Finance and accounting cover a broad range of business areas, all of which revolve around money and keeping track of it. All businesses are subject to federal and state taxation and reporting laws, and must keep records in the event they are audited. While these topics are dense and require in-depth study to understand fully, here are the basics of small business finance and accounting.
What are the most important small business finance topics to understand?
Expenses are the costs that your business incurs in operating. A business must keep records and receipts of all expenses as they are deducted from the business' taxable income.
Revenue is the total amount of money that comes through the business. Businesses are not taxed on revenue, and having high revenue does not necessarily indicate a profitable business. Having strong revenue can be an important part of healthy cashflow. The difference between a business' revenue and expenses is called its profit margin.
Profit is simply the revenue, minus the expenses. This is the money the business has actually made, and is the figure that is taxed by the ATO. Many businesses reinvest their profits to lower their taxable income while raising the value of their business.
Cashflow is the movement of money through a business. A business can be profitable but if there are periods where it does not have enough cash on hand to pay its debts it may end up insolvent. Therefore, a business must ensure that it is regularly generating enough revenue to meet its obligations.
Accounts receivable is the total amount of money owed to a business. Every time a business generates an invoice, it has increased its accounts receivable.
Accounts payable is the total amount of money a business owes to others. Every time a business receives an invoice or bill, it has increased its accounts payable.
Businesses keep a list of all the employees and
their salary information called a payroll. Businesses are responsible for paying their employees on time, for withholding PAYG tax, for superannuation contributions and for payroll tax.
As businesses earn and spend money, they need to follow proper business banking procedure to ensure they are setting up and using their accounts properly. Using business accounts improperly can result in difficulties at the end of the financial year.
What does a financially healthy business look like?
A financially healthy business is:
Generating enough cashflow to meet its accounts payable
Operating on a strong profit margin
Consistently working to create accounts receivable
Chasing accounts receivable for timely payment
Paying staff in full and on time
Keeping proper financial records for 7 years
Meeting all tax and reporting obligations
A financially healthy business is more likely to receive business loans and attract new partners. Businesses with strong financial records will also be easier to sell down the line. Businesses that stay on top of their financial affairs with strong, consistent processes are likely to have lower staff turnover, higher productivity and larger profits.
What sort of reporting and financial obligations do small businesses typically have?
Quarterly Business Activity Statements (BAS)
Pay as you go (PAYG) tax instalments
General goods and services tax (GST)
Capital Gains Tax (CGT)
Business finance and loans
Given the complexity and importance of meeting their financial and reporting obligations, many businesses hire bookkeepers and accountants to assist them in assessing and managing the financial health of their business. As a business grows, it becomes more and more important to ensure that the processes and record keeping practices are being adhered to precisely.