should get involved is if your collections person isn’t getting anywhere so then it gets escalated to you. If you are a solopreneur this is obviously a tad more difficult, but not impossible. Here are a couple of suggestions: – if you have a bookkeeper they can do this for you, otherwise your

accountant may offer this service – if you have a virtual assistant (VA), this is a task they could easily

do for you.

TIP: The longer a debt remains unpaid the harder it is to get paid.

TIP: Don’t forget to chase the smaller debts too. They all add up.


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I’VE BEEN CHASING THE MONEY BUT STILL I’M NOT GETTING PAID. WHERE TO NOW? WHAT ARE MY OPTIONS?

This is where it gets tricky, sometimes ugly. The amount of money involved will determine your options.

Option 1: Place their account on hold

If they’re an ongoing customer, the quickest, easiest option is to stop pro-viding goods or services until you receive payment. I know you’re think ing but then they’ll just go elsewhere, and yes that is always a possibility, but you are just digging a bigger cash hole for yourself if you keep supplying them rather than if you stop now. At the very least they may start paying something so you can drip feed them more stock.

Option 2: Write it off

If it’s a relatively small amount, sometimes you are better to cut your losses and write it off now (bad debts are a tax deduction if that soothes some of the pain) and not dealing with them again. You could be spending your valuable time actually being productive rather than spending time in a negative cycle chasing money you’re unlikely to get. Remember what I said earlier: the older the debt the less likelihood you have of recovering it.

Option 3: Send it to a debt collection service

Most debt collection services charge a percentage of the collection sum so often you are not out of pocket, so it’s worth doing. In my experience the challenge has actually been finding a decent debt collection service that is willing to deal with amounts less than $5,000, which for many small businesses is significant dollars. If the debt collector is unable to collect the money they can then advise you of the next steps, and many will even manage these next steps for you. Depending on the amounts, the options


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could be lodging a debt with the Small Claims Division of the Local Court or going to a lawyer.

TIP: I hope you never have to do any of these things, however if you do you are more likely to get a better outcome if the customer has completed a signed credit application form agreeing to your terms and conditions.

TIP: If you go to the resources page on my website – www.andersontax.com.au/resources/ – there is a link to the debt collection service I use and recommend.

SHOULD I SEND STATEMENTS?

It depends. Statements are an absolute must if you have 30-day terms or if your customers are really bad payers, but for very different reasons.

If you have 30-day terms you can’t really call a customer to check they have your invoices, so statements provide a gentle touchpoint where they are reminded they owe you money and it gives them an opportunity to check they have all the invoices. Larger businesses, meaning corporates and government, generally reconcile statements with invoices in their system and may even chase missing invoices, so they’re definitely worth sending to these customers.

If your terms are seven or fourteen days, statements are really only beneficial for the late payers, not because they can check they have your invoices because you should have already been in contact with them, but because it’s just another touchpoint to ask them to pay and an opportunity to highlight their payment is overdue.

TIP: With statements, if you are physically posting them always print them on a different coloured paper so they stand out.


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PAYING THE BILLS

First things first – throw out your cheque book. If you are still writing cheques it is costing you time and money on many levels.

The banks are charging you every time a cheque is presented, but that is nothing compared to how much time you are wasting writing cheques, posting cheques, managing unpresented cheques, and then having to manually enter the information into your accounting system or – worse – paying someone to do all this for you.

Wherever possible, use electronic payments or credit cards, and when-ever possible I recommend setting up automatic payments for things such as your telephone, electricity, internet and other regular monthly-type expenses where it adds no value whatsoever to manage them manually, so you might as well automate them.

The other benefits of paying everything electronically are that your bank feeds can automatically pick transactions up and allocate them for you, it’s quicker, you know exactly how much is in your bank account at any given time (no having to check for unpresented cheques), and if you have to make bulk payments you can process them through your accounting software and then just upload them into your online banking. No more transposition errors, and this minimises the risk of duplicate payments or overpayments.

TIP: Did you know that of all the businesses I’ve seen over the last 26 years there is only a handful of them who voluntarily refund duplicate or overpayments back to their customers. The majority of them just accept them, sit on them, and if it’s not noticed they keep it. I had a client many years ago who was double paid $36,000 by a large corporate. He put it in a term deposit and left it there – after 12 years they still hadn’t asked for it so he just kept it.


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MANAGING SUPPLIER INVOICES

There are a few different ways of processing supplier invoices in your accounting system, and the volume, type and cash flow of your business will determine which method you choose.

Method 1: Detail, detail, detail

This method is ideal when you have credit terms with your suppliers, and it is an absolute necessity if you have a large volume of supplier invoices to manage or inventory to track.

In this instance you should individually enter every supplier invoice into your accounting software as soon as you receive it. You should also enter them in some meaningful detail; for example, if you get an invoice from an office supplies company you may need to allocate part of the invoice to office furniture (asset) and some to stationery (expense). You would also do this if you hold, buy and sell inventory items so you can keep track of what’s on order and what is in stock available to be sold.

Method 2: Simple and easy

This method is ideal for a business that doesn’t hold inventory and doesn’t buy much of anything; for example, a consulting company that really just uses services such as telephone and internet and purchases ad hoc items such as stationery which are generally paid for at the time of purchase or shortly thereafter via direct debit or credit card.

In this case I would recommend keeping things really simple and don’t even enter the supplier invoices into your accounting system, but just process the payments and let your bank feeds allocate the expenses for you.

I know I keep teasing you with bank feeds – I promise I’ll talk about them soon.


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Method 3: The combo

As is implied, this is a combination of the two above methods and is ideal for a company where there are big-dollar items such as contractors and you want to make sure that your expenses are allocated in the same financial period as the corresponding income, or if you don’t pay your suppliers within a very short period – either because their trading terms are long or your cash flow is tight. By entering supplier invoices into your account-ing system it makes it easier to manage your outstanding bills and plan payments.

WHAT ABOUT WHEN I’M STRUGGLING TO PAY THE BILLS?

This happens to all of us at various times and is extremely common when you’re having a business growth spurt, particularly if you’ve had to put on additional staff or buy stock to support an increase in customer demand.

The best thing to do here is keep the lines of communication open with your suppliers. Your suppliers will always be your cheapest and easiest method of financing, so it’s worth staying in their good books by keeping them in the loop.

If you can’t make payments in full, it’s a good idea to make frequent smaller payments as a sign of goodwill. That will ensure you keep the relation ship with your suppliers intact as they are a crucial part of your growth and long-term success.

If the problem is short term, consider speaking to your bank about an overdraft or credit card to help you over the hump.

If the problem is longer term, speak with your accountant sooner rather than later to come up with a plan. (See chapter 10 for strategies for avoiding future cash flow headaches.)

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5PAYING YOUR STAFF –

AND YOURSELF!

HIRING YOUR FIRST employee is a huge milestone. It is a sign you’re growing and ready to take your business to the next level. Congratulations!

However, the moment you hire an employee you have just entered a whole new level of complexity. Overnight you have taken your compliance obligations up quite a few notches.

The biggest mistake I see people make when taking on an employee is that they hire someone before making the proper enquiries about what it actually means, specifically what the legal requirements are for things such as registrations, contracts, insurance, tax and superannuation. All of these need to be put in place before you hire someone, not afterwards.

In this chapter I will tell you what you need to know before you offer someone a job, and also how to make sure you are fully compliant. In addition to this I also cover how to pay yourself, because depending on your business structure there are very different ways to deal with that too.

Paying staff

Having staff is probably one of the most complicated areas of running a business.


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The laws around staff are incredibly complex and constantly changing, so the first thing you need to do is get onto the fairwork.gov.au website and familiarise yourself with it, because if you’ve got staff you will need to use it frequently.

Paying your staff involves a few different areas, and I could write a whole book on payroll alone, but for the purposes of this book the key things you need to be aware of are:

• You will need to register with the Tax Office as a ‘Pay As You Go Withholder’. This means that you will be withholding tax from your employees’ wages, which is a legal requirement. The Tax Office terminology for this is PAYG Withholding or PAYGW. To register for PAYGW either call the ATO or your accountant can do it for you using their ATO portal.

• Know what employment award your employees are covered by and what the award conditions are. You can get this from the Fairwork website.

• Make sure you have a copy of the award readily available on the business premises, and that all your employees know where it is kept.

• Make sure you document everything, from leave taken (including annual closedowns), performance management and changes of employment to conditions of employment and any accidents, regardless of how minor they may seem at the time.

• Always, always have a written employment contract. This can save you thousands of dollars down the track, so don’t skimp on this.

A client of mine who has three employees had an employee request they pay him leave loading on his unused annual leave plus the two months leave he had just returned from. The employee cited that Fairwork had advised him he was entitled to it. They contacted Fairwork, and Fairwork said yes according to his award he was entitled to leave loading. Luckily they called me to help enter it in

Paying your staff – and yourself!

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MYOB as they’d never paid leave loading before. I asked if he had an employment contract, and thankfully there was one. When I looked at his contract it said he was being paid well above the award rate and stated that the rate included all allowances and loadings. You see, they had a professional contract drawn up, meaning everything was covered and in writing. Had this client paid the leave loading on termination they then could have left themselves open to having to back-pay leave loading for all the years the employee had worked for them. By having a contract in place they saved themselves about $9,500 in leave loading, but arguably more importantly they saved themselves undue stress because once they could refer back to the contract there was nothing to argue about.

• Upon commencement, you need to give all new employees: – a copy of the National Employment Standard – a superannuation choice form – a tax file number declaration form.

• Make sure you are paying the right amount – including loadings and allowances – by checking the Fairwork website regularly.

TIP: Pay rates usually change at least once a year. Fairwork have a service where you can sign up for an email advising of any changes to the award/s you are dealing with. To sign up to this service, go to the useful links section on my resources page at www.andersontax.com.au/resources/.

• Know the correct classification of your employee. Are they full time, part time or casual? This is an area most people get wrong, especially when they engage someone on a casual basis which is often really a part-time basis. If you are hiring someone on a casual basis to work every Monday for example, then there’s a fair chance that person is really a part-time employee not a casual. For a detailed explanation


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of the differences either go to the fairwork.gov.au site or for the direct link go to the useful links section on my resources page at www.andersontax.com.au/resources/.

• Withhold the correct amount of tax from your employees’ wages. Your accounting payroll system will work this out for you. This is the law, and you are not allowed to reduce the amount of tax withheld unless you have a letter directly from the ATO advising you otherwise. These ATO letters are only valid for one financial year at a time, so make sure if you are in this situation your employee applies to the ATO for a tax variation each and every year.

• You will need to make sure you are SuperStream compliant and pay your employees superannuation at a minimum quarterly. Superannuation is a complex area, but in a nutshell if an employee earns more than $450 in a month you will need to pay 9.5% on top of their wages into their nominated superannuation fund, by the following legislated dates:

January–March quarter 28 AprilApril–June quarter 28 JulyJuly–September quarter 28 OctoberOctober–December quarter 28 January

There are a bunch of rules as to what you do and don’t need to pay superannuation on, so if in doubt refer to their award, Fairwork or the ATO for clarification.

TIP: You must pay superannuation for and withhold tax from casual employees too.

• Get workers’ compensation insurance.

• Give your employees payslips within 24 hours of paying them.


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TIP: When using the Fairwork website use the employee section as it’s written in a much simpler way, plus that way you’ll also know what your employees are seeing when they look things up.

If you have a team of staff it’s worth having a relationship with a human resources consultant. Accountants and bookkeepers can help you with some stuff, but it’s a good idea to make sure all the employment-related land mines are covered because when you’re dealing with employees it really can be a legal minefield.

TIP: Staff and payroll are another area I strongly recommend you get professional help with. This is not a part of your business where you can rely on asking a friend or Google. When in doubt, call Fairwork. Get the answers direct from the horse’s mouth and document it: who you spoke to and the day and date. If you use their livechat facility you can even have the conversation emailed to you so you can keep it on record.

BUT THEY’VE GOT AN ABN SO I DON’T NEED TO WORRY ABOUT THIS STUFF, RIGHT?

Wrong … so wrong. This is another area where businesses get tripped up all the time.

Just because someone has an ABN does not necessarily mean that they are a contractor. Subject to circumstances they could be a ‘deemed employee’ – meaning that for some legal purposes they are considered employees for obligations such as superannuation and workers’ compen-sation.

So what makes someone a deemed employee? Good question, because there are lots of grey areas, but a few of the main indicators are shown in the following table.


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Indicator Employee/deemed employee Contractor

Degree of control over how work is performed

Performs work, under the direction and control of their employer, on an ongoing basis

Has a high level of control in how the work is done

Hours of work Generally works standard or set hours (note: a casual employee’s hours may vary from week to week)

Decides what hours to work to complete the specific task

Payment Regular payment – weekly, fortnight or monthly

Payment upon invoice. Usually upon completion of work or at the end of a contract or project

Expectation of work

Has an ongoing expectation of work

Engaged for a specific task

Risk and responsibility

No risk. If the work is defective and requires rectification this is done at the expense of the employer

Any rectification of defective work is done at the time and expense of the contractor

Tools and equipment

Provided for by the employer Provides their own tools and equipment

The above list is not the be all and end all unfortunately, as it’s not always clear cut. There are a couple of decision tools you can use (and rely on) to determine whether a contractor is actually a contractor or deemed employee. Both tools can be found on the useful links section on my resources page at www.andersontax.com.au/resources/.


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TIP: Once you’ve completed the decision tool keep a copy of the result in a file in case you need to rely on it down the track in the case of an audit. Audits that are affected by employee/contractors are: employee obligations, payroll tax, workers’ compensation and fringe benefits.

WHAT IS SUPERSTREAM? WHERE DID THAT COME FROM?

SuperStream is a government initiative to streamline the way superannua-tion payments are made, making it easier for everyone.

SuperStream has been compulsory for big business since 2015 but only became compulsory for small businesses as of 30 June 2016.

I know … you’re probably thinking OMG, not another thing I have to worry about, but honestly it actually does make paying superannuation significantly easier, especially if you have more than one super fund you’ve got to pay.

Some good news if you’re using accounting software is all the major programs are SuperStream compliant, which means that within a couple of clicks in your software you can pay superannuation and all the paper-work and reporting is done for you. No more having to write cheques, logon to several superannuation fund websites, or fill out their ridiculous forms – just a couple of clicks of your mouse and it’s all done for you.

If you’re not sure if your software has been set up for SuperStream yet, contact your software consultant or your software provider and they will help you.

If you don’t use software to manage your payroll or your software isn’t SuperStream compliant, the alternative is you can use the government’s free Small Business Superannuation Clearing House. Although not seam-less or quite as easy to use, it is still a good free and simple alternative. For more information go to my resources page: www.andersontax.com.au/resources/.


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Now this doesn’t mean that doing it the old-fashioned way isn’t neces-sarily compliant, however you really do need to check. The best place is on the ATO website: https://www.ato.gov.au/Super/SuperStream/Employers/

There are only two exemptions from SuperStream:

• contributions to your own self-managed super fund (SMSF) (that is, if you’re a related-party employer; for example, if you’re an employee of your family business and your super guarantee contributions go to your SMSF)

• personal contributions (for example, if you’re a sole trader and you contribute to a super fund for yourself ).

Although the law says you only have to pay superannuation every quarter, you can pay it as frequently as you like. With SuperStream I have now started paying superannuation every time I process a pay run because it’s so quick, easy and quite frankly helps manage the cash flow too.

What if I can’t pay superannuation on time?

If you don’t pay superannuation on time you will have to lodge a Super-annuation Guarantee Charge Statement with the ATO. You will need to pay the superannuation plus penalty plus interest to the ATO, who will then pay it to your employees’ superannua tion fund.

Although the fine doesn’t seem like much at $20 per employee, per quarter, there is also 10% interest payable. But these are the easy parts – it’s the form you need to fill out to lodge the late payments that is the kicker because it’s time consuming and not much fun.

