Finance, Tax and Accounting Practices
Your business will benefit from good business practices.
Good financial practices are critical to small businesses and will help a business work through various economic and business conditions both in good times and bad.
Whether or not you are an existing business or a new business, it is essential that you review and ensure you have covered off the essentials required to run business. The following few paragraphs are a checklist of activities, processes, and systems that should be incorporated into a daily, weekly, monthly and annual routine.
To understand your business health, you as the business owner or your accountant should prepare financial statements regularly so that you can make better decisions about how to progress with your business, how your business is going and areas of concern.
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Implement Accounting Software to Run Your Business
There are a variety of software platforms that can be used to run your business' financial affairs. As your business grows, you might need to change accounting platforms so as to improve reporting, or to connect your accountant to your software platform so he can easily finalize your Business Activity Statements or Annual returns.
There have been many changes with requirements set by the ATO so it is important to understand if your accounting system can cater to these changes.
Regular Input and Management of Financial Data
Enter your financial data regularly and recheck to make sure your information is accurate. To make things even easier, link the accounting system to your bank so that all the information can flow into your accounting platform which will reduce errors. Another important step is to take paper records (such as receipts, invoices, etc.) and digitize them. There are a few great applications out there that can help you achieve this.
If You Sell Products - Stocktake
Make sure that you do a physical count of your stock twice a year so you can record any shortfalls or write off stock or determine any products that are not selling very well and you can put them on special to move them. Make sure you also evaluate your spending on stock and review your supply chain for opportunities to improve or reduce your purchasing.
If You Sell Services
Bill you're clients when a milestone is achieved and make sure you are requesting regular work-in-progress payments.
Good Practices - Debtors and Creditors
Debtors: Have a reminder system in place to follow up on slow payers. Potentially put slow payers on different trading terms and for those debtors who just aren't paying, it's better to have a specialised form to attempt collection of the debt. A specialised debt collection agency might take a large fee for the collection but you will then have received something rather than having to write off the debt altogether.
Creditors: Review and reconcile outstanding money owed to suppliers and reconcile your purchase orders with payments to ensure there have not been any over/underpayments or missed payments. Check trading terms and determine if you want to renegotiate trading terms or if you are not paying on time. Always check supplier payment details in your online banking system to ensure you are not transferring payments to a suppliers' old or disused bank account.
Check Your Equipment
Make sure you account for all your equipment quarterly and record it if the items are being written off, sold or maintained. Be conservative with your equipment purchases and do a return-on-investment on the purchase to really see if it is worth the purchase.
Bank Statement Reconciliation
It is essential for your business that you do this weekly, if not daily if you a dealing with large sums of cash. Make sure that you keep your cash handlers removed from a reconciliation process to avoid potential dishonesty.
If you are registered to collect GST, make sure you are reconciling and submitting your Business Activity Statements within the timing provided by the ATO. This could be quarterly or annually. After submitting your activity statements to the ATO, and you uncover an error, you can make adjustments in the next statement period.
Loans Into Your Business
If you, a partner or shareholders are making loans into the business, these should be reviewed and reconciled annually.
PAYG (Pay as You Go) Tax Obligations
Review PAYG withholding obligations, there are new laws in place with the ATO which are designed to control the black market economy and increase the accuracy and timeliness of the submission of PAYG.
To ensure you are meeting your tax obligations, ensure that employee declarations are up to date and comply with the frequency of payments dictated by the ATO.
Employee Leave Entitlements
Having large amounts of leave built up is a liability to the business, so it is important to encourage staff to take leave regularly and if you have long term employees, identify if there are long-service leave entitlements as your business will need to factor this into the financials of the business.
Calculating these liabilities. Accruing for these in a separate fund/account might be the best way to manage this type of exposure.
The Superannuation Guarantee is heavily legislated and is a direct responsibility of a business owner to ensure that the correct amounts are paid into an employee's account.
You must comply with the requirements relating to the frequency of payments and ensure the amount is deposited into the employee's chosen fund.
More Tax obligations and Reviews
Review fringe benefits tax obligations.
Review payroll tax obligations (payable to state governments).
Review paid parental leave obligations - A business does not need to pay maternity leave to an employee, however, an employer can opt-in to the Australian government’s paid parental leave to an employee. humanservices.gov.au
Strategic Finance Activities
It is important to understand future orders in order to have the foresight needed to expand or contract your business accordingly. So prepare P&L (profit and loss), balance sheet and most importantly cash-flow statements monthly, by doing this it will expose if there are potential challenges and problems coming up in the business.
It will help you put in a plan on how to correct these looming problem areas. Working with an accountant is the best option when preparing your monthly statements as they can also interpret these reports and provide some essential advice in the area.
Don't create a budget that is massaged to suit the desired result. Your budget estimates need to be realistic.
Try to envisage where you would like to be in 12 months from a business perspective and set some goals that you can apply to your business plan. It might be difficult for you to think about this so research other businesses in the same industry that you might be able to compare your business with.
You can get some basic industry benchmarks at the ATO or your accountant should be able to access some detailed data.
Continuous Financial Review
Make sure you are reviewing your actual performance against the annual targets you set for yourself at least every quarter. If you are under-performing to plan then there might be many underlying reasons for this:
It could be that you are just too ambitious for the 12 month period in which you would need to adjust your goals or
You are in a situation where there are marketing, product or service issues.
Perform a break-even analysis to identify what you need to sell before you make a profit. As stated previously, make sure you prepare a profit and loss on a regular basis - forewarned is forearmed.
Showing cash flows for each month across a 12 month period will enable you to determine strategies to increase sales or reduce expenses or change trading terms.
Have your cash flow forecast show the projected cash flows for each month in the 12 month period. Address any future cash shortages through increasing cash sales, and collecting outstanding debts. It is important to pause and do some analysis to work this out.
Altering Your Metrics (Targets)
Reevaluate your targets, and incorporate non-financial metrics such as:
Number of social media content posts per quarter
Number of calls made to clients
Number of promotions and the results of those promotions
Don't hide your targets in a PowerPoint; Word or Excel spreadsheet, print them out with some visuals and post them in a prominent place so you can continuously remind yourself and your staff of the importance of these targets.
Review Your Financial Statements
Ideally, this should be done every month but at least once a quarter will help you keep a handle on your business finances and make the appropriate adjustments to your business in the following areas:
Business Ratios - compare your business's key ratios, in the case of a business that manages stock, this should be your stock turnover ratio. Also, look at your working capital ratio.
Actual's against targets - if you are a business that has traded for a number of years, look at historical performance and measure it against your current targets and actual performance. Measure your performance monthly so you can identify how to correct problems. Create positive and negative scenarios, such as if sales dropped by 10%, what effect would this have on the business. What type of remedial action would you take?
Make sure you have diarised the dates of lodgement for payment of statutory obligations.
Good business practices will help ensure your business is well run. A well-run business will help place your business in the best possible position to respond to whatever trading conditions you face, and help you move your business in the direction you want it to go.
Whatever the state of your business, look for services or products that are not “earning their keep” low sales might be the indicator; frequent problems with product support might be another.
Your financial system should be able to tell you whether there is little or no gross profit from a product, or the product might tie up too much working capital relative to its profit level.
Once you know the source of the problem, see whether it can be corrected or
whether you should consider no longer selling that product or service. Structural changes, reorganisation is best made in good times. However, if you need to make structural changes in less positive periods communicate openly with the affected people; make sure you treat them with dignity and pay them any entitlements.
Whether your business is strong, weak or patchy, this checklist will help you make the most of any situation and feel more in control of your business.