So, you’ve decided to join thousands of Australians and jump off the employment bandwagon to start your own business.
There are so many different things you have to consider as an entrepreneur when setting up a new business.
However, one thing you need to be on top of at all times when starting out in business is your financial situation.
Here’s my guide to what you need to do to make your new venture financially robust – from creating a business plan to book keeping to managing cash flow and taxes.
Make a business plan
A lot of businesses fail because they don’t have a plan. At the beginning, founders plan what they hope to achieve from their new venture and establish goals and objectives.
A good way to achieve this is to establish a written business plan. A business plan should describe what business you are in, the products or services you will sell to make money, how it will operate, and staff you may need.
Your plan should also include the time-frame in which you want to achieve your goals. Your business plan would be to take into consideration the first 3 to 5 years of your business, which could start with trialling your ideas or even working on it part-time until it is established.
The business plan also depends on who is going to see it.
If you are using your plan to be reviewed by someone external to the business e.g. seeking a loan from a bank or investors then your plan will need to be more detailed and formally presented.
If your plan is only to be used for internal purposes e.g. the basis for discussions between partners or spouses, or reviews with staff or management team, then the plan could be much simpler.
The following should be considered when preparing your business plan:
- Defining what type of business you are in.
- An analysis of the industry and markets you will operate.
- Your goals and objectives, with time-line to achieve these.
- The main products and services to be offered.
- Customers and target-market, both now and the future.
- Comparative advantage or unique selling points.
- Marketing plans to establish and grow your business.
- Suppliers and staff you require.
- What your competitors are doing.
- Facilities required in operating your business.
- Pricing: how much you will charge.
- Capital requirements to start and in the future.
- What equipment will you need now and later.
- Financial projections and cash flow analysis.
Take care of book keeping
Good business records help you manage your business and make more timely decisions.
Under tax law, you must keep records to document and explain your business transactions. It is a requirement to keep records relating to income tax, GST, payments to employees and business payments. You can keep the records on paper or electronically.
It is also a legal requirement to keep your business transaction records for a minimum of five years, so it is important you maintain good record keeping practices.
The accounting records you must keep include all documents relating to the income and expenditure of your business. This involves compiling and preparing the business’ financial reports and income tax returns.
In addition to the legal requirement of having appropriate book-keeping records, recording all your financial transactions assists in reducing administration time. It also provides means of keeping accurate records to assist in the analysis of business activities, lodging and paying tax.
It’s important in meeting all your reporting requirements, seeking finance and attracting potential investors as well as beneficial in selling your business when the time comes.
A further consideration, for new business owners establishing their business is that one day you may get audited by the ATO. When that day comes, you need to be able to support the financial and tax transactions that you have reported on. Comprehensive and accurate book-keeping records will be able to help you achieve this.
There is an extensive range of accounting and business software available to assist with book-keeping. You can either maintain yourself, if you have the skills to do this, or outsource to an experienced book-keeper who has these skills.
If you decide to do it yourself, accounting software can help you to accurately record your income and expenses. With features such as the ability to automatically upload your bank transactions on a daily basis and back-up your information.
Some software allow taking a photo of expense dockets on mobile phones and upload them directly into the software. Pre-coded expense categories facilitate carrying out book-keeping while ‘on-the-road’.
If you decide to outsource your book-keeping to a specialist book-keeper, you simply hand over your paperwork to them and they will take care of it. This helps to free you up to spend time doing what you do best and focus on running your business.
An outsourced book-keeper can also act as a second-pair of eyes to help keep your business on-track. It is recommended to purchase accounting software that has the ability for both the founder and outsourced book-keeper to view information together remotely.
Business owners, when setting up their new business, do not usually set up their business with the intention of failing.
However 80% of business do fail in their first 5 years of operations; with approximately 10,000 businesses becoming insolvent each year.
Business failure is not necessarily because of not making a profit but because they run out of cash and are unable to pay their debts when they are due.
To avoid incurring cash flow issues for new businesses, these initiatives should be considered at the outset:
- Implement accounting software to quickly generate invoices, record income/expense transactