Expert Advice on Managing Small Business Finances
One might argue that risk-taking and entrepreneurship go hand in hand. When starting a business that is to become your livelihood, you have to understand your rights and obligations from finding funding and paying your tax to covering superannuation payments and more. And that is just the financial aspect of entrepreneurship. A great idea alone is not enough. But fear not, we are here to prepare you for the risks and challenges that come with the dream of being your own boss.
If you’re thinking of becoming self-employed, you’re in good company. According to a recent report published by the Australian government, 98%
of all Australian businesses are small businesses. Abandoning a regular paycheck and your old career, you will not get around becoming an absolute finance wizard - or at least finding someone who knows finance management for small businesses like the back of their hand.
Most people who start their own business have some financial knowledge, but not everyone went to business school. Or has to for that matter. Almost all relevant information, tips and tricks can now be found online. Including specialists and software solutions to help you with any problem you’re facing on your journey.
This article is for anyone with a great idea, who is thinking of running their own small business - without having an actual idea of how to handle the financial aspects of running a business (yet).
Here are five tips for managing small business finances that will save you a lot of hassle!
Everyday Money Management Tips For Entrepreneurs
1. Set Up A Business Bank Account
You may be using a chunk or even all of your financial resources to fund your business idea. According to recent Startup Statistics, 77% of small businesses
are financed with the help of personal funds. If you too fall into that category, you will eventually need to separate personal and business finances. Only sole proprietorships and partnerships without a trading name
are not legally required to open a business bank account.
Keeping your business and personal finances separate, is the first step to properly managing your small business finances. This is essential for organisational and tax purposes. And your bookkeeper will thank you for making their life easier. Not to mention that, if anything should go wrong and you’re facing legal trouble, your personal finances are protected.
has rated AMP as the best small business savings bank of the year in their Mozo Experts Choice Awards for Small Business banking accounts in 2019. Have a look at their list of top financial institutes and pick whichever one suits your needs best. Again, this is where research comes into play!
Consider various factors such as:
- Monthly fees
- Business checking vs. savings account
- Included transactions
- Online banking capabilities
- ATM access
- Cash deposit limits
- Your credit card requirements
A business credit card comes in handy, should you be wanting to make purchases for your business only and build a business credit history. There are different credit card options and you may choose to obtain a credit card from your bank or an external provider.
2. Understand Business Accounting & Finance Jargon
As you are taking your first steps towards getting your business finances organised, you will come across accounting terms and documents that seem daunting at first but are surprisingly easy to learn and understand. Soon enough, you’ll be fluent in "accounting”.
Here are a few basic terms to get you started:
- Accounts receivable. The balance due for goods or services delivered or used but not yet paid for by customers.
- Burn rate. The rate at which a company is losing money. Typically expressed in monthly terms.
- Equity. The ownership of assets that may have debts or other liabilities attached to them.
- PAYG. A system for making regular payments towards your expected income tax liability.
- ROI. The Return of Investment measures how well an investment is performing.
- Liability. The company's legal financial debts or obligations that arise during the course of business operations.
- Gross revenue. The total amount of sales recognised for a reporting period, prior to any deductions.
- Net profit. The entity's income minus the cost of goods sold, expenses, interest, and taxes for a reporting period.
- Expenses. The cost of operations that a company incurs to generate revenue.
- Cash flow. The net amount of cash and cash-equivalents being transferred into and out of a business.
- Break-even point. The production level where total revenue equals total expenses.
See what your competitors are doing and find out what makes successful people successful:
Are you struggling to start off on the right foot? A bookkeeper can step in and help you keep track of your finances. It’s hard enough trying to get your business off the ground without having the time and focus to become an accounting and bookkeeping specialist. After doing your initial research, you will see that hiring an expert will be of massive help! They typically use accounting software
like MYOB, Xero or Quickbooks. If you’re unsure where to turn to - look no further, at Shoebox Books, we offer all of these services
3. Financing Your Business Idea
You’ve had a great business idea and have done your market research, now the only challenge left is to find ways to finance your entrepreneurial endeavour. Finding financing can be challenging, whether you're looking for ways to fund your start-up, capital to expand your existing business or money to make it through rough times. Here is a short guide on how to get started!