If you did pay the superannuation but you paid it late then, by law, you still need to submit a Superannuation Guarantee Charge Statement.


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What if I didn’t pay because they didn’t give me a fund to pay it too?

This is so, so common it’s unbelievable – but unfortunately for employers it’s no excuse.

As an employer you must have a default superannuation fund. A default superannuation fund is the fund you will put their superannuation money into if they don’t provide you with their fund of choice.

Your default fund details must be on the superannuation choice form you give them when they start working for you.

TIP: Get all your employees’ details before they start, because after they start it’s like pulling teeth trying to get it. For a sample New Employee Details form go to the useful links section of my resources page: www.andersontax.com.au/resources/.

BUT WHAT ABOUT ME? HOW DO I PAY MYSELF?

Yay – another one of my favourite parts. There are lots of ways to pay yourself. How you go about doing so

depends a lot upon your business structure and of course your cash flow.

Sole trader or partnership

If you’re a sole trader or a partnership you cannot be an employee in the legal sense because you cannot employ yourself – a bit like you can’t marry yourself. Therefore you don’t pay yourself through payroll but rather just do transfers from your business account to your personal account and allocate it to a Balance Sheet account called owner’s drawings.


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TIP: If you prefer to be able to see how much profit you’re making after taking out payments to yourself, set up a Profit & Loss account called owner’s drawings. Although not technically correct, when preparing your tax return your accountant will ensure it is treated correctly for tax purposes.

Company

If you are trading as a company things get a little more complicated, and as with most things there is more than one way of doing it.

There are basically only three ways for an owner of a company to get money out of the business. They are:

• salary or wages• directors’ fees• dividends.

Remember, if you are trading as a company the company is a completely separate legal entity to you, so the company’s money isn’t actually yours to do with as you please and take whenever you want; there are all sorts of legal, tax and superannuation implications.

The easiest and cleanest way is to pay yourself a salary or wage, but even then there are a couple of ways to do it:

• The proper way. I call this the proper way because technically it’s the most correct way to do it, and that is to pay yourself a wage just as you would any other employee by processing it through a payroll system, withholding tax, and also paying superannuation and accruing annual and personal leave entitlements. The key with this method is to pay yourself the same amount each pay period, so that you don’t mess around with the amount of tax being withheld. This really is the ideal way to process your wages, and will ensure you are meeting all your company’s statutory requirements as well as avoiding


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tax bill shock when you do your personal tax return. Obviously this works well if cash flow is stable.

TIP: Gross is the amount you get paid before tax is taken out. Net is the amount you get paid after tax is taken out.

• The other way. For many small businesses cash flow is their number one pain point, so paying yourself the ‘proper way’ above may not be an option. In this case, what works for many of my clients is to pay yourself what you can and then at the end of the quarter add up what you’ve taken and then divide by three to work out what your monthly income was, and process this through your payroll system to calculate the tax and superannuation amounts; for example, if you took $12,000 over the quarter you would divide it by three to get $4,000 net, or the after-tax amount, per month. Then in your payroll system enter a gross figure, or before-tax figure, that gives you $4,000 net per month. The difference between the gross and the net figure is the tax amount.

TIP: Don’t forget, if you’re an employee you must pay yourself superannuation too. It’s not a choice, it’s the law.

What about directors’ fees and dividends?

Directors fees and dividends are two very different things. I often hear people talking about how they reduce their tax by paying

directors’ fees or dividends, however what most people forget is that they are included in your personal income just the same as if you received wages or salary. So why take directors’ fees or dividends over wages, and are there any benefits?

Firstly, from a tax perspective directors’ fees for working directors are basically considered the same as salary and wages, which means you also


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need to pay superannuation on top of the directors’ fees plus they need to be included in payroll tax and workers’ compensation calculations and the like. The main benefit can be for tax planning because directors’ fees may be deductible for the company when the resolution is made but only assessable to the individual when they are actually paid. There are various rules around this, so if you are considering this as an option speak to your accountant before you do anything.

Dividends are the distribution of profits to the shareholders of the business. Depending on what you consider to be an advantage, dividends are good because they don’t attract superannuation, payroll tax or workers’ compensation, but they are still considered taxable income when paid to the shareholder, meaning the shareholder has to pay tax and the Medicare levy just like they would have on wages or interest.

There are two types of dividends – unfranked and franked dividends:

• Unfranked dividends are simply dividends where the company has not paid any tax on them yet.

• Franked dividends are dividends where the company has already paid tax on them, so when they are then paid to you – the shareholder – you can offset the tax already paid by the company against the tax you need to pay. This can be a real advantage if you are in a lower tax bracket than the company tax rate.

Dividends can also be a great way of distributing income to a low-income shareholder such as a spouse, but in order to do that they must be a share-holder.

THE REAL WORLD …

In reality, how you pay yourself will depend on numerous factors with the predominate one being cash flow, closely followed by profitability and tax


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effectiveness. I strongly suggest you speak with your accountant to work out what the best solution is for you because the reality is it’s probably a combination of all of the above.

HOW MUCH SHOULD I PAY MYSELF?

This is one of the most frequently asked questions, and there is really no straightforward easy answer except to ask yourself how much do you need to earn and start from there.

My other response to this is, how much would you earn if you worked for someone else? You should be earning at least that plus some, as you also have the responsibilities of running a business, including the sleepless nights on top of just doing your day-to-day job.

Now, that’s all good and well in theory, but there’s not a lot of small business people who actually pay themselves what they would get if they worked for someone else, so don’t beat yourself up if you’re in that category as there are a couple of very valid reasons why this is the case:

• Your business in still in start-up phase. In the early days of business all your cash is being used to fund the setup and growth. Very normal. There is no definitive timeframe for this start-up period as every business is different, and there are also several ways to fund start-up businesses. In a recent speech about innovation our Prime Minister referred to start-ups as businesses up to 10 years old – which I thought was a little generous, but that just goes to show that this phase can vary in time and be very different for different businesses.

• If you’ve set up a lifestyle business there’s a good chance you’re trading lifestyle – for example, flexibility and work location – for money, and that’s quite valid too.


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CAN I PAY MY SPOUSE?

This is a good question, and will very much depend on the circumstances. If your spouse is legitimately working in the business, yes you can pay them, but it must be at a reasonable market rate. There are definitely regulations around this, so before you make any decisions speak to your accountant first.

TIP: It is illegal to pay your spouse a wage if they are not legitimately working in the business … simply having to listen to you talk about the business is not sufficient.

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6AUTOMATING THE BORING STUFF

TECHNOLOGY – LOVE IT or hate it, technology has changed our lives. If you’re like me and get bored quickly or just hate doing the same thing again and again, or even just don’t have the time, then this chapter is going to show you how to use some really cool technology that can, and will, save you a lot of time.

One of the biggest issues for so many small business owners is that there just aren’t enough hours in the day, so by using some simple, yet very effective automation, you can easily get back hours that you previously spent on mundane data entry and use that time for something better … time with the family, marketing, or even catching up with friends.

Finally, I’m going to explain all about these mysterious bank feeds I’ve been teasing you with in the earlier chapters.

BANK FEEDS ARE LIFE CHANGING

Bank feeds are life changing … no exaggeration, they really are. Thanks to the magic of technology, gone are the days of spending hours entering trans actions into accounting systems because now technology can auto-matically do the data entry for you by you simply authorising your bank to send an electronic file containing your transactions straight into your accounting system.


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Not all accounting systems have bank feeds, and if you’re using an older style accounting system you won’t have them, but it’s worth calling the software company to see if there is an update you can purchase that will give you bank feeds because it’s worth every single cent. Obviously the more transactions you have going through your bank account the more of a bonus it is.

There are essentially two types of bank feeds:

• The first is a direct feed, which is a file transfer directly from the bank straight into your accounting system. These are the most reliable and safest bank feeds in that you must expressly authorise the bank to release the transaction file to your software and then the bank transactions are seamlessly put into your accounting system, waiting to be allocated. With direct feeds you will either need to complete a form authorising your software to get the feed, or with some banks you can actually do the authorisation from within your online banking.

• The second type is via a third-party provider. These feeds are not actually sent from a bank at all. With these feeds you supply your internet banking login details to a third-party provider, such as Yodlee. This provider logs into your bank account, takes a snapshot of your transactions (called screen scraping), converts it to text and puts them into your accounting file to be allocated. You need to be careful with this type of bank feed as supplying your online banking username and password to a third party may contravene your bank’s terms and conditions, so in the event that your account is hacked you may not be covered.

TIP: A good way to tell if it’s a third-party feed is if you had to enter your financial institution’s internet banking username and password into your actual accounting system. In this case it is not a direct feed but a third-party feed.

Automating the boring stuff

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Not all bank feeds are equal though. Even though there are lots of account-ing systems that use direct feeds, some feeds can still be wrong. How can that be? Well, for example, one accounting package I have used would give me my credit card transactions every day, and then when my bank pro-duced my monthly statement the entire month’s transactions would come into my accounting system again. The worst thing about this was it wasn’t every month, just every few months, so I had to keep a close eye on it.

I can confirm though that MYOB only have direct bank feeds and all feeds are verified before being allowed into your accounting system. They also offer a money-back guarantee on their bank feeds, which I guess is easy to offer when they only use direct feeds. In the six or so years I’ve been using MYOB bank feeds I have processed literally millions of transactions and have never had a duplication or missing transaction. Now that’s impressive.

BANK RULES ARE THE BOMB

It’s pretty cool that your transactions are put in your accounting system waiting to be allocated, but along with bank feeds came something even cooler: bank rules.

Bank rules are the bomb. They are what really made bank feeds so life changing.

In their simplest form, bank rules are where you tell your account-ing system how and where to allocate a transaction based on either the transaction reference from the bank – for example, if the bank reference says ‘Account keeping fee’ allocate it to bank charges – or if there is a withdrawal amount of exactly $584.23 allocate it to business insurance.

Bank rules can become quite sophisticated depending on the account-ing system. Every accounting package has different bank rule parameters, and although I haven’t seen one computer system that I think has the perfect combination of options yet they are definitely getting very close.


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With some systems you can use a variety of combinations, such as:

• transactions that start with a particular string of characters; for example, deposit

• transactions that contain a particular string of characters anywhere within the description; for example, petrol – which would then pick up and allocate descriptions that had the words petrol or petroleum in them

• transactions that contain a particular string of characters and must be for a certain amount – perfect if you have multiple finance agreements with the one finance company but you need to allocate each monthly payment to a different liability account in your balance sheet.

TIP: Don’t set up a rule for ‘BP’ (petrol) because depending on the system you’re using it might allocate any transaction with the string ‘bp’ in it to motor vehicle fuel; for example, BPAY. I had a client years ago who set up ‘BP’ as a rule, and not only did all their petrol go to the motor vehicle fuel account but so did all their BPAY payments to the ATO. What really hurt them was because they were doing their own bookkeeping and BASs and not checking their own work, they had been inadvertently claiming GST back on all their tax and BAS payments. When they came to me to do their tax return I then had to break the bad news to them that they had to repay the ATO $126,000 worth of GST they had incorrectly claimed for almost two years.

Apart from automatically allocating transactions for you, with some sys-tems you have the option of – once you’ve set up a rule – you never, ever have to even see the transaction again. The system just allocates it in the background without any intervention from anyone. This is a fabulous feature because, provided you’ve set the rules up correctly, the majority of your bookkeeping quite literally does itself while you sleep.

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However, in the majority of accounting systems you have to go through and manually check and press an ‘approve’ button for the allocation before it actually becomes a real transaction.

Bank rules can also be set up to match customer payments with invoices and supplier payments with invoices.

Bank rules are a game changer and have literally disrupted and revolu-tion ised the bookkeeping industry. This is one of the reasons why you will notice a lot of bookkeepers have moved away from hourly billing to set price packages. As technology continues to improve, the amount of data entry work is decreasing. This doesn’t mean you don’t need a bookkeeper to do your bookkeeping, but it does mean there is very little incentive for your bookkeeper to implement technology that will directly decrease their revenue.

TIP: With many software systems you can allocate transactions on your smartphone with an app, so if you’re sitting in a waiting room somewhere you can quickly login and allocate or approve transactions. Very handy, very cool.

IF I USE BANK FEEDS DO I STILL NEED TO DO BANK RECONCILIATIONS?

Bank reconciliations are the single most important step in ensuring the integrity of your accounting system. A bank reconciliation is where you compare the bank balance in your accounting software to the bank balance in your bank account. They should always be exactly the same.

Some software companies have been very naughty by promoting that if you use bank feeds you no longer need to do bank reconciliations. Well, they are not just naughty they are just plain wrong. Allocating a transaction is not reconciling a transaction; allocating a transaction is just allocating it to an income or expense account, and as I mentioned earlier there are lots


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of instances where bank feeds are duplicated and even missing altogether. Imagine if I didn’t do a bank reconciliation and – as I mentioned earlier – my credit card feeds had come through twice. I would have unknowingly claimed GST twice, claimed double tax deductions, and all my financial reports would have been wrong, all because I didn’t go the extra step and do the bank reconciliation.

TIP: If you’re not comparing the bank statement balance with what’s in your accounting system and then pressing a ‘Reconcile’ button you are not doing a bank reconciliation.

PART III BAS’s, TAX AND THE DREADED 30 JUNE

WHEN I ASK small business people what keeps them up at night one of the most common answers is compliance. Interestingly, it’s not actually the compliance that they say is stressful, it’s that they’re worried about what they haven’t done or what they may have missed. So my aim with Part III is to give you an overview of all the bits and pieces you need to know about. Because I’m an accountant compliance is second nature to me, but as I was writing this part even I was amazed at just how much there really is to know. I was quite genuinely surprised at not just the volume but also how difficult it is to simplify our very complex system – it made me realise how overwhelming this is for small business owners.

What I also realised was that as much as I wanted to teach you how to do all this compliance stuff, the best advice I can give you is that you must know about it and have an idea of what’s involved but then you really should decide whether you leave it up to someone like me, who lives and breathes this stuff. Believe it or not there are people – and I’m one of them – who actually enjoy compliance and love nothing more than helping others through this crazy maze.

So while you’re reading this section, know that I’m not expecting you to do all this yourself. There will be parts you can do, parts you should do, and parts I would implore you not to do. But best of all I’m going to tell you who you should go to for help and what to look for when you’re getting that help.

I often have clients ask me if they should do a four-day bookkeeping course so they can do it themselves. Let me just say this … if I did a four-day course in graphic design would that make me a good graphic designer? If I did a four-day course in law would that make me a good lawyer? If I did a four-day course in hairdressing would that make me a good hairdresser? If I did a four-day course in building would that make me a good builder? You get my drift … Bookkeeping is not something you can master in four days, or even four weeks. It takes years to learn to do it well; it is an art as well as a science.

One of the most difficult things about tax and compliance is that it is always changing. Just because it was like that last year does not mean it is like that this year, or that it will be like that next year. So keeping up to date is challenging – even for people like me who do it for a living – but the important thing isn’t to know exactly what the rule is but to know that there is a rule. To know that you need to get advice or that you need to learn about something new. Knowing that you don’t know something is crucial, as is surrounding yourself with the best possible advisors to ensure that all bases are covered.

So enough of just talking about compliance – now I’m going to dive into the specific areas of compliance and give you a solid overview of what you need to know.

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7CONGRATULATIONS,

YOU’RE IN A RELATIONSHIP … WITH THE ATO

LIKE IT OR not, now you’re in business you’re also in a relationship with the Australian Taxation Office. The ATO is the government department whose role it is to administer the tax system and ensure taxes are paid as and when they should be. Contrary to popular belief, they don’t make the tax laws, but they do get stuck with the job of interpreting them and making them work, which – if you’ve ever read any of our tax legislation – you will realise is not always as simple or straightforward as it sounds. Hence the reason why we have ‘grey’ areas and loopholes.

BUT I DON’T WANT TO PAY TAX …

As much as many people resent paying tax, taxes are the reason we have public schools, public hospitals, police and emergency services, roads, a defence force, Medicare and welfare systems, to name just a few of the things our taxes pay for.

