Understanding your business finances is hugely important to knowing how your business is performing. How your business if performing and how your cashflow is looking for the short term a hugely important for planning purposes as well as for legal reasons. For some business owners this is not an issue, and can even be something they enjoy being across, but for others it can all be a bit overwhelming. This is why some business owners take the step of hiring a Bookkeeper to assist with the day to management of their books. Of course it is always important to ensure whoever you may be looking to hire to do your bookkeeping is registered with the Tax Practitioners Board and that they have appropriate insurance in place.
A large number of people elect to manage their own books, which is Ok, but there are a few common errors which should be avoided.
Not prioritising your bookkeeping
For most people bookkeeping is not an enjoyable part of owning a business. It’s usually one of the first things to be dropped when things get busy. The issue with this is that other than being able to see if there is money in the bank there is no way of knowing how your business is actually performing. If you find yourself too busy with “actual” work to keep on top of your day to day bookkeeping then it may be time to consider hiring someone, even for just an hour or two a week, to take the pressure off and ensure everything is up to date.
Budgeting
Budgeting may seem like it’s unnecessary for a small business but it can be hugely important to have a record of upcoming expenses for things which may only be paid once a year. It is a common mistake to see a profit on the profit and loss and money in the bank and to spend money leaving yourself short for cash when the bill comes in for insurance, or your next Income Tax Instalment. It is always good practice to have a look at upcoming expenses prior to making decisions to incur expenses.
Blurring personal and business finances
A lot of small business owners operating as sole traders don’t maintain a separate bank account for their business. Whilst there is no law against this it is always better to separate the two. A separate bank account for the business to operate out of ensures that all transactions for the business are easily identifiable and ensure that every eligible expense can be accounted for on your year end tax return.
Knowing if someone is an employee or contractor
There is a common misconception that hiring someone as a contractor means you just pay them based on their invoice and that is the end of it. This isn’t always true however. If someone works for you as a contractor you may still be liable for paying superannuation on the amounts you have paid them. The ATO has a simple questionnaire that can filled out and it will give you an idea of if someone you have contracted is to be treated as an employee.
Of course hiring an employee has it’s own implications and risks. Having to process payroll regularly, payment of superannuation and PAYG, entitlements like annual and sick leave. These are all things which need to be considered and which also need to be included in your budget.
Inadequate record keeping
All businesses need to keep financial records for 7 years either electronically or in physical files. This ties in with keeping on top of your bookkeeping in that if you keep putting off the day to day bookkeeping it becomes more difficult to keep track of receipts and invoices and the risk of misplacing something increases. Then there is the fact that if audited by the ATO they will request to see evidence of transactions you have recorded and if it was a year, or two, or five ago would you know where to find them?
Most small business accounting packages now have the ability to store images of invoices and receipts directly in the system linked to the transaction making it simple to find whatever you might need, provided of course, you remember to attach it to the transaction at the time of processing.
Not hiring a bookkeeper when you should have
Whether it’s because you are taking on an employee but don’t have a good understanding of how payroll systems work, or STP, or your obligations as an employer, or it could be because you are lucky and your business is booming but you now don’t have time to do you bookkeeping regularly. There are many reasons why you would consider hiring a bookkeeper, but it is sometimes better to do it sooner rather than later. If you go to your accountant with a box full of receipts they will still be able to prepare your tax return but they will gladly charge you for all the time required to trawl through the box. Similarly if you put off hiring a bookkeeper your risk what would have been a small expense each week, fortnight or month becoming a much larger expense just getting things back up to date. Plus hiring someone earlier ensures you are able to see how your business is performing and make adjustments to spending early on if needed rather than picking up on it when your bank account is suddenly empty.
These are just some key issues that small business owners need to keep in the back of their mind. As long as you can avoid these mistakes then you are on the right track.
If you would like to have a chat about hiring Cygnet Bookkeeping to help keep your business up to date contact us to see how we can help.
Cygnet Bookkeeping 