If you are starting or running a small business, keeping your finances in order is of vital importance. Many new businesses focus entirely on securing clients and sales, without putting in place systems and processes to ensure they are recording and reporting all of their income and expenses. While this may not cause a problem in the short-term, the ATO requires businesses to keep their records for 7 years and if you are audited and fail to produce documentation to support your deductions you may face costly penalties.
What do I need to know about small business finance and accounting?
If you are running a small business, it is essential you enlist the services of a bookkeeper and accountant to
ensure you are meeting your obligations. Many businesses also find value in engaging a financial planner, who can assist you and your business in making a long-term strategy to reach financial success. With that said, there are a number of practices you should adopt from day one to make your business finance and accounting easier (and cheaper!):
- Keep personal and business finance separate: this is the most important rule of running a business. Do not mix up your business and personal records, and do not use your business as a piggy bank. There are processes available to dispense funds to yourself for personal use, but you should discuss this with your bookkeeper to ensure you are not exposing yourself to unnecessary tax.
- Record everything: every transaction to and from your business should be recorded. You must record how much money is coming in, and how much is going out, along with where it coming from or going to. You should also record any petty cash withdrawals and keep receipts for purchases made with cash.
- Keep track of inventory: maintaining detailed records of all inventory is vital if you want to prevent theft and predict future income. Tracking your inventory will also give you insight into market trends and help you make better business decisions.
- Pay your debts on time: many suppliers will extend you a line of credit, which can be incredibly useful if you can include their products or services in your offering with a healthy margin. If you abuse this privilege and fail to pay on time, you may find they demand upfront payment, which will significantly impact your cashflow.
- Chase your accounts receivable: while many clients and customers are diligent payers, you cannot assume that an invoice sent is the same as money in the bank. You must clearly define your payment terms and chase your money if the invoice becomes overdue. Keeping detailed records and generating a paper trail is also an effective way to avoid a client disputing a valid invoice down the line.
- Meet your payroll obligations: if you fail to pay your employees on time, or you neglect to pay their superannuation or withhold Pay As You Go (PAYG) tax instalments, you risk jeopardizing your relationship with them and you may face penalties from the ATO or from Fair Work.
- Prepare for the end of the financial year: if you keep good records and follow the advice above, this should be simple - especially if you hire a bookkeeper and an accountant to handle your reporting and deductions. As a business owner, you should be focused on managing and growing your business, not digging around poorly maintained files and records to substantiate deductions and work out your tax owing.