So imagine a life without taxes … how would all those services be provided? They could be privatised, but then how would the not-so-rich


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people cope? Think of your elderly parents or relatives who probably use the public health services more than most. Imagine your parents are sick and can’t afford to go to hospital, and you can’t afford to pay for it for them because you have school fees to pay.

For me, thinking of my parents, or kids for that matter, always puts things into perspective. I’m very happy to pay my fair share of tax when I consider the other option of whether I’d be able to financially support and help them if there wasn’t a tax system that provided government-funded essential services.

BUT OUR TAX SYSTEM ISN’T FAIR; BIG BUSINESS ISN’T PAYING THEIR FAIR SHARE OF TAX BUT US SMALL BUSINESSES ARE EXPECTED TO

The vast majority of us, individuals and businesses, are doing the right thing, however there is always the minority that spend a lot of energy (and money) doing everything they possibly can to avoid paying tax. It’s wrong, it’s not socially responsible, and it impacts each and every one of us every day. I do a lot of consultation work with the ATO and they spend an extraordinary amount of time, energy and money chasing these people, closing loopholes and generally trying to make our tax system a fair and equitable one. Unfortunately there are always going to be some people who just don’t seem to appreciate that we all have a responsibility to con-tribute to this society if we want to remain the ‘lucky country’.

THE ATO SCARES ME

Relax. The good news is you don’t have to do this all on your own because that is what your accountant is here for – to have your back and deal with the ATO on your behalf.

Congratulations, you’re in a relationship … with the ATO

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IS AN ACCOUNTANT THE SAME THING AS A TAX AGENT?

Despite common belief, no they are not the same thing, however they can be the same person.

Accountant is a broad term for anyone who has a qualification in accounting. Just like there are different types of medical doctors – such as general practitioner, paediatrician, psychiatrist, oncologist, ophthal-mologist – in the accounting profession there are also different types of account ants too – such as in-house company accountants, management accountants, tax accountants, financial accountants, cost accountants, forensic accountants, and the list goes on.

A tax agent is a specialist accountant who must be registered by the Tax Practitioners Board to provide tax agent services to the public. They have specific educational, experience and insurance requirements. They are also required to maintain their knowledge by way of mandatory ongoing professional education.

Because this book is all about small business and the chances of you having an in-house accountant or another accountant who isn’t your tax agent are pretty slim, I have used the term accountant and tax agent inter-changeably.

So … what’s a CPA then?

CPA means Certified Practising Accountant. For want of a better term, it is a ‘brand’ of accountants a bit like Toyota is a brand of cars.

There are various different ‘brands’ of accountants, and very generally they usually work in different areas of accounting. The brands are actually just the different professional associations.

There are three main professional accounting associations in Australia:

• IPA – Institute of Public Accountants. Generally tax agents, management accountants and business advisors, with the majority working for themselves specialising in small business.


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• CPA – Certified Practising Accountant. Generally tax agents, management accountants and business advisors who work for either corporate accounting firms or themselves.

• CA – Chartered Accountants. Generally work for the Big 4 accounting firms and in the corporate accounting sector.

Within the ‘brands’ they then have membership status levels which are like the models of a car. They range from Student to Fellow, and are dependent on experience. Obviously a Student is still in training and unqualified, whereas a Fellow usually has 20-plus years of experience.

All professional association members, regardless of status level, must meet certain entry requirements including qualifications and experience, but also associations have specific additional professional requirements of their members as well, such as quality control processes, ongoing profes-sional development, and they are also responsible for doing regular man-datory audits on their members’ processes and policies.

TIP: Interestingly, to be a tax agent it is not a requirement to be a member of any of these professional associations. However, I would strongly recommend that you check if your tax agent is a member of at least one before engaging them because that way you can be assured their processes are being regularly checked.

Do I really need a tax agent?

Absolutely, categorically, positively! No business owner should ever do their own tax return.

A tax agent’s primary responsibility is to look after the best interests of their client within the confines of the law. And I know you probably don’t believe me, but the ATO actually wants tax agents to get the best possible result for you. Sometimes there is more than one way to look at a situation, and in some circumstances the ATO actually allows us to swap and change methods each year to get you the best result.

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Australia’s tax laws are among the most complex in the world. Tax agents do much more than just crunch numbers. We interpret and apply tax law, and because our tax laws are constantly changing it is pretty much a full-time job just keeping up with all the changes and knowing when they are applicable – or not.

A typical example of this is in 2015 when the Treasurer announced tax incentives to encourage small businesses to invest in their business by changing the way they can claim tax deductions for asset purchases. The new law was effective 7 pm 12 May 2015 – even though it wasn’t passed by parliament until some months later. This means that if you bought a new computer costing $5,500 on 12 May 2015 at Bing Lee at 4.30 pm it has to be depreciated over three years, but if you bought it at 7.15 pm on 12 May 2015 then it is an instant tax deduction.

Hopefully this gives you an insight as to why we are always asking for more information and documentation, as well as why we always seem to have to check dates and amounts, as laws are changing all the time.

It’s also the reason I spend half my life at conferences, seminars, attend-ing webinars, and reading just trying to stay up to date, because I want to make sure my clients are always getting the best and most accurate advice possible.

CHOOSING AN ACCOUNTANT

Finding the right accountant for you will be one of the most important business decisions you will make. Your accountant will be your confidant, your sounding board, your source of truth and your most trusted advisor.

What sort of accountant should I get? There are so many to choose from

You’ve probably heard about top-tier accounting firms and mid-tier account ing firms and wondered what that was all about. Well basically there are three what are known as tiers of accounting firms which are



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basically categorised based on their size; for example, the number of part-ners and staff they have.

At the top of the hierarchy we have the top-tier firms, also called the Big 4. They are the large multinational accounting firms, big-end-of-town accountants for the big-end-of-town businesses. They have lots of highly specialised divisions that focus on areas such as international tax, mergers and acquisitions, and risk management, to name a few. These guys are the bees knees of accountants and anything you want or need they can do … but as you would expect, it comes with a pretty hefty price tag.

Next we have the mid-tier firms, who are still big businesses in their own right and also have specialist divisions, but are more affordable. They are ideal for large businesses that need a high level of service and access to specialist advice but generally aren’t over-the-top complex and therefore don’t need or want to spend the big bucks.

In a mid-tier firm you may meet with a partner very occasionally, but mostly you’d be dealing with a manager-level employee and below.

Then we have the boutique and suburban accounting firms. These firms can have anywhere from one to thirty employees and – depending on the level of service you require and your budget – these are the accountants that the majority of small businesses will work with. Don’t think for a minute though that you are getting any less experience or service because the majority of accountants who run these firms are highly experienced and often come from the top- and mid-tier firms, but for whatever reason they have made the leap of faith into small business – just like you have.

TIP: Most small to medium businesses would use a boutique or suburban accounting firm unless they have specific or complex issues that required specialist advice, in which case they would move to the mid-tier. It would be highly unusual for a small or even a medium business to use a top-tier firm.

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What should I be looking for when I’m looking for an accountant?

When engaging an accountant you need to be thinking long term. The relationship with your accountant is quite different to what you would have with any other business advisor. It is much more strategic and high level, and the best results are usually obtained with complete trust, openness, and a deep knowledge and understanding of a person and their business.

Your relationship with your accountant is a very intimate one. You should be able to ring them and ask absolutely anything without feeling stupid. If you don’t understand the answer you need to be able to ask them to explain it again or differently. Your accountant should be speaking to you in language you can understand and relate to, and then checking back with you that it makes sense to you.

When you’re meeting a potential new accountant you need to feel comfortable. You want an accountant who is honest and trustworthy as you will be relying on that person to ensure you are always compliant, they have your back and will give you sage advice. If the accountant makes promises that sound too good to be true then the reality is they probably are. Remember, it’s your accountant’s job to make sure you are taking advantage of every opportunity to minimise your tax within the confines of the law. If they are prepared to go beyond the law you should run, because they are putting you and your business at risk.

If you want an accountant who is going to be actively involved with your business then you need to consider two things:

• You should be their ideal client, and preferably one of their ‘bigger’ clients.

• You need to pay them appropriately for the level of service you want and need.

It sounds obvious I know, but if you try to screw your accountant down on price what you are really doing is reducing the level of service they can afford to give you. Be honest and realistic when you speak to your



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accountant about what your expectations are from them and what you need from them, and be prepared to pay an appropriate fee for it.

What sort of questions should I ask them?

I’m a big believer that people who are passionate about what they do will always do a better job. Since you’re looking for a long-term relationship with your accountant, getting an understanding of why this person is an accountant is paramount to ensuring you get the right fit for your business.

Ask questions like:

• How long has the accounting practice been around for?• Who owns it?• What sort of clients do they specialise in and what do they do for

those clients? • How many people work there and who will actually do your work?

If it’s not the person you’re meeting with, can you meet them too? • Do they offshore any of the work?• Who is your point of contact? • Who do you call or email with questions?• What accounting packages do they work with?• Are they able to help you make sure that you are using the software

effectively and getting the most value out of it?• What other services does the firm offer?• Do they have relationships with other service providers such as

bookkeepers and finance, insurance, HR or legal people?• Do they receive kickbacks from these software or referral partners?

How much should I be paying?

Every business is different. Everyone’s situation is different. So saying how much you should be paying isn’t a straightforward question.

Just as your business’s pricing model is dependent on various external factors, so is your accountant’s business. It’s the same business problem,

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and it’s called covering overheads. So if your accountant is based in a prime location with gorgeous views of the harbour, they are no doubt paying a premium for rent. If they have lots of fancy meeting room and facilities, they are paying for those too, so at the end of the day you are the one that pays for them through your fees.

Accountants are quite similar to doctors really. If you have a ‘normal’ business operating only in Australia then you can pretty much go to any one of the many suburban or boutique accountants, just like if you are feeling unwell you can go to a GP. But if you have extra complications then you will need to seek specialist advice, and just like medical specialists, specialist tax advisors are the ones who will know the ins and outs of the various tax laws applicable to specific areas such as international taxation. And just like medical specialists, they generally have much fancier rooms and charge accordingly for access to their speciality advice.

Although price is going to be a consideration when choosing your account ant it shouldn’t be the only consideration. Remember this person is your business confidant, and so you need to be extremely comfortable with them, trust them and know that no matter what, they have your back. Quite frankly there is a big difference between accountants, and sometimes you absolutely need the ‘big end’ if you have super-duper complex tax affairs, such as you have multiple companies all registered and trading in multiple countries. In situations like this you really should be looking for a specialist accountant.

How can I tell if my accountant is a great accountant?

An accountant can make or break your business, so you don’t want just any accountant – you want someone who isn’t afraid to get into the trenches with you and get their hands dirty when you need it.

A great accountant will:

• Really ‘give a s#@t’ about you, your family and your business. They will have your back, drop everything in times of need, and give you



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advice that sometimes you don’t want to hear but actually need to hear.

• Ask you lots of questions about your business, what your short-term and long-terms goals are for the business, and really try to understand what you want to achieve.

• Ensure you are a good fit for their firm and that they are the right fit for you too. There is absolutely nothing worse than a wrong fit because then no-one is happy.

• Never tell you to change your accounting system as a requirement of working with them. If an accountant tells you that in order to work with them you must change your accounting system, that is a warning sign. It is a sign that their primary concern is their business, not your business.

• Use technology to be efficient, and encourage you to as well. • Have a clean, well-organised office. Messy paperwork everywhere is a

sign of disorganisation and inefficiency.

Breaking up with your accountant

So you’ve decided your current accountant isn’t the right fit for your busi-ness anymore. They don’t get you, they’re not showing you any love, or you just can’t talk to them … you’ve both changed.

After looking around you’ve met an accountant you love but you’re hes-itant because you don’t know how to break it to your old accountant that you’ve met someone else. This is harder than breaking up with a boyfriend or girlfriend because it’s not like you’ve just left your toothbrush there and you can just go buy another, unfriend them on Facebook and get on with your life. This is much more serious, because they’ve got all your financial history, they know everything about you, and you’ve been together for years … what to do, what to do? How are you going to break the news without anyone getting hurt?

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The good news is that you don’t have to do anything as your new accountant can manage that whole process for you. Your new accountant will write to your old accountant advising them they will be taking over, and also request copies of documents they need to ensure a smooth tran-sition.

The bad news is that not all accountants are happy to provide copies of documents, and depending on the original terms and conditions of engagement with you they may not be required to hand over everything, or in some cases anything. If your old accountant does this then that’s just another sign you were in the wrong relationship.


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8OKAY … TIME TO TALK TAX

WE’VE ALL HEARD the saying ‘there’s two sure things in life – death and taxes’, and it’s absolutely true.

However, that doesn’t mean you should be paying more tax than you need to, and as I said earlier it’s your tax agent’s job to ensure you only pay as much as you absolutely have to, within the confines of the law.

Although Australia has a complex tax system, there are a few funda-mental things that I think all business owners should have a basic under-standing of. This isn’t a textbook so I’m not going to bore you by going into too much detail, but it is important you understand some of the basics. It’s your tax agent’s job to sort this stuff out for you, but you’ll get a much better result and everything will be less stressful if you have an understanding of what’s going on.

HOW MANY BUSINESS TAXES ARE THERE AND WHAT ARE THEY?

Too many is my answer here, but unfortunately it is what it is, so I’ll go through the main ones for you so at least you know they exist and you can have a basic conceptual understanding of them.


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Here they are:

• Income tax is the tax you pay on the profit you make in your business. It’s a biggie and arguably the most important, so I will go into it in more detail shortly.

• Goods and services tax – also known as GST – is a 10% flat tax on most goods and services bought and sold within Australia. The good news here is that if you’re a business and registered for GST then you can claim it back on purchases so it isn’t actually a cost. Although it sounds simple, the government has successfully managed to complicate it, so I’ll go into it in more detail later.

• Capital gains tax – also known as CGT – is the tax you pay when you sell a property or investment. For you and me this usually means our business. It’s a fairly complex area of our tax law and way beyond the scope of this book, but what you need to know is that it is the one tax that can be extensively reduced or controlled with the right business structure and the right tax advice. With CGT, timing is absolutely crucial so make sure you get advice well in advance of making decisions.

• Fringe benefits tax – also known as FBT – was introduced to close the loophole of employees getting non-cash benefits from their employers. The main culprit here is the humble company car, however other benefits that are affected are entertainment, car parking and loans, to name just a few. It’s a complex area for both benefits that are subject to FBT and those that are exempt. For the purposes of this book, if you are providing any benefits to employees (remember if your business is a company you could be an employee) be aware there may be FBT implications and speak to your accountant before you agree to anything with an employee, because depending on the benefit type FBT can be very expensive – anywhere up to 49% in fact.

Okay … time to talk tax

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TIP: FBT can be reduced or even negated by getting the employee to pay back some or all of the value of the benefit. This is called ‘employee contributions’. Speak to your accountant for specific advice on how this could work for you or your employees.

• Payroll tax is a state-based tax which is levied on employers when they reach a certain payroll dollar figure or threshold. I hate this tax; in my opinion it’s completely ridiculous in that it actually disincentivises businesses to employ more people and grow their business. Every state has its own regime, but to give you an example, in NSW when your payroll exceeds $750,000 you then pay 5.45% on the payroll over $750,000 (not on the whole amount). Payroll by the way includes wages, salaries, allowances, bonuses, commissions, superannuation and FBT, to name a few. If you employ staff in multiple states it gets very messy very quickly because they all have different rules, thresholds and rates.

TIP: If you own more than one business, your businesses may need to be grouped for payroll tax purposes, so opening a new entity to avoid payroll tax is generally not an effective strategy.

AM I PAYING TOO MUCH INCOME TAX?

In Part I, I talked about the importance of having the right business struc-ture for you, and one of the key reasons for that is because not all busi-nesses pay the same rate of tax. No, I’m not talking about multinationals and tax avoidance here, I mean business structures have a direct effect on how much tax you pay because different structures have different tax rates and pay tax differently.

