TAKING CARE. of BUSINESS. Small. How to take control of your small business. Debra Anderson

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1 TAKING CARE Small of BUSINESS How to take control of your small business all BUSINESS Debra Anderson

2 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: (paperback) Subjects: Small business. Small business Management. Success in business. Dewey number: 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.

3 CONTENTS Foreword 1 Tim Reed, MYOB CEO Introduction 3 A dream come true 3 Who is this book for? 5 PART I: LAYING THE FOUNDATIONS 1. The foundations 9 It s a bit like building a house 10 Now what about starting a business What structures are there to choose from and what do they really mean? 15 Why 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? Accounting systems 27 Do 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 iii

4 TAKING CARE OF SMALL BUSINESS PART II: GETTING DOWN TO BUSINESS 4. Invoicing and paying the bills 59 Let 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? Paying your staff and yourself! 79 But 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? Automating the boring stuff 93 Bank 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 iv

5 Contents PART III: BAS S, TAX AND THE DREADED 30 JUNE 7. Congratulations, you re in a relationship with the ATO 101 But 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 Okay time to talk tax 113 How 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 June is not the end of the world 147 What do I need to do, when and how? 147 v

6 TAKING CARE OF SMALL BUSINESS PART IV: TAKING CONTROL OF YOUR BUSINESS 10. Keeping an eye on how your business is tracking 153 What 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 vi

7 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 For a number of years now we have introduced 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. 1

8 TAKING CARE OF SMALL BUSINESS Whether you are new to business, new to technology or a savvy business operator, this book will give you greater confidence to set up your business for prosperity. I wish you every success! Tim Reed MYOB CEO 2

9 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. 3

10 TAKING CARE OF SMALL BUSINESS The problem is, though, that by the time the money does start flowing 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 halfbaked 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 4

11 Introduction 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? 5

12 TAKING CARE OF SMALL BUSINESS Firstly, I am going to go through getting the foundations of your business 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 understanding. 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. 6

13 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 something 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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15 1 THE 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. 9

16 TAKING CARE OF SMALL BUSINESS 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 it 2. 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 approval 2. Engage a builder who prepares the site and lays the foundation 3. 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-over 2. Minor defects fixed 3. Move in 4. Landscape 5. Purchase of furniture Down the track 1. Maintain property 2. Renovate and/or extend 10

17 The foundations 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 business 2. 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 11

18 TAKING CARE OF SMALL BUSINESS 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, and social media 4. Logo, website and business cards designed The business 1. Advertising and marketing 2. 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 business 4. 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 12

19 The foundations 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 business 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. 13

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21 2 WHAT STRUCTURES ARE THERE TO CHOOSE FROM AND WHAT DO THEY REALLY MEAN? WITHOUT A DOUBT the single most common and completely avoidable 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 15

22 TAKING CARE OF SMALL BUSINESS 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 16

23 What structures are there to choose from and what do they really mean? 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 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. Sole trader cons 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. 17

24 TAKING CARE OF SMALL BUSINESS 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 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. Company cons 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. 18

25 What structures are there to choose from and what do they really mean? Company pros Easy to bring in and exit partners or investors. Company cons 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 complicated structure and have their own set of rules. Trusts are often favoured because you can split income between beneficiaries, 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 19

26 TAKING CARE OF SMALL BUSINESS 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 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. Trust cons 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. 20

27 What structures are there to choose from and what do they really mean? Partnership pros Depending on the partners it can be a simple structure; e.g. husband and wife. Simple to set up and exit. Partnership cons 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. 21

28 TAKING CARE OF SMALL BUSINESS I ve seen many small businesses over the years that have some rather impressive structures that are just way above and beyond their needs. Normally 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 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 22

29 What structures are there to choose from and what do they really mean? 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 requirement 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, and ABN applications are free. 23

30 TAKING CARE OF SMALL BUSINESS An Australian Company Number (ACN) If you register a company you will be issued with an ACN once the company 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 register 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: There is an initial fee of $34 for one year or $79 for three years, and then an ongoing annual fee. 24

31 What structures are there to choose from and what do they really mean? Goods & Services Tax (GST) Once you have an ABN you can then register for GST. Any business structure 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 ( s 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 25

32 TAKING CARE OF SMALL BUSINESS 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 address such as debra@flowersbydebra.com.au, 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 26

33 3 ACCOUNTING SYSTEMS THERE ARE LITERALLY hundreds of accounting systems on the market, 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 information you will receive now and in the future. 27

34 TAKING CARE OF SMALL BUSINESS SO THEN WHAT ARE MY CHOICES? The general rule is, the more complex your business the more sophisticated 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 unsophisticated 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. 28

35 Accounting systems 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. 29

36 TAKING CARE OF SMALL BUSINESS 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. 30

37 Accounting systems 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 manage 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 accountant 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. 31

38 TAKING CARE OF SMALL BUSINESS 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. 32

39 Accounting systems 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 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. 33

40 TAKING CARE OF SMALL BUSINESS 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 selling 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 34