A) Come up with a financial plan and initial budget
Knowing what money will be coming in and going out in the first year of business is essential to track if you’re set up for growth or will be losing money in the long run. Although it is commonly known that "you have to spend money to make money”, maintaining positive cash flow is critical to the survival of your business.
First things first: Before you set out to find the required financial resources, you need to create a budget to allow the planned financial operation of the business to be measured. If you’re planning strategically to grow your business, you’ll be able to not only secure a stable income but potentially exceed your total profit and with it, increase the numbers on your paycheck.
If you plan to look for outside investments from angel investors, through small business loans or crowdfunding, potential investors will want to see in detail how you plan to use their money to create revenue. You’ll need to be able to present your calculated break-even point, gross profit and profit margin figures, allowing you to price your goods and services to cover your total cost of production or service.
The need for financial planning will accompany you every step along the way. Profitable businesses have regular budget reviews and make allowance for rising costs or drops in sales. Again, this is where working with a bookkeeper
comes in handy!
B) Secure the financial resources
When sourcing the financial resources to fund for your business, there are generally two types of finance models: Debt finance, where the money is borrowed from a lender to the business and equity finance, where the money is provided in exchange for shares of the business. Both types of finance have advantages and disadvantages
- Business loans. Usually, loans and other financial products from banks, building societies and credit unions, sometimes through family and friends.
- Crowdfunding. Donations from the general public.
- Angel investor. A private investor supplies their own money.
- Venture capital firms. Monetary investment managed by professional investors spending their client’s money.
- Government grants and assistance. Grants from the Australian government are available to help grow a business, develop a business idea or to start exporting. Find a grant or support program to fund your business.
4. Pay Your Business Tax
If you own and run a business, you will inevitably have to pay tax. Not only does your income tax need to be paid, but GST, fuel tax credits and PAYG withholdings need to be reported to the Australian Taxation Office (ATO) on regular business activity statements (BAS).
But not every business owner has to pay GST, the Australian goods and services tax. Find out if you need to register, report and pay GST!
Are you required to register for GST purposes?
As a sole trader - the exclusive owner of a business (who is entitled to keep all profits after tax has been paid but liable for all losses), you are required to register for GST purposes if one or more of the following statements are true:
1. Your annual turnover from your business activity is over $75,000 - not including a salary or other income earned outside of your registered ABN.
2. You provide taxi or rideshare services for a fee, as part of your business.
Yes, I need to be GST registered. How often do I need to lodge a BAS?
If you are required to be registered for GST purposes, you’re required to lodge a BAS on at least a quarterly basis. Once a BAS period has concluded, you have approximately 4 weeks to lodge your BAS.
No, I don’t need to be registered for GST. What else do I need to do?
You will still need to report your annual business income to the ATO in a regular tax return statement. To make things easier at the end of the financial year, make sure to keep adequate records of your business activity.
Shoebox Tax is an Australian registered tax agency offering convenient tax services to individuals and businesses Australia wide. We help a diverse range of businesses from new to well-established businesses. Call us today
5. Be on Top of Your Employer Obligations
Are you keeping up with your employer obligations? You can avoid costly mistakes by understanding the required pay and employment conditions, as well as tax and superannuation payments in Australia.
You will be required to report employee earnings to the ATO, collect PAYG and contribute to your employee’s superannuation funds. We know it’s a lot to consider. To make things easier, Super and PAYG obligations are usually part of a quarterly tax return. These payments should be separated from your cash flow statement and the money put aside to not get caught short at the end of the quarter. The ATO has relevant information regarding PAYG
Tip: You may also be required to pay payroll tax. The Department of Finance can provide information about payroll tax
In A Nutshell
If you’re looking at starting a new business, you’re soon going to wear a number of hats. Hire a bookkeeper to make your life easier. Let us take care of all the receipts so you can focus on growing your business! Request a free consultation with the Shoebox experts or call us