I’ll start with companies, because – believe it or not – they are actu-ally the simplest to explain, and then I’ll compare this to a sole trader so


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you can appreciate just how much the business structure can change the amount of tax you pay.

Company

If you are operating your business as a Pty Ltd company you pay a flat rate of tax on every dollar of profit you make. The current company tax rate is 30%.

If you are considered a small business, which is currently defined as businesses with a turnover (turnover is sales not profit) less than $10 mil-lion per year, then you pay a reduced rate of 27.5% tax while the bigger businesses pay 30%.

Sole trader

Remember in Part I when I explained that as a sole trader you and your business are one and the same, and how you are legally the same entity, have the same tax file number, and if you die the business dies too? Well, as a sole trader you really are just you. You and your business are taxed exactly the same as any other individual taxpayer is, at personal income tax rates. You are taxed on the combined total of your business profit, interest earned, dividends received, rental income, wages from other employers, and so on.

In Australia, individuals are taxed on a progressive basis. This simply means that – unlike companies, which pay a flat rate of tax – as an individ-ual the more you earn, the higher the rate of tax you pay, with the highest tax rate being 45%. As an individual, if you are an Australian resident you are also entitled to the first $18,200 of your income completely tax free.

The personal tax rates are not actually that complicated, however how they work is very commonly misunderstood. As a business owner it’s important for you to get your head around it and really understand it because it is the cornerstone of how much tax you will ultimately pay, and may make you rethink your current business structure.


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The personal tax rates at the time of writing are:

Taxable income Tax on this income Effective rate

0–$18,200 Nil 0%

$18,201–$37,000 19% of excess over $18,200 0% – 9.7%

$37,001–$87,000 $3,572 plus 32.5% of excess over $37,000

9.7% – 22.8%

$87,001–$180,000 $19,822 plus 37% of excess over $87,000

22.8% – 30.1%

$180,001 and over $54,232 plus 47% of excess over $180,000

30.1% – 44.9%

Many people worry about earning more money because they think they will need to pay more tax on all their income, but as you can see from the above table, if you earn more money and go into a higher tax bracket, you don’t pay the higher rate on the whole amount – the higher rate is only applicable to the portion that has gone into the next tax bracket. Combine that with the first $18,200 being tax free and the effective tax rate is considerably different.

Sole trader versus company structure

Let’s compare some examples of a sole trader versus a company structure and work out the actual amount of tax payable, so you can appreciate just how much the business structure can make a substantial difference to the amount of tax you pay.

Assuming turnover is less than $10 million and using the 27.5% small business company tax rate, these are the indicative amounts of tax you’d pay based on different levels of profit under the two main business struc-tures.*

* Please note these figures are indicative only as there are many other factors that need to be considered, plus there are flow-on effects, which is why you need to seek professional tax advice.


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Net profit Sole trader: tax payable Company: tax payable

$17,000 Nil $4,675

$75,000 $15,922 $20,625

$150,000 $43,132 $41,250

$200,000 $63,632 $55,000

$400,000 $157,632 $110,000

Now can you see why structure is so important from a tax perspective?

Partnerships

Even though partnerships are not a legal entity in their own right and don’t actually pay tax, a partnership must still have a tax file number and must lodge a tax return.

With partnerships, tax is paid at the partner level, meaning that if a partnership has two partners and one is a company and the other is an individual, the partners will be taxed according to their individual structure; that is, the partner that is a company would pay company tax rates and the partner who is an individual would pay personal tax rates. It is via the tax return that the ATO are advised the income that has been apportioned to each partner.

Trusts

Trusts have their own complete set of rules, but in a nutshell trusts lodge a tax return but are not allowed to retain any profits within them. This means that if they have a profit, all their profits must be distributed to their beneficiaries and are taxed in the hands of their beneficiaries/owners according to the structure of their beneficiary; for example, if a beneficiary is a company they would pay company tax rates, and if they were an indi-vidual they would pay individual tax rates. Unfortunately, it doesn’t go the


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other way. If you make a loss the losses are trapped in the trust and you can’t transfer that to the beneficiary’s tax return.

Just like a partnership, the tax return is what advises the ATO of the income that has been apportioned to each beneficiary.

Traps to be aware of include if children are beneficiaries, as if it’s not managed correctly it can become very tax ineffective as tax may be charged at the highest rate.

TAX DEDUCTIONS

What does ‘tax deductible’ actually mean?

‘Tax deductible’ is another commonly misunderstood concept. Most peo-ple think tax deductible means that you get it for nothing, but that is far from the case.

Tax deductible means that you can reduce your assessable income by the amount of the expense, which then gives you your taxable income, which is the amount that you actually end up paying tax on. Sounds more confusing than it actually is, so maybe an example would help.

If you had assessable income of $30,000 and tax deductible expenses of $10,000 then you would pay tax on $20,000. Using the small busi-ness company tax rates, this means that instead of paying 27.5% tax on $30,000 ($8,250) you would pay 27.5% tax on $20,000 ($5,500), the difference being 27.5% of $10,000 or $2,750.

As you can see, you don’t actually get the $10,000 item for ‘nothing’, you just get a deduction of 27.5%, or in this case $2,750.

If we go back to business structure again for a minute, just as the amount of tax payable can vary according to business structure so too can the effective value of tax deductions vary. For example, if you are a sole trader and your net profit is below the $18,200 tax threshold then you are effectively getting absolutely no tax benefit at all for that expense.


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TIP: If you don’t need it, don’t buy it just because it’s ‘tax deductible’ because it’s still profit you’re not going to get.

So what is and isn’t tax deductible?

That’s a complicated question, and the best I can say is, ‘it depends on the circumstances’. I had a client recently ask me to send him a list of everything that was tax deductible, and I literally just laughed out loud because it really isn’t as simple as that. Unfortunately there’s no definitive list that you can just go to and look up. There is just legislation upon legislation that needs to be interpreted and applied to each situation. Just because something might be tax deductible for one person does not make it tax deductible for another.

That said, I’ll explain the underlying concept so you can apply some common sense when deciding whether to purchase something or not because it may be tax deductible.

When you run a business most of the expenses you incur in the run-ning of your business are tax deductible. In order for something to be tax deductible, however, it must be directly related to earning your income. Sounds straightforward, however this is where it can get a little confusing because although you may think it was directly related to earning income there may be specific legislation that says that it’s not deductible.

A couple of great examples of this are parking fines and entertainment. You can argue until you are blue in the face that you received a parking fine because a client meeting went longer than anticipated so the meter expired and you were fined, but the client signed off on the job and therefore it was directly related to earning income. Great argument, but I’m sorry to tell you that it just doesn’t cut it because according to the Income Tax Assessment Act 1997 Section 25-5(2)(d), regardless of what happened, how it happened or why it happened a parking fine is not tax deductible.


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TIP: If you have your own business, don’t let all your friends make you shout at the pub because they think you can claim it as a tax deduction because you can’t.

Why do I have to depreciate some items instead of just claiming them as a tax deduction now?

When you spend money in your business it’s usually because you need to use the item here and now to sell, or so you can keep the business running. Examples of these might be stock to sell, electricity, rent, wages or stationery. But sometimes you buy something that is going to increase the value of your business and has a future benefit to your business – for example, machinery or computers, property or renovations – and these are called capital expenses.

They’re still expenses and they’re still tax deductible, but because the benefit to the business is considered long term (meaning more than 12 months) the law says we cannot use the full expense as a tax deduction in the year it was incurred but rather we have to spread the tax deduction over a number of years; this is called depreciation. The rate at which we can depreciate a particular item is also determined by legislation, and working it out for each asset can sometimes be a difficult and time-consuming task.

Thankfully, there is a provision for small businesses so the process is considerably simpler. Small businesses are able to ‘pool’ most of their assets into either a General Asset Pool or a Low Value Pool.

For small businesses that choose to use the pooling provision, the rule is that items costing less than $1,000 go into the Low Value Pool and can be expensed 100% in the current tax year, but items costing more than $1,000 must go into a General Asset Pool and are depreciated at the annual flat rate of 30% (or 15% for a part year).


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TIP: Identical assets or sets are considered to be one asset not several; for example, if you purchased eight identical boardroom chairs they are considered a set, or one asset, and the combined value of the chairs is what determines their category.

TIP: In the 2015 Federal Budget a short-term incentive was introduced to encourage small businesses to invest in their businesses by increasing the limit of a low value asset from $1,000 to $20,000. This incentive is due to expire on 30 June 2017.

WHEN IS MY TAX RETURN DUE?

If you do your own tax return it is due on 31 October, but if you use a tax agent you will usually, and I stress it’s only maybe, have a due date anywhere up to mid-May.

The reason I say only maybe is because although most tax agent–lodged tax returns are due mid-May, if you’ve got a poor compliance history or overdue tax returns the ATO doesn’t give you, or us, that extension.

The extension is actually for the tax agent and not the taxpayer. As you can imagine, if we had to do all our client tax returns by 31 October each year we would work like lunatics for four months of the year and then the remaining eight months would be the complete opposite. The business case says it’s just not viable. Not only would we struggle to effectively resource the four-month peak period but what do we do with staff for the remaining eight months? And from a quality and service perspective, we would be so busy trying to churn through volume that proper care and consideration for each client’s circumstances would be compromised. As such, the ATO issue us with what’s called a lodgement program each year, which is basi-cally just a list of staggered due dates for each of our client’s tax returns.

As I mentioned earlier, if you have a poor compliance history then your return will be due earlier, but the ATO also measures our compliance as


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tax agents. We must maintain a minimum 85% on time lodgement across all returns (income tax, GST, Fringe Benefits Tax) in order to keep our eligibility for the extensions.

Now having said the deadline is usually mid-May, that doesn’t mean you can’t do your returns earlier. That way, if you’re due a return you can get it quicker, and if you’ve got to make a payment that can be held until the due date.

The best thing about doing your return sooner rather than later is that then you actually know what your tax position is going to be and you can plan accordingly. In my opinion, there is nothing worse than not knowing because then you’re worrying about something that probably isn’t even an issue.

One of my clients recently was stressing over how much tax he was going to have to pay as he’d had to dip into his tax savings account unex-pectedly. Even though his tax wasn’t due until mid-May, I did his tax in February and it turned out that he didn’t have to pay any tax. He could have waited and stressed for another couple of months, but now he knows what his situation actually is and can relax.

WHAT IS PAYGI AND WHY AM I PAYING IT?

PAYGI is short for ‘Pay As You Go Instalments’, or in old-school language it’s provisional tax.

PAYGI affects both sole traders and companies, and is a bit of a bugger because it only kicks in after you lodge your first tax return or you have your first big year making a profit.

The way it works is that once you’ve had to pay a lump sum of tax the ATO assumes that you will have to pay another lump sum next year, so instead of them waiting 12 months for you to pay they then make you pay about 25% of it each quarter. That’s the theory – and in theory it makes sense.


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The reality is that because of timing it can be quite devastating on your cash flow. You see, in the real world it usually goes something like this:

May: you lodge your prior financial year’s tax return and get a tax bill; for example, $10,000 due early June

June: you get your first PAYGI bill based on the amount of tax you had to pay for the previous financial year, but because you’re already in the fourth quarter of the new financial year you get a PAYGI bill of $10,000, being four quarters’ worth of instalments of $2,500 each

September: you get a PAYGI bill for $2,500 for the first quarter of the next financial year

December: you get a PAYGI bill for $2,500 for the second quarter of the next financial year

And so it goes on.As you can see, if you haven’t been putting money aside as you go to

pay for tax, the cash flow implications can be horrendous. It’s at this point, after the first tax return has been lodged, that PAYGI raises its ugly head and things can get very stressful.

There are really only two ways to avoid this situation occurring:

1. Be proactive and put money away in a separate bank account specifically to pay your tax.

2. You can voluntarily register to start paying PAYGI to the ATO at any time. Ideally this would be in your first year of business. If you’ve previously been operating at a loss or are expecting your profits to increase significantly this is also definitely worth considering.

Now there are actually two ways that PAYGI can be calculated.The first one is called the ‘instalment amount’. This is a predetermined

amount set by the ATO that you pay each quarter. The instalment amount is calculated based on your most recent tax return.


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However, if your income fluctuates there is a second method which is a much better option, but surprisingly not many people seem to know about it. It’s called the ‘instalment rate’. The rate is again a predetermined rate set by the ATO and based on your most recent return, however instead of being a set dollar figure each quarter you simply multiply your total sales figure by the rate the ATO has given you.

The advantage of the instalment rate method is that if you’re having a slow quarter your instalment amount will be low but if you’re having a bumper quarter then your instalment rate will reflect that and will be higher.

I would strongly suggest everyone uses the instalment rate method instead of the instalment amount method for the simple reason that it reduces the likelihood that you will have tax bill shock. Now I know you’re probably thinking that money is better off in your bank account than the ATO’s; well, I’ve got two things to say to you about that. Firstly, have you seen interest rates lately? It’s not worth it. Secondly, how has putting money aside for tax been working for you so far? If you’re like the majority of people, it hasn’t been.

If you want to simplify your life and reduce your stress it’s worth seri-ously considering option 2. Just saying.

HOW MUCH MONEY SHOULD I BE PUTTING ASIDE FOR TAX?

If you’re a company, a good rule of thumb is to set aside 28% to 30% of your net profit in a separate bank account just to cover income tax.

If you’re a sole trader or you prefer a more accurate estimate, this is where a good working relationship with your accountant is essential because they will be able to keep an eye on your business throughout the year and very roughly estimate your tax based on your circumstances; for example, structure, purchase of capital equipment and turnover.


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TIP: The ATO have a PAYGI calculator tool for both individuals and companies that you can use to estimate how much tax to put aside – go to the useful links section of my resources page: www.andersontax.com.au/resources/.

WHAT IF I CAN’T PAY MY TAXES? WHAT SHOULD I DO?

Firstly, don’t panic. You are not on your own with this. I can assure you that almost every small business I have ever dealt with, including myself, has had this problem at some point.

The best thing you can do is make sure that you lodge on time and that all your lodgements are kept up to date, as then you are automatically in a favourable position with the ATO because you are showing your willing-ness to comply. You may not see this as a biggie, but I can assure you that from the ATO’s perspective it is.

Of course, the secondary benefit of having everything up to date is that you actually know what your full situation is and what amounts you are talking about. If you have no idea what you are stressing about the stress is often significantly worse than the actual problem. Money is a funny thing because people see amounts of money very differently. For example, if I said go and buy yourself an expensive car, what exactly is an expensive car? For some they think a Maserati, for some it might be an Audi, and for others it might be a Hyundai – it’s all relative. But as soon as you can put a dollar figure on it then you can make informed judgements and decisions.

The next and probably the most important thing to do is make sure you communicate with the ATO. Effective communication is always vital in business, and it is crucial to a healthy working relationship with the ATO. It is the people who hide from the ATO that they come down on the hardest because they know you are avoiding them for a reason. It’s like


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a friend if you avoid their phone calls or don’t respond to emails – they will think something has happened and will get suspicious and concerned.

TIP: It doesn’t have to be you who talks to the ATO; in fact, most likely it will be your accountant. Just keep the lines of communication open.

So if you are proactive, or at the very least contact them if you receive a letter or phone call, you may be pleasantly surprised that they will do what they can to help you meet your obligations. Remember, it is in everyone’s best interests if you can pay your taxes – even if it is over a couple of years – rather than not paying at all.

I had a client recently who had a short-term cash flow issue and was going to have to pay their BAS a few days late. Instead of just paying it late, she called the ATO to let them know that they were waiting on some money to come in and would pay some today and the rest would be paid within a week. The ATO person noticed that this client had paid a fair amount in interest and penalties because they’d had a few issues a number of years earlier, but since working with me for the past two years all their lodgements and payments had been done on time, every time. The ATO person then offered – yes, offered – to refund this client almost $4,500 of penalties and interest they’d previously paid because of their recent consis-tent compliance history. True story.

ATO payment plans

If cash flow is an issue the ATO is usually willing to assist you by allowing you to go on a payment plan. Of course, whether or not they say yes to this will often be a direct result of your compliance history – if you’ve always tried to do the right thing then payment plans are probably an option for you.

Most people hate asking the ATO for a payment plan, mostly because they just hate phoning the ATO, but not many people realise that if your


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tax debt is less than $25,000 you can call an automated, operator-free phone line and tell it how much you would like to pay and how often, and it will give you a yes or no response without even having to speak to anyone.

TIP: The automated payment plan line for businesses is 13 72 26. There is also a payment plan calculator you can use to help you work out how much you can pay and whether it would be an acceptable arrangement to the ATO; go to the useful links section of my resources page: www.andersontax.com.au/resources/.

The key to remember with payment plans is that it isn’t like a home loan in that if you make advance payments it isn’t just held in the account as an advance payment. If you say you are going to make a payment of $1,000 per month you must make a payment of at least $1,000 per month, every month, until it’s paid off. I can’t stress this enough, because if you miss a payment you automatically default, and getting another payment plan after defaulting is a painful process. So, remember, even if you pay $5,000 one month you must still pay at least $1,000 the next month.

I’VE HEARD THE ATO PUT BUSINESSES INTO LIQUIDATION ALL THE TIME FOR PAYING THEIR TAX LATE. IS THIS TRUE?

Yes, the ATO do wind up businesses for unpaid debts, but this is usu-ally because either the business was in complete disarray and there was no alternative but to put the business out of its misery – like a critically injured animal on life support – or because, despite all of their attempts to contact and work with the business owners to find a solution, they got no response or cooperation so they were left with no other alternative.

Remember what I said earlier – communication is key.


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TIP: If you suffer with ATO anxiety and really can’t deal with them, use your accountant. We talk to the ATO every day – it’s what we do, it’s what we are here for and we have your back.

WHAT ABOUT GST?

GST is a user pays tax that is imposed on the end users of goods and services. The end user is usually the average mum and dad consumer.

Despite being introduced back in 2000, I am constantly surprised how many people still don’t understand it or get it wrong, so just to make sure you understand it properly I’m going to cover it very briefly.

The way GST works is that everyone in the supply chain charges GST to their customer when they sell their product or service. They then pay the GST they collected to the Tax Office when they lodge their Business Activity Statement, which is known as the BAS.

The next business in the chain can then claim the GST they paid to their supplier back from the Tax Office on their BAS. This process hap-pens all the way down the supply chain until it gets to the last consumer in the chain who, although they’ve paid GST, cannot claim it back. This is usually you and me, being the mum and dad consumer.

So if you are a business you effectively pay GST when you buy some-thing and then you charge GST when you sell something. The GST you’ve paid is then deducted from the GST you’ve collected and the difference is paid to Tax Office. In a nutshell, you are acting as a tax collector.

To GST or not to GST? What is the difference?

First things first – GST is not a cost if you are registered for GST. If you are registered for GST it means you must charge GST on all

your Australian sales but it also means you can claim back the GST on any purchases you make that have GST in them – hence GST is not a cost.


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On the flip side, if you are not registered for GST you cannot charge GST nor can you claim back GST. This might seem logical, but I have come across a few businesses over the years who were not registered for GST but have been charging GST for years and never actually sent any of it to the Tax Office.

Not every good or service is subject to GST, which makes the whole system very confusing; for example, health, education and fresh food do not have GST. If you are unsure as to whether you should be charging GST on your product or service, contact your accountant or the ATO.

The law says you don’t need to register for GST until you turnover $75,000 (there are exceptions to this rule; for example, taxi drivers who must be registered for GST regardless of their turnover) – note that turn-over is sales, not profit! However, depending on what sort of business you are in it might be worth considering voluntarily registering for GST even if your turnover is below $75,000.

Reasons to voluntarily register earlier might be:

• In the early stages of business there is usually a lot more money going out the door than there is coming in. If you are dealing with other GST registered businesses you could reduce your expenses by 10% simply by registering for GST.

• It looks more professional if you are registered for GST as otherwise you may seem too small for a potential purchaser to deal with – particularly if your customers are corporate.

• If your competitors are registered for GST it will make it easier for customers to compare pricing if they are comparing apples with apples.

• If you are in the fresh food industry, education or health sector and your products or services are deemed GST free, if you register you can claim GST back on things such as rent and petrol, which means you are effectively reducing your costs by 10%.


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Reasons not to register for GST earlier might be:

• If you deal with mostly mum and dad consumers who pay the brunt of the GST, you can be more competitive if you don’t charge GST as you can keep your prices down; for example, cleaners.

• If you sell your time and have very little purchases you can be more competitive with your pricing.

• It’s a much simpler business life if you don’t have to worry about GST reporting or payments.

TIP: Check ABNs because there are often suppliers who don’t understand the GST system and are charging GST because they have an ABN. It is your responsibility to ensure that if you are claiming back the GST for a purchase that the supplier is registered for GST. The best way to do that is to look up their ABN on the ABN lookup site: www.abr.business.gov.au or go to the useful links section of my resources page: www.andersontax.com.au/resources/.

WHY ARE THERE SO MANY GST CODES AND WHAT DO THEY MEAN?

When GST was introduced it was a political minefield. Everyone had something to say, and in the spirit of consultation there was input from all sorts of government departments, industries, lobbyists and the like, and so instead of having a simple goods and services tax system such as New Zealand does, we have a very complex goods and services tax system, which is why some things are subject to GST and some things aren’t.

TIP: Did you know only 46% of goods and services are actually subject to GST?


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To add insult to injury, it was also built into the system that we have to say why things have GST and why they don’t. These rules were introduced for both risk assessment purposes and also statistical purposes, hence we have all these GST codes.

I’m not going to go through all the GST codes, but I will go through the main four because these are the ones that cover the majority of trans-actions within most businesses:

• GST 10%: means that there is 10% on the good or service being bought or sold; for example, toilet paper

• CAP: means there is 10% GST on the good or service but the purchase is of a capital expenditure nature not an operational expense; for example, a computer

• GST free: the good or service has a zero rate of GST; for example, fresh milk

• No tax: the transaction falls outside the scope of GST; for example, transfer between bank accounts, payment of tax (you don’t pay GST on tax).

UPDATE – Great news. The Government recently announced they are introducing a simplified BAS for small businesses along with a reduction in GST codes. As of 1 July 2017, if you are a small business (turnover of less than $10 million) you only need to track whether something has GST in it or no GST in it – you no longer need to track and report why or why not. This means that instead of using the dozen or so GST codes (some of which I went through above) you only need to use:

• GST 10%: means that there is 10% on the good or service being bought or sold – you also no longer need to classify whether or not it was a capital or non-capital purchase

• No tax: means that there is no GST on this good or service, regardless of whether there was no GST because it was purchased overseas, from a supplier who isn’t registered for GST or simply because it wasn’t a GST item; for example, fresh milk.


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THE DREADED BAS

If you are registered for GST you must complete a regular Business Activ-ity Statement (BAS) and make the required payments (or, if you’re lucky, obtain a refund). Business owners often shudder at the thought of doing their BAS, but if you’re well organised it doesn’t have to be too much of a chore. Let’s have a look at what’s involved.

When do I lodge my BAS?

The standard reporting period is quarterly, however depending on your turnover you may be able to elect to lodge annually and have your account-ant do it at the same time as they do your tax return.

The downside of lodging annually is that you might be tempted to spend the GST you have collected, which isn’t actually yours to spend. Remember, us business owners are the middle men between the govern-ment and the end consumer – essentially we are acting as a tax collector.

TIP: Open a separate bank account to put the GST you’ve collected into, so you don’t get caught out at BAS time with no money in the bank to pay the ATO. Remember, the GST you’ve collected is not your money.

I have quite a few clients who, although they only have to lodge their BAS quarterly, they voluntarily lodge it monthly so it’s easier to manage their cash flow. Sounds crazy at first, but if you’re in the health or fresh food industries where you are always paying GST but don’t collect GST you will always be due a refund, so it’s better the money is in your pocket than the ATO’s.

On the opposite side of that, if you are not great with managing your cash flow it’s worth considering doing a monthly BAS just so you aren’t tempted to spend the GST. You can give the ATO their money on a monthly basis … but more about that later.


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What does it mean to use the cash method or accrual method?

There are two methods by which you can report and pay GST: cash or accrual. If you turn over less than $10 million per year you are eligible to use the cash basis method.

The cash basis method means you only pay the government GST you have charged on sales if you have been paid by your customer. Similarly, you can only claim GST on purchases you have made if you have paid your supplier.

The accruals basis however means you pay the government the GST on the sales you have made regardless of whether or not you have been paid by your customer yet. This also works in reverse in that you can claim the GST on purchases you have made even if you have not paid for them as yet.

TIP: If your turnover exceeds $10 million you must change your BAS reporting from the cash basis to the accrual basis. This can have quite a cash flow impact, so if you’re getting close to $10 million make sure you’re talking to your accountant to come up with a plan.

How can I work out how much GST to pay?

It’s easy!

GST collected – GST paid = Amount you pay the Tax Office

The good news is that your accounting system will do this for you.

Common GST mistakes

You can only claim back GST if what you buy has GST in it. Sounds logical I know, but all too frequently I see people claiming back GST on things that never had it in there in the first place.

The hard part is knowing what does and what doesn’t have GST as there are no hard and fast rules. We have one of the most confusing GST


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systems in the world, and unfortunately for purely political reasons I don’t think that is going to change any time soon.

If you work in industries such as health, fresh food, convenience stores or import/export you should really make sure you take the time to speak with your accountant or bookkeeper for specific GST guidance. As for the rest of us, here are a few of the areas where business owners frequently make mistakes:

• Overseas purchases: if you buy something from overseas – for example, a subscription to Dropbox – there is no GST because they are not based in Australia and are not registered for Australian GST. Note that if you are buying from a country such as New Zealand that does charge GST it is not Australian GST and therefore you cannot claim it back via the Australian tax system either.

• Insurance: the majority of insurances have a stamp duty component and you don’t pay tax (GST) on tax, so usually the GST is not simply 1/11th of the policy. The exception to this is workers’ compensation insurance which doesn’t have stamp duty.

• Private sellers: if you buy something from a private seller – for example, via eBay – as they are not registered for GST, they are not charging you GST and therefore you cannot claim GST back.

• Suppliers not registered for GST: just because a supplier has an ABN does not mean they are registered for GST. Remember, ABNs are compulsory to run a business but registering for GST isn’t compulsory if turnover is less than $75,000 per year.

• Not checking ABNs: even when someone writes that they’ve charged you GST, you should double-check their ABN, especially if you’re suspicious, because if they’re not registered for GST you cannot claim it back regardless of what they write on their invoices.

• Invalid invoices: if you have received an invoice charging GST, the invoice must have the words ‘Tax Invoice’ on it otherwise it is not valid.


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THIS IS STARTING TO GET COMPLICATED – SHOULD I GET A BOOKKEEPER?

Ask yourself these questions:

• Am I confident I know what I am doing with my bookkeeping?• If I wasn’t spending time on my bookkeeping what could I be

doing instead?• If I got a professional bookkeeper to do my accounts would they do a

better job of it?• Do I enjoy doing my bookkeeping?• Am I doing my bookwork instead of earning money for my business?

Many small business owners think they’re not big enough for a bookkeeper, but it’s not about size but rather about integrity. If you’re a hairdresser you’re good at cutting hair, and although you probably can do your own bookkeeping, think of it this way – a bookkeeper could quite easily cut their own hair too. I know you are disagreeing with me now because, although anyone can cut hair, there is an art to it … right? Well, it’s the same with your accounts. Unless you are a trained bookkeeper there is a good chance that you’re doing it wrong doing and don’t even realise it.

Getting a bookkeeper

What is the difference between a bookkeeper and a BAS agent?

Everyone knows what a bookkeeper is, but you may not have heard the term BAS agent. Let’s see what each of them does:

• Bookkeepers are usually unqualified and do day-to-day things such as invoicing customers, processing supplier invoices, chasing customers for money, allocating cash received, paying suppliers, payroll, bank reconciliations, and usually will get the accounts to a point where the accountant will take over (called Trial Balance stage).


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• A BAS agent is a bookkeeper who has at least done a Cert IV in bookkeeping and is registered by the Tax Practitioners Board as being competent to provide BAS services to the public. BAS agents must hold appropriate insurances and are required to maintain their knowledge with mandatory continuous professional education.

So BAS agents and bookkeepers are the same thing?

Yes and no. BAS agents are generally bookkeepers – and sometimes even accountants – that only work in the compliance area up to and including the completion of Business Activity Statements.

When the GST was introduced back in 2000, many bookkeepers ven-tured into preparing Business Activity Statements, however they had no training or education to ensure they were doing it competently. In 2009 legislation was introduced to ensure that anyone providing BAS services was adequately trained, and from there the BAS agent was created.

Although the legislation has been around for some time now, there are still a number of cowboy bookkeepers out there providing BAS-related services they aren’t legally allowed to. It’s a bit like getting a handyman to do your house renovation rather than engaging a qualified builder. Even though the skills required may be similar (and yes, arguably the handyman may have previously been a qualified builder), because he isn’t a registered builder he may not have the insurances required and he may not be up to date with current regulatory requirements – so if something goes wrong nei-ther of you are covered and there are possible fines and penalties involved.

Filling out the form

Filling out the actual piece of paper or online form called the BAS is argu-ably quite simple, but knowing what goes into each of the fields is the key and can be the difference between being flagged for an audit and not. A tax agent or BAS agent will not just take your system’s figures and plug them


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into a form, they will review the data, do reconciliations and check source documents to ensure the numbers being submitted are in fact correct.

The scary thing is that the majority of businesses in Australia prepare their own BASs, which is like saying most cars being driven are serviced by their owners – okay, maybe not quite so dramatic, but you get the picture.

UPDATE – The Government recently announced a simplified BAS for small businesses (turnover of less than $10 million) which means that as of 1 July 2017 you now only need to report:

• Total sales• Total GST collected from customers• Total GST paid to suppliers.

Combine this with only having to decide whether transactions have GST or no GST in them and compliance just got a whole lot simpler for the average small business – hallelujah!

These days the majority of professional bookkeepers are, or should be, BAS agents, which is why in this book when I say bookkeeper I will be referring to one who is a registered BAS agent.

If your bookkeeper isn’t a BAS agent I would strongly recommend you look for one who is.

TIP: To check if a bookkeeper is registered go to the useful links section of my resources page: www.andersontax.com.au/resources/.

What should I be looking for when I’m looking for a bookkeeper?

At the very minimum, every bookkeeper should have some sort of formal bookkeeping or accounting training and preferably be a registered BAS agent. In being a registered BAS agent you can be assured that the Tax Practitioners Board are satisfied that the bookkeeper has the required skills,


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qualifications and a minimum amount of experience to correctly account for GST and prepare your BAS according to legislation.

If your bookkeeper is not a registered BAS agent, check they have a current professional indemnity insurance policy so in the unlikely event that something does go wrong you are protected.

All professional bookkeepers should belong to at least one professional association to ensure that they are maintaining their professional know-ledge by keeping up to date with changes in legislation and best practices.

Look for someone who is technologically savvy. If they are still using a Nokia 3810, forget it. Bookkeeping is one of the parts of your business that can really benefit from automation and technology so you want some-one who is up to speed with technology and how it can help you and create efficiencies within your business.

Finally, the relationship between client and bookkeeper is a sacred one, and by this I mean that most people don’t share their financials with friends or even their family, yet this person is privy to everything – especially if you are using the one account for business and personal … but I’m sure after reading this book you won’t be doing that anymore! Make sure that you actually like your bookkeeper, that you trust them and feel comfort-able being completely honest with them. Your bookkeeper cannot assist you to get the most out of your accounts if you are not being completely transparent with them.

What sort of questions should I ask them?

When searching for a good bookkeeper I think it’s important to meet them in person so you can get a feel for whether the fit is right, because although skills and qualifications are important, so is getting someone who can think for themselves, is proactive and you can get along with.

When you meet with a potential bookkeeper, ask them to bring or email you a copy of their professional indemnity insurance policy. This is particularly important if you are engaging a bookkeeper who isn’t


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a registered BAS agent, as to be a registered BAS agent you must have PI insurance.

Talk to them about how and why they became a bookkeeper, so you can get an understanding of why they’re doing it and whether they actually enjoy it. I always find that when people actually enjoy what they do, they light up when they talk about it, and most importantly they do a great job.

Ask about their experience. Bookkeeping is notorious for being a post-baby vocation, so to ensure their experience is solid and varied, make sure doing their partner’s or family’s books is not their only experience and they’ve worked for a few clients, or had at least one meaty, full-time all-round accounts role as an employee, so you know they can handle the basic tasks and are resourceful.

As a bookkeeper/BAS agent it’s just as essential to know what you don’t know as it is to know what you do. There are very strict regulations about what you legally can and can’t do, but more importantly there’s nothing worse than someone who is too scared to say ‘I don’t know’, so just allo-cates things incorrectly or hides them. A bookkeeper is not a qualified accountant or a tax agent, so if they are unsure about anything you need to know they are quite happy and willing to ask for help or clarification, whether that be from you or from someone else.

Ask them to clarify what services they do and don’t provide and how they work. With the advent of cloud computing many bookkeepers only work remotely these days, but that may not work for you or your business. If they do only work remotely, when do they work? Are you able to call them if you have questions, and what are the days and hours they’re avail-able for calls or meetings?

Finally, ask them for a couple of references, just like you would for any job. They may only be working with you monthly or quarterly but it’s important that you speak to other clients or past clients about how their situation worked, what didn’t work so well, why their business relationship ended and would they recommend them to you.


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How much should I be paying a bookkeeper?

As with many things it’s not a straightforward answer, however there are a couple of guidelines that can help you.

First and foremost, remember the old saying ‘pay peanuts, get mon-keys’ – I am a firm believer that this is true as a general rule. Bookkeeping is a go-to favourite for people who decide they don’t want to return to full-time work after having children, so there are quite a lot of untrained, inexperienced and – quite frankly – dodgy bookkeepers out there, so please beware. Although price is not everything, it can be indicative of their experience and qualifications.

In my experience, if you are paying less than $30 per hour you are probably dealing with a backyard-bookkeeper and are potentially at risk. Even scarier is that your tax agent probably trusts what your bookkeeper has done so probably isn’t checking the data nearly as closely as if you were doing the books yourself.

For a bookkeeper who is not a registered BAS agent I would expect to pay between $30 and $50 per hour, remembering that this person is not legally allowed to do anything related to your BAS – not even sit next to you and show you what figures go where on the BAS form.

Registered BAS agents are required by law to have a certificate in book-keeping, experience and insurance. Obviously you pay for these additional requirements, but the money is definitely well spent. A BAS agent/book-keeper will be your tax agent’s right-hand person, and therefore your tax preparation expenses should reduce as the tax agent can rely on a BAS agent’s work to a certain degree. So how much should a BAS agent cost you? This is a tricky one because their qualifications and experience vary dramatically, but they can be anywhere from about $50 to $180 per hour.

Judging bookkeepers strictly on price is fraught with danger, but as with most professionals the less experienced, less qualified bookkeeper will usually be cheaper, so if you’re simply comparing hourly rates a highly experienced bookkeeper will always seem more expensive. However,


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choosing the cheaper option to supposedly save some money is usually a false economy because the more experienced bookkeeper will also work significantly faster and smarter than someone who has less experience. An example of this happened to one of my clients recently. He was paying his previous bookkeeper almost half of my rate per hour, but she charged him 16 hours a quarter to do his work. When he came to me he almost fell over when I told him our prices, however when I did his work it took me four hours in total – so, yes my hourly rate was almost double but his bill was less than half.

How can I tell if my bookkeeper is a great bookkeeper?

Qualifications and registrations tell you that you have a competent bookkeeper, price will give you a guide as to whether you have a good bookkeeper, but honestly if you want to focus on kicking some serious business butt and not worry about your bookkeeping, ‘good’ isn’t good enough – you want and need a ‘great’ bookkeeper.

A great bookkeeper will do more than just get you over the line with your BAS obligations:

• A great bookkeeper will take the time to really understand your business and how you operate, so they can make sure that the processes are as simple and efficient as possible and things aren’t being missed or processes duplicated unnecessarily. They will be able to use their experience, and if they see areas that can be streamlined they will let you know.

• A great bookkeeper will ask lots of questions. Many business owners find questions annoying, however to ensure transactions are correctly allocated it is better that your bookkeeper asks rather than guesses. I have an IT client whose bookkeeper had allocated computer purchases to Computer Equipment in the Balance Sheet rather than hardware purchases in Cost of Goods Sold, so for months they thought their profit figures were really great … until the accountant


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went to do their tax return and asked about all the asset purchases which weren’t asset purchases at all and then had to be reallocated to purchases in their Profit & Loss. If only she had asked.

• A great bookkeeper knows what they don’t know. Not only do they know what is legally within their scope (for example, BAS agents are not permitted to give any income tax or FBT advice), they are also not afraid to say ‘I don’t know’ if they don’t know something rather than worry about looking silly, and they will contact your accountant for advice.

• A sign of a really great bookkeeper is one who is up to date on what is happening in the bookkeeping, accounting and technology spaces. With rapidly changing technology, bookkeeping and accounting practices have changed considerably over the past few years. Your bookkeeper should be explaining and encouraging you to use technology to speed up and automate processes utilising cloud accounting packages such as MYOB Essentials or MYOB AccountRight and their features such as bank feeds and mobile invoicing. Recent industry surveys show that the small business owner can save on average more than 10 hours a month just by using bank feeds – personally I think that figure is on the low side and could easily be doubled.

SO WHERE IS THE LINE BETWEEN TAX AGENT AND BAS AGENT? HOW DO I KNOW WHO DOES WHAT OR SHOULD BEING DOING WHAT?

This is a great question – I’m glad I asked. Although it’s seemingly clear cut, it’s also often a very grey area.

If you have both a tax agent and a BAS agent your BAS agent will look after the nitty-gritty bookkeeping side of your business – including payroll – and then prepare and lodge your BASs.


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Your tax agent will then take over from there and look at it from a higher level, focusing on the areas they know the ATO are interested in and ensuring you’re compliant with tax and corporations law.

I know that sounds quite clear cut, but the reason it can be grey is that many tax agents may be quite happy with you having a bookkeeper/BAS agent to do the day-to-day bookkeeping but they like to do your BAS. It’s not because they don’t trust your BAS agent but rather because they can know your business better if they are reviewing your accounts more frequently.

At the end of the day, if you have good advisors they will work well together and communicate with each other regularly.

AUDITS … ARRRRGGHHHHH

Before I move on to the end of the financial year, I really need to cover a few things about audits. They seem scary, but if you’re prepared and managing your business well you should come through unscathed.

Whether it be a tax audit, GST audit, superannuation audit, payroll tax audit, workers’ compensation audit or an occupational health and safety audit, if you do these four things you should be okay:

• Respond and communicate with the auditor. Always keep the lines of communication open – if you can’t provide something within the required timeframe, don’t avoid them. Let them know and tell them when you will have it to them.

• Always be able to demonstrate that you’ve tried to do the right thing. Even if you didn’t get it 100% right, it’s valuable if you can show that you made a genuine effort to meet your obligations.

• Make sure you have good systems in place, so if you have to provide information you can explain your process and show them how you do it, and get your hands on information quickly and easily.


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• Use your accountant to manage the relationship with the auditors. Your accountant has the experience to understand and provide the auditors with exactly what they need. Nothing more, nothing less.

Now I’m not saying you won’t get a fine or any penalties if you do these four things – but you should have a reasonably easy audit with the best possible outcome.

TIP: Get yourself audit insurance now. Pick up the phone or go online now; get the insurance, because for a couple of hundred dollars it will be worth absolute gold if you are audited, because then you can just delegate the audit to your accountant and all their fees are covered by insurance. There is a link to the audit insurance provider I use and recommend in the useful links section of my resources page: www.andersontax.com.au/resources/.

TIP: Most audits are initiated because of a tip-off from a disgruntled ex-employee, ex-partner, ex-friend, jealous neighbour or an unpaid supplier.

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930 JUNE IS NOT

THE END OF THE WORLD

JUST SEEING THE EOFY sales causes small business owners unneces-sary anxiety because in our minds we are thinking we need to be doing something, and we’re not doing anything, so what aren’t we doing that we should be doing? Argh!!!!

WHAT DO I NEED TO DO, WHEN AND HOW?

There are a few things that really matter for 30 June, and a bunch of things that really don’t.

Stocktake

If your turnover is more than $10 million and you have stock, you need to do a stocktake. Review your stock for obsolete and damaged stock that can be written off. If you conduct a review of your stock early enough, you can also decide if it’s worth holding your own EOFY sale to clear some slow-moving or even damaged stock. Doing a stocktake also means you can then choose to revalue the stock on hand by using the cost price,


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replacement cost or market value. For the best tax result, select the option that gives you the lowest closing stock value.

If your turnover is less than $10 million a year you have the option of taking advantage of simplified ATO rules which mean you only need to report changes in your trading stock balances if the amount changes by more than $5,000 from year to year. This applies whether the value of your stock goes up or down. You are then able to perform a reasonable estimate to value your stock within that $5,000 range.

Prepay expenses

If your turnover is below $10 million there is a small business concession that allows you to claim prepaid expenses up front provided that it is for a period not exceeding 12 months. As an example, you can pay your insur-ance policies in June for the next 12 months and claim the total amount as a tax deduction in the June period, rather than claim it over the two financial years. This can work for rent, subscriptions, memberships, inter-est, conferences and even travel expenses. But keep in mind if cash flow is tough this may not be worth it if you have to finance it with expensive funds such as overdrafts or credit cards.

Purchase assets

If your turnover is below $10 million and you’re thinking of purchasing equipment that is under $1,000, buy and pay for it before 30 June so you can claim it this financial year and get the full tax benefit sooner. (Note that until 30 June 2017 the threshold has been temporary increased to $20,000 instead of the usual $1,000.)

TIP: Prepaying expenses, buying new assets and paying superannuation prior to 30 June are only useful strategies if you are in a profit situation.

30 June is not the end of the world

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TIP: If you’re in a loss situation, it’s best to hold off on those expenses until the new financial year when hopefully you will be making a profit.

Review asset register

Review your asset list for any assets that are no longer in operation and can be written off.

Write off bad debts

Review your debtors list and write off any bad debts. In order to be eligible you must have written them off, or at least documented that they are to be written off, prior to 30 June.

Directors’ loans

If you are operating as a company or trust you must settle all monies owed to the company or trust by directors. This is the most basic version of the rules, so if you have directors’ loans of any kind it’s imperative you speak with your accountant prior to 30 June.

Payroll

Staff bonuses or commissions

If you are thinking of paying staff bonuses or commissions it’s advanta-geous to pay them prior to 30 June because it’s all about when money is paid, not when it is earned.

Superannuation

Pay any employee’s superannuation (including your own) before 30 June if you want to claim it as a tax deduction in that year. Obviously if you are in a loss situation you don’t need to worry, but don’t forget it still needs to be paid by 28 July at the latest.


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Payment summaries

You need to provide each employee with a payment summary by 14 July. A payment summary is basically a one-page statement showing the employ-ee’s details, including the gross amount earned, any allowances or special payments made, and the total amount of tax withheld for the year.

TIP: Payment summaries were previously known as group certificates.

You also need to send a PAYG Payment Summary Annual Report to the Australian Taxation Office by 14 August.

With paying the payroll at end of financial year it’s important to know that income is assessed when it is actually paid/received, not when it is physically earned. So you need to keep this in mind when you are entering your payroll around the end of June or beginning of July, as it’s crucial that the payment date you enter in your accounting system is the actual date the payment is made. Remember, it isn’t when the employee actually worked or earned the money it’s when they were actually paid that matters. So if you do a pay run on 1 July for the previous week worked which was all in June then that pay amount will not be included in the payment summary for the June financial year just gone but instead it will go in the payment summary for next financial year.

TIP: If you are using a computerised accounting/payroll system you can produce the payment summaries and the PAYG Payment Summary Annual Report from within your software and then lodge it electronically with the ATO.

PART IV TAKING CONTROL OF

YOUR BUSINESS

REMEMBER HOW IN Part I I talked about getting your accounting system set up by a professional because it’s not about getting your tax return right it’s about managing your business?

Your system is only as good as the information in it. As they say: garbage in, garbage out. So if you’ve been skimping on bookkeep-ing, doing it yourself or getting a ‘friend’ to do it for you in their spare time and you’re not confident in the reports you’re getting out of your accounting system, you’ve done yourself a huge disservice, because trust me when I say the reports you get out of your system are imperative to you being able to manage your business effectively and successfully.

If you only get your bookkeeping done quarterly, you are also doing yourself a disservice. So much can happen in three months – it’s even a different season of the year. One of the major advantages small business has over big business is that we are nimble. We can change strategy or direction quickly and easily. We are speedboats while they are ships. In order to use this to our benefit we must be able to make fast, informed decisions, and for that we need regular, accurate reporting.

In this part I’m going to go through how to use your accounting system to help you understand your business day in, day out, so you can

make fast and informed decisions in good times and bad. I’m also going to go through cash flow again because without cash your business is dead. To help you with cash flow and forecasting I will also go through making a budget and working out your break-even point.

Let’s go …

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10KEEPING AN EYE ON HOW

YOUR BUSINESS IS TRACKING

IT’S ONE THING to do the day-to-day business but it’s another thing to actually know how the business is tracking. It’s very easy to be busy all day, but if that busy isn’t reflected by profit you need to know why and understand how and what to change.

Most small businesses love 5 pm, not because it’s time to go home but because that’s the time that the banks do most of their payment transfers, so we can see what money has come into our bank account that day. Most small businesses measure their performance on their bank account, and although it can be an indicator that’s primarily just a timing thing. For example, if it’s late April and the bank account is looking very healthy it should be looking healthy, because your January to March BAS is due for payment – so all that money in the bank isn’t necessarily yours.

Keeping an eye on what’s going on in your business has never been easier. With the internet, cloud accounting, daily bank feeds and mobile invoicing there is absolutely no reason why you can’t know exactly how your business is really performing on a daily basis.


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WHAT REPORTS SHOULD I BE RUNNING AND WHAT DO THEY MEAN?

For most businesses there are basically four reports you should be running either daily, weekly or at least quarterly to keep an eye on your business:

• Profit & Loss • Balance Sheet• Accounts Receivable outstanding• Accounts Payable outstanding.

Profit & Loss report (P&L)

The P&L is a statement showing how much income you have earned, then it deducts your expenses and leaves you with either the profit or loss at the bottom.

If you are registered for GST then your P&L will be GST exclusive. Remember, GST is not a cost unless you are not registered for GST – so obviously if you aren’t registered your P&L will be inclusive of GST. So don’t get confused when you compare sales reports with your P&L and they don’t match, because sales reports usually show the GST-inclusive figure.

TIP: If you are paying commissions or incentives on sales figures use the P&L figures not the sales reports, because remember if you’re registered for GST, GST is not income.

In most cases when you run a P&L report it will be on an accruals basis. An accruals basis means the report uses the date of the transactions – for example, the invoiced date not the payment date – to determine what month to report the transaction in. With some software you have the option to run your P&L on a cash basis if you prefer to look at it that way.

Keeping an eye on how your business is tracking

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There are essentially three main sections of a P&L: Income, Cost of Sales (also called Cost of Goods sold if you are in a product business) and of course Expenses. Let’s look at them individually so you can get a better idea of what each of them represent:

• Income is my favourite part because it’s all the income we’ve earned. Often income is separated into different components such as labour and materials. It could also be via streams such as retail, wholesale, domestic, commercial, and so on. Whatever is meaningful to you and can help you make better informed decisions is what you should use. There is no right or wrong, just whatever works best for you and your business.

• Cost of Sales (COS) or Cost of Goods Sold (COGS) are the expenses that directly relate to earning the above income. For example, if you are a carpenter COS will include timber, nails, glue and all the other bits necessary to make your product. COS could also include subcontractor fees if you hired a subcontractor to do part of the job, or if you have another carpenter working for you it would include their wages.

• Expenses are the leftover expenses that you pay to run your business but aren’t directly part of what you’ve sold. These are often referred to as overheads, as they don’t add any real value to your product or service. Examples of these expenses are rent, telephone, memberships, conference expenses and bank charges.

Your P&L should be a simple statement that shows you a snapshot of how your sales versus expenses is going, however all too often people over-complicate it by creating too many categories and using their P&L as a quasi sales report instead. What I find is the more you complicate the different categories, the less meaningful they become. Although it might be manageable and meaningful when you’re a micro business, as your busi-ness grows and you get other people to help – for example, a bookkeeper


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or staff – or even as you automate your processes using, say, bank feeds, the various categories get muddled and therefore their relevance is lost.

TIP: Only use categories if they mean something and add value, otherwise keep it simple.

If you want to really keep your finger on the pulse, at the beginning of each month write your sales target on a whiteboard in your office and then, depending on your business model, run a budget versus actual Profit & Loss report every day or week to monitor how you’re going. Daily is good for retailers or businesses that invoice consistently, or weekly is good for businesses that invoice on a more ad-hoc basis. Even though I invoice on a fairly ad-hoc basis I still run my P&L every day so I can see how I’m tracking for the month, but I also use it as a reminder to bill clients as I find it very motivating when I see my sales figures go up.

TIP: If you are registered for GST, Profit & Loss report figures are all GST exclusive as GST isn’t a cost. If you aren’t registered for GST, your Profit & Loss figures will then be GST inclusive because you can’t claim the GST back.

Balance Sheet

A Balance Sheet is a crucial yet under-utilised and often misunderstood report. A Balance Sheet is a statement of what you own, what you are owed, what you owe, and finally what equity you have in the business.

It is separated into three sections – assets, liabilities and owners’ equity – and both the assets and liabilities sections are then divided into current and non-current categories. Current means it’s either cash or are expected to convert into cash within 12 months, and non-current is for things with a life expectancy of more than 12 months.


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Let’s have a look at these categories:

• Assets are things that are owned, that have value, and are available to meet the debts or commitments of the business. Current assets include cash at bank, accounts receivable/debtors, prepayments and deposits. Non-current assets include furniture, computer equipment, tools, machinery, motor vehicles, buildings, land and also intangible items such as trademarks, patents or goodwill if you purchased an existing business.

• Liabilities are debts or obligations of the business. Current liabilities include credit cards, accounts payable/creditors, customer deposits, GST and tax payable, and superannuation payable. Non-current liabilities include loans and long-term leases.

• Net Assets is simply all assets minus all liabilities.

The importance of separating assets and liabilities into current and non-current is all to do with your liquidity or your ability to pay your debts as and when they fall due, which is why looking at your balance sheet regularly is so important because you need to keep an eye on not just your assets and liabilities but the mix of current and non-current. The mix is crucial because if you have lots of non-current assets but high current liabilities you may look at the net asset figure and feel good but if you look at the detail within you will soon see there are cash flow problems coming, if they’re not already here.

The balance sheet is very informative because not only can it warn you of an upcoming cash flow problem, it can also show why you have a cash flow problem – which is usually because your accounts receivable or inventory levels are too high. This can tell you where you should focus if you need to get free up some cash quickly, and help you make decisions such as whether to focus on collecting money from customers or consider a stock clearance sale.


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TIP: If you are registered for GST, Balance Sheet figures are all GST exclusive as GST isn’t a cost. If you aren’t registered for GST, your Balance Sheet figures will then be GST inclusive because you can’t claim the GST back.

Outstanding Accounts Receivable report

The first thing I do every morning is check my online banking and allocate any payments received from customers. Most small businesses check their bank accounts daily too but don’t always go the next step of actually allo-cating the receipts. I do this first thing every day for two reasons:

• In order to have control over your cash flow you need to keep your accounting system as up to date as possible. You can’t make informed decisions based on inaccurate information; for example, you need to be able to know at any point in time whether you should do more work for a client or supply them more goods, but if you haven’t got an up-to-date record of what you’ve billed them and whether they’ve paid it’s not that easy. Bank feeds have made this very easy to do – no more excuses.

• It also means that I can use an automated debt collection system that chases my customers for overdue invoices and requests payment. The bonus of course is that my cash flow is automatically improved.

Outstanding Accounts Payables report

If you’re in a business where you buy on account and then pay your suppli-ers at a later point in time, this report is important for you to keep an eye on what you owe and when it’s due.

Just like knowing what’s due to you, it’s equally as important to know what bills you have coming up so you can plan your cash requirements accordingly.


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HOW OFTEN SHOULD I RUN THESE REPORTS?

This will depend on your business and your bookkeeping processes, but I would recommend at a minimum running a Profit & Loss, Accounts Receivable and Accounts Payable report at least weekly and your Balance Sheet at least monthly.

TIP: You can also use the Balance Sheet as a guide to how much your GST bank account should have sitting in it ready for your next BAS, because there is a section in it for ATO liabilities, and specifically GST liabilities.

ARE THERE ANY OTHER USEFUL REPORTS I SHOULD RUN?

I personally love the Profit & Loss by month report. What I love about it is that it shows your Profit & Loss report in monthly columns, all next to each other, which helps you to see trends or patterns in your business which will help you better understand the financial side of your business. It also helps identify if there’s something not quite right because it will usually stand out like a sore thumb.

TIP: In MYOB AccountRight it’s referred to as a Multi-Period Profit & Loss report, and in MYOB Essentials and Xero you can just specify in the filters that you would like to see the report by month rather than by year.

If you’re an inventory business, running inventory sales and stock on hand reports is an important way of monitoring what is happening with your product lines, what’s selling, what’s not, and what you have too much of or not enough of.


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THE DIFFERENCE BETWEEN PROFIT AND CASH FLOW

Have you ever looked at your P&L and it shows you’re making a profit but when you go to your bank account it’s empty? We’ve all been there.

Profit and cash flow are closely related but also vastly different. Profit is what we’re all in business to make, however it is ultimately an

accounting concept. It is revenue minus expenses, but it doesn’t necessarily reflect our investments into capital assets such as equipment or vehicles, or the liabilities we have funding our business such as loans and hire pur-chases.

Cash flow on the other hand is the lifeblood of our business. Although it’s closely linked to profit, unlike profit it does reflect money that we’ve paid out for assets or that we are paying servicing liabilities such as loans. Cash flow is also about timing. It’s about having or receiving money before you have to pay out money.

Managing cash flow is usually one of the most stressful issues when you run a small business, and is also one of the most important indicators of business health.

Things that impact cash flow can vary, and include:

• declining sales• customers paying late• incorrectly priced products • overheads being too high• holding too much stock• inefficient systems and processes• lumpy bills such as tax/PAYGI• timing; for example, end of quarter superannuation and BAS due• lumpy or seasonal sales cycles• having to pay for stock prior to receipt – particularly if you’re

importing from overseas with long lead times


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• large projects• growing pains – putting on more staff, increasing stock levels• unrealistic forecasts.

No wonder cash flow is such a nightmare – look at all the variables that affect it! Some of these issues are obviously just part of doing business, such as seasonal sales cycles, however some of them are avoidable and some are at the very least manageable.

Next I’m going to give you some very practical strategies that will make a difference.

Six ways you can improve your cash flow today

If you’re serious about improving your cash flow and reducing your stress levels, I can guarantee that by implementing these strategies you will see an almost immediate improvement in your cash flow:

• Invoice your customers. Yes, that’s what I said, just give your customer an invoice. I spoke a bit about this in Part II when I talked about invoicing, but it constantly astounds me how many people just don’t get around to giving their clients an invoice. You will never get paid if you don’t invoice.

I was having dinner with a friend the other night and was asking her about how they manage their accounts receivable. Her husband piped in and said they’ve been so busy they haven’t invoiced since December … and it was now March. I couldn’t believe it – and she was mortified he told me because she knew I would hit the roof – and she was right. It turns out she had actually gone to the bank and gotten an overdraft because she was ‘too busy’ to invoice.

If you’re too busy to invoice, hire someone to either do the work or do the invoicing. Cash is the lifeblood of your business and if you don’t invoice your business will die.


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• Invoice on the go. This obviously depends on the nature of your business as to how you can implement this, but instead of doing the job, doing the next job, then the next job, then doing a bunch of invoices in one go – do the invoices as you go. Do a job and then invoice it straight away. That way invoicing becomes less of a chore because it only takes a minute, not a couple of hours.

A plumber friend of mine was complaining that he had three months of invoicing that he needed to do because he had kept putting it off and now cash was starting to become a real issue. What had happened was he was using a manual job book, doing all his jobs, and then at the end of the week he would sit down and do all the invoices. His system worked until one week he didn’t do the invoicing, and then the next week the pile of invoicing was quite big so he put it off. Then the next week the pile was even bigger so he started feeling overwhelmed and couldn’t face it, and soon enough three months had passed and he was now losing sleep worrying about the pile of invoicing that needed to be done in conjunction with a rapidly declining bank balance.

With cloud accounting software, smartphones, tablets, or if you’re a complete technophobe even the old-fashioned invoice book from Officeworks, there is absolutely no excuse as to why you can’t invoice as you go. In fact, the mobile app options alone are a mile long and many of them are even free. Obviously, if you already use accounting software it makes sense to use their mobile invoicing options.

If you do the invoices as you go it is a small job; if you leave them until there are a bunch of them not only does the job become bigger but you’ll never get paid until you actually send the invoices.

• Make it easy for your customers to pay you. I talked about this at length in Part II, but if you don’t make it easy for your customers to pay you they will do it later. And if they do it later it means you don’t have the cash in your bank account until … later.


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There are a few quick and easy things you can do now to make it easier for them: – At the absolute bare minimum, put your bank details on your

invoices. This is the simplest option of all, yet still so many businesses don’t do it. If you don’t have your bank details on your invoices, go do it right now and I guarantee you will start getting paid faster.

– Get BPAY facilities. For some reason there are people who are still nervous about EFT but feel a greater level of comfort using BPAY. The advantage of BPAY over EFT is that there is a level of comfort in knowing your payment is going to the right place because when you enter the BPAY code the supplier’s name comes up, which doesn’t happen when you do an EFT.

– Accept credit card payments. Get yourself a merchant facility, either with a bank, or many of the accounting software packages have merchant facilities available for you to use today. These days everyone uses credit cards for everything – people even buy cars on credit card. If you’re in any kind of retail space – be it you’re a doctor, café, restaurant, masseuse, hairdresser, you name it – you must have credit card facilities or you are losing sales. If you’re in retail, go back and re-read Part II; the statistics will knock you over.

Credit cards are not just for retail though – if you think they are you are very wrong. Corporates are one of the biggest users of credit cards. You can even pay your tax by credit card! Businesses use credit cards for different purposes: to fund short-term cash flow issues, to manage expense accounts, to take advantage of bank feeds, to get frequent flyer points. You don’t know why nor do you need to know or care why your clients pay by credit card, but I can assure you, hand on heart, if you offer credit card payment options people will pay you quicker. Guaranteed.


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– Use a mobile payment device. There are so many options out there from banks, accounting software providers, apps on your phone, PayPal, you name it – everyone seems to offer this. If you have customers where you do the job then leave, you absolutely need one of these. Take each customer’s payment there and then, while you are there and they are happy. It’s a no-brainer and fabulous for cash flow.

– Set up a PayPal account. It’s quick, it’s easy, and best of all your customers feel comfortable because PayPal is reputable and they have a guarantee system which gives your customers peace of mind. PayPal is mainstream, it’s everywhere, and customers can pay on their phone or via the internet. PayPal is essential if you sell online.

– Direct debit. If your customer gets the same service from you regularly – whether it’s a subscription, ongoing licence fees or weekly cleaning services – set up a direct debit facility where the client signs an authority and the money is automatically taken from their bank account and put into yours. The great thing about this is the customer almost forgets they’re paying it (think gym fees), you reduce administration and it’s regular money in your bank account.

• Ask for a deposit up front. It could be a deposit on a project or a deposit to secure an appointment. Although this is a no-brainer for those of you doing large contracts, it also works for smaller jobs too. It’s a great way to get the client to commit to the job they’ve asked you to do, and it incentivises them to get their s#@t together so the job can actually get started and finished.

Deposits are also ideal for confirming appointments, especially if you’re dealing with one-off type clients where there isn’t an established relationship or loyalty element yet. I recently introduced charging a


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deposit whenever I book an onsite MYOB consultation because I was finding that frequently they would cancel at the last minute and I was left in the lurch. Since introducing a deposit to secure the booking I’ve had no cancellations because psychologically when they pay money their level of commitment increases.

• Offer discounts for early payment. If you have clients you’re always chasing for money, a good strategy is to incentivise on-time payment by way of a small discount. I have a few clients that do this and it surprises me that the customers who take advantage of it are usually their really big customers, the ones who owe them the most money. Now, while you might be thinking but isn’t that eating into my profit margin, just think for a minute about how much you might be paying for your overdraft facility, and if this helps speed up customer payments it’s well worth trying, or at least considering – plus if it works, build it into your pricing model.

• Ask to be paid. Sounds too simple to be a real tip I know, but honestly if you don’t ask, you won’t get. There is an unspoken law in business that says ‘the squeaky wheel gets the grease’, meaning when deciding who is going to get paid first, the one who screams the loudest gets paid first. No-one likes being chased for money, so if you’re asking to be paid you’ve got a much better chance of being paid before someone who’s not asking.

I know asking to be paid is unpleasant at the best of times, and let’s be honest it’s time consuming too, but thanks to technology you can even automate this horrible task. My two favourite automated systems are Debtor Daddy and ezyCollect. They do things slightly differently but both are fully automated and cloud based, have no contracts, are pay by the month, are easy to use and fully customisable, are cost effective and really are life changing.


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I am a small practice with minimal invoices, and I have to admit most of my clients are pretty good payers, but I use an automated system because I just don’t have time to do everything and so by automating these tasks I can focus on what I do best – looking after my clients. The best thing about these systems is that my clients have no idea it’s fully automated – they think that I’ve sat down and personally sent them the SMS or email, so when I get messages saying, ‘Sorry Deb, I completely forgot but it’s paid now’, I’m beside myself … automation is so cool.

TIP: Debtor Daddy and ezyCollect cost between $30 and $100 per month depending on what bells and whistles you want and the number of customers on your books. For more details head to: www.andersontax.com.au/resources/.

No matter how big or small you are, if you ever have to chase your clients for payments, look at either one of these or any of the other solutions out there and sit back and watch the payments come in all by themselves.

Remember – if you don’t ask, you don’t get.

STRATEGIES FOR AVOIDING FUTURE CASH FLOW HEADACHES

So now let’s look at some easy yet effective ways that will help improve cash flow longer term.

Review your trading terms

I know I’ve harped on this one in Part II, but please change your customer trading terms to seven days. You are not a bank. You are a small business. Even if your clients are corporate companies you are still not responsible for or able to finance them. If you are giving them 30-day terms you are crazy. If you are giving them 30 days from end of month you are a sucker.


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Corporate accounts payable departments have two piles of invoices for payments:

• the COD/7-day pile• the 30-day pile.

Which pile do you want your invoice to be in? It doesn’t matter if they don’t pay you in seven days – let’s be honest, you’d probably fall off your chair if they did – but if you don’t ask you will never get. If you don’t ask to be paid within seven days, they will not offer. If you don’t tell them you want payment now, they will always pay you later. You see, corporate companies are smarter than most small business people because instead of paying a high rate for an overdraft or, even worse, exorbitant credit card rates to finance their business, they use the cheapest source of funding available: their suppliers.

Besides the ultimate prize of actually getting paid within a decent amount of time, the real benefit is that you can start the process of asking to be paid after seven days rather than waiting 30 (or in some cases up to 60) days. By contacting them early you can circumvent the old ‘we never received your invoice’, deal with it, and you’ve only lost a week, not a month.

Organise your bookkeeping

If your books are in disarray, controlling your cash flow is always going to be a nightmare. How can you see what you’re owed, what you owe, or even know where your cash is being chewed up if you don’t have accurate and up-to-date accounts?

There are three ways to fix this:

• if you don’t already have a computerised and preferably cloud-based accounting system, get one today

• use technology to get mobile invoicing, credit card facilities and bank feeds today


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• if you’re really hopeless at all this or just don’t have time to do it yourself, get a bookkeeper today.

There are no excuses. Your lack of organisation is costing you money and probably causing your business to haemorrhage cash, and you may not even know it. Take control and get organised today.

Have a cushion of cash for a rainy day

Put money aside for tax

Open an interest-bearing bank account to put money aside for tax. When I say tax I’m not just talking income tax. You also need to be putting money aside for GST and PAYG you’ve withheld from your employees’ wages because that money does not belong to you. Remember, you’re just the middle person, a quasi tax collector, which is a huge responsibility, albeit one you never asked for or wanted.

Every time you do a pay run, including your own, transfer the tax withheld portion into your ‘taxes bank account’. Every week or so, run a GST report or check your balance sheet and transfer the net amount of GST you owe – if you don’t know how to work this out, speak to your bookkeeper or accountant.

TIP: Open the taxes bank account with a different bank so you can’t see it whenever you log on to your internet banking – it’s much less tempting to dip into the funds if you can’t see them.

Pay superannuation every pay run

Legally you only have to pay superannuation quarterly, however that came about because traditionally it was so cumbersome to actually write the cheques, fill out the paperwork and post it all off that requiring you to do it more regularly would have been totally unreasonable.


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With SuperStream it’s literally as simple as the press of a few buttons and it’s done within minutes, whether you have 1 or 1,000 employees. Make the most of technology and your accounting system and pay super-annuation every time you do a pay run. Not only will it help you manage your cash position better, but your employees will benefit from the magic of compound interest within their super funds. It’s a win/win.

Keep a close eye on your inventory

If you have inventory there’s a good chance it’s one of the single biggest items on your balance sheet, which means you’ve got a lot of cash tied up in product sitting on your shelves or in your warehouse.

Review your inventory reports regularly. What’s selling, what’s not? What’s saleable, what’s not? If your stock has best-before dates, how close are items to being unsalable? If you’re stocking products ‘just in case some-one wants it’, ask yourself how much that is really costing you to have that sitting there ‘just in case’.

Do regular stocktakes to ensure you have accurate information, and while you’re there check your slow-moving items and consider holding a stocktake or clearance sale of your slow-moving and even damaged or obsolete stock. You’d be surprised what people will buy if it has the word SALE on it. I saw someone in IGA recently buy more than 20 big boxes of chocolates because they were ‘on sale’.

Inventory is an area that with some management you can make a huge difference to your cash flow. The Japanese realised this decades ago with their just-in-time inventory management methodology.

A detailed discussion of inventory is outside the scope of this book, but if you’re looking for specific inventory assistance the best place to get that is your software consultant – make sure you get one with inventory experience as it is a bit of a specialised area.


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Have a budget

I believe having a budget is fundamental to business success. As per Benja-min Franklin’s very famous quote, ‘If you fail to plan, you are planning to fail’. Preparing a budget is also the single best, most proactive action you can take to anticipate, prepare and plan for the inevitable ups and downs of cash flow.

Which leads me perfectly into the next section which is all about – you guessed it – budgets.

YOU NEED A PLAN

Where am I going and how do I get there?

Imagine if I gave you the keys to my car and only said, ‘There you go – I’ll meet you there’.

How do you know where you’re going? Which direction should you go in? How will you get there?

But if I gave you the keys to my car and said, ‘There you go – I’ll meet you at Bondi Beach’, you may have no idea where Bondi Beach is or how to get there but at least you know what your destination is and you can work out how to get there.

In fact, worst-case scenario, if the car breaks down on the way to Bondi Beach you can work out what other alternative methods you can use to get there because you know where you are going. You could work out you can catch a bus, but just as importantly you would work out that catching a train isn’t going to get you where you need to go.

Does that make sense?


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Budgets

Having a budget is like driving a car. You need to know what your destina-tion point is so you know what direction to go in. Once you know where you’re headed you can then get down to the nitty-gritty and work out how to get there. That is when you work out what roads you plan to take and what turns you need to make.

Budgets are exactly the same. It’s a goal. It’s never going to be 100% accurate because it’s your best guess, given what you know combined with what you think will happen. But at least if you know where you want to end up you can then come up with a plan of how you’re going to get there. Are you going to advertise? Are you going to hold a sale? Are you going to get yourself a website? Are you going to hit social media and drum up some business that way? Can you afford an office or will you have to work from home? Do you need staff? Can you afford staff?

So many clients say to me, ‘You don’t understand, my business is unique. We can’t do a budget.’ Guess what? Every business is unique, and yours is no more or less unique than the next one, and yes, you can set a budget, and I’m going to show you how because it’s a lot simpler than you think. That said, you can make it as complicated and sophisticated as you like, but let’s start with simple and you can build on it from there.

TIP: I suggest you build your budget in Excel as it’s really flexible – I have created a very basic budget template that you can download from my website at www.andersontax.com.au/resources/, which you can use to get you started.

There are a couple of really simple ways to come up with a budget depend-ing on whether you are a start-up or you have been trading for a while.


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Method 1 – Perfect if you’ve been in business for a while:

1. Get last year’s income and expense figures and put them into a spreadsheet month by month (if you use an accounting package you can usually just export a monthly Profit & Loss report into Excel to save time).

2. Go month by month and review the income and change it to what you would like it to be this year. It could be as simple as increasing last year’s figures by a set percentage, or it could be that you know that something is going to happen – such as you have just put your prices up, or you are planning to introduce a new product range, or you’ve increased capacity – and you plan on, say, doubling last year’s income. It isn’t exact, it’s a best guess using a combination of what you know and the goals you want to achieve.

3. Now go through your expenses line by line. Using last year’s figures is perfect here because often you don’t even realise how much things are costing you until you really look at them. You can either look at it as an annual amount or month by month, depending on how you work best or what is most appropriate for each expense type, reviewing each one. For example, telephone expenses are easier done by month because you get billed monthly, but business insurance is an annual expense. How you pay for the expense is a cash flow issue – right now we are just looking at the total costs for running your business.

Now remember there are two different sorts of expenses or costs to run your business: Cost of Sales or Cost of Goods Sold (COS or COGS) and Operating Costs.

Cost of Sales are costs directly attributable to the sales you make; for example, if you sell products the Cost of Sales will be the amount that it costs you to buy or make the product you are selling. If you sell services it might be the amount you pay a staff member or contractor to supply that service.


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Operating costs on the other hand are the general business expenses such as insurances, telephone and rent.

There are also two types of operating costs: ones that stay the same regardless of how much you sell, and ones that change depending on activity or volume. In accounting speak we call those ‘fixed’ and ‘variable’ costs. The thing about fixed and variable costs is they may be fixed for one business and variable for another, depending on the type of business you run; for example, if you are a courier then motor vehicle expenses would be variable, but if you are an accountant then this would be considered fixed.

Don’t worry too much about whether expenses are COGS or operating or fixed or variable at this stage because it all kind of works itself out in the end.

4. Once you’ve put all your estimated income and expenses in the spreadsheet, do a simple formula for income minus expenses, which is your profit.

TIP: If you haven’t included your wages in the budget this is how much you will make before tax.

TIP: I always include how much I would like to earn in the expenses section of my budget so I can easily see if I’m on track to make a profit after covering my wages and superannuation.


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Method 2 – Ideal for start-ups:

1. Start at the end. How much money do you want or need to make this year?

2. How much are your fixed costs per year? Fixed costs are costs that don’t really change whether you sell $1 worth of services or $100,000 worth of services; for example, rent, telephone, motor vehicle, computer expenses.

3. How much are your variable costs? Variable costs are costs that change depending on the volume you sell; for example, if you sell products it is the cost for you to purchase or make the item. Another variable cost could be if you have a warehouse that charges you to store, pick and pack the items; for example, $1.50 per item.

4. How much or how many items do you think you will sell?5. Once you’ve put all your estimated income and expenses in the

spreadsheet, do a simple formula for income minus expenses and compare the bottom line profit figure with the figure you chose in step 1.

6. If it’s out, review each line and tweak if appropriate.

In going through this process you will get a much better idea of what your expenses are and therefore how much you really need to sell to make a profit. If your budget is showing you’re going to make a loss you need to reconsider each and every line item – sales and expenses. How can you increase sales? How can you decrease expenses? Is this business model even viable?

Your accountant does budgets every day, and if they are like me they love it too, so use them to help you prepare and refine your budget and, if necessary, troubleshoot.

Remember what I said earlier: this isn’t an exact science – it’s your best guess based on what you know mixed in with lots of unknowns. It’s a guide, it’s a plan, it’s a goal. Now you have something to work towards.


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TIP: Watch and measure your progress. Run P&L versus budget reports daily or weekly and monitor your progress – it’s quite motivating to watch as you get closer and closer to your sales target each month. Don’t forget to celebrate your wins.

WORKING OUT YOUR BREAK-EVEN POINT

Once you have a budget you are so close to having the most critical busi-ness number of all: your break-even point. Your break-even point is where your total income equals your total expenses. At this point you are not making any profit, but you’re also not making a loss, hence why it’s called break-even.

If during the budget process you found you were showing a loss, you probably (hopefully) went back through each line, both income and expenses, and reviewed whether or not the figures were realistic and what you could do to increase sales or decrease costs – you were already inadver-tently working towards determining your break-even point.

There are three steps to working out your break-even point.

Step 1

How much are your fixed costs? Remember, fixed costs are the costs you incur regardless of whether you sell $1 or $100,000 – it’s what it costs you just to open the doors each day.

Step 2

What is your gross profit margin? Gross margin is income minus Cost of Sales, so the gross profit margin is gross profit divided by sales.


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Example:

Sales $100,000COGS $80,000Gross profit $20,000Gross profit margin = $20,000 divided by 100,000 = 20%

Step 3

Break-even point = fixed costs divided by gross profit margin

Example:

Assuming fixed costs are $15,000Break-even point = $15,000 divided by 20%Break-even point = $75,000

This means that in order to cover costs, make no profit but no loss either, you need to make sales of $75,000.

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CONCLUSION

AS I SIT here writing the conclusion to Taking Care of Small Business I am hesitant to push the go button to my publisher saying ‘I’m finished’ because there is just so much to know about small business, and I desper-ately want to make sure that you are adequately armed with the knowledge you will need on your small business journey so as to give you the best possible chance of monumental success, bucketloads of cash as well as systems and strategies to manage it.

Small business is not a walk in the park; it is not the easy option and it most certainly is not for the faint hearted. To be a successful small business person you need purpose, passion, energy, vision and confidence. You must be resilient, driven, positive, savvy and resourceful.

Small business is hard work. It is tough on a good day and hell on a bad day. As small business owners we are the sales manager, the receptionist, the accounts department, the purchasing department, the warehouse guy and the boss. It’s a tough gig, but small business is also rewarding beyond words. Small businesses make a difference in this world … we make a difference to people. We know our clients really well. We know what our clients want and need – often when they don’t even know yet. We value our clients and respect our clients. We love what we do and do it because we love it. Our clients buy from us because we genuinely love what we do and they can feel it. Don’t ever lose that passion because that is the founda-tion of happiness. Remember – if it was easy, everyone would be doing it.


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For me small business is my passion, my hobby, my life. I love working with government and small business influencers such as MYOB to make the compliance side of your business life simpler. I sincerely hope that by reading this book you have learned some valuable skills and gained insights to help you take back control of your business rather than it having control over you. As I said in the Introduction, you don’t need to change every-thing at once. Pick something, try it, tweak it until it works for you and your business. Then you can start on something else.

I would love it if you would connect with me on LinkedIn, Facebook or Twitter and tell me how your journey is going. What challenges are you facing? Share your wins. I’d love to hear what is working for you and what you need more help with. Every day I post some tips, updates or reminders. Please feel free to share my tips, articles and even this book with your small business friends. There can never be too much small business love as they are all fighting their own battle and you may just share with them the solution to their puzzle.

I also do a monthly newsletter/update. To subscribe go to my blog at www.andersontax.com.au/blog and sign up – I’d love to share these with you and continue helping you on your small business journey.

I wish you and your business infinite success, joy and abundance. I would love to hear how you go.

Good luck,

Debra [email protected]

AndersonDebra

@DebraAnders0n

f www.facebook.com/andersontaxconsulting

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KEY DATES THAT EVERY BUSINESS OWNER NEEDS TO KNOW

Superannuation payments due

January–March quarter 28 AprilApril–June quarter 28 JulyJuly–September quarter 28 OctoberOctober–December quarter 28 January

Quarterly BAS payments due

January–March quarter 28 AprilApril–June quarter 28 JulyJuly–September quarter 28 OctoberOctober–December quarter 28 February

Tax

Tax returns If you do it yourself it’s due 31 OctoberIf you use a tax agent it’s usually due 15 May*

Payment summaries to employees due 14 JulyPayment summary reconciliation report to the ATO due 14 AugustContractor reportable payments due 28 August

* Will depend on your compliance history and risk profile with the ATO.

THANK YOU

TO MY BEAUTIFUL children, Cassandra and Max, thank you for under -standing that Mummy is passionate about small business and for being supportive and for being proud of me – without your support and under-standing I couldn’t do what I do – and I really love what I do so thank you xxx.

To my ex-husband Geoff, thank you. Thank you for encouraging me to write this book and for helping with the children so as to make this dream a reality.

To Jane, you are my rock. Thank you for believing in me and for lifting me whenever I needed it. I will be forever grateful for your love and sup-port. I miss you every single day.

To my great friend Kyle, thank you for being the inspiration to do my MBA all those years ago and for encouraging me to be the best version of me I possibly can be.

Thank you to my friends, family, colleagues and clients who have sup-ported and encouraged me during this journey. A big thank you for the support of my kick-arse accountability group – Justine, Michael, Tracey, Gemma, Janelle and Natasha. I got so lucky the day I met you all.

A huge thank you to MYOB for your consistent support to small busi-ness for 20-odd years. I am so proud to be one of your partners because you genuinely care about small businesses. Most people will never see or appre-ciate the work you do behind the scenes trying to make life easier through not only your software but through your work with government and trying to simplify compliance. Also, a very special thank you for the opportunities

you have given me over the last few years. It has been an absolute plea-sure to work with your developers on Essentials, AccountRight and your tax products, and I am confident that you will only go from strength to strength – you are the ultimate Australian small business success story.

To MYOB’s CEO Tim Reed, I am grateful for all your support, time and sage advice. You have been an inspiration to me over the many years I’ve known you and I love that I can call you and talk about software or small business anytime and that you not only ‘get it’, you genuinely care, you listen and – more importantly – act. You are making a big difference to small business.

To the ATO and everyone I have had the pleasure of working with over the last few years, I have thoroughly enjoyed being part of your consulta-tive process and I am constantly blown away by how much you actually care for small businesses. I am honoured to work with each and every one of you, and look forward to working with you for many, many years to come.

Finally, I’d like to thank adversity. It is surprising how from bad things great things happen, and I have adversity to thank that I accidentally ended up being an accountant and finding my purpose … but maybe that’s another book.

anderson tax & consulting · 2016-06-16 · taking care of business l debra anderson taking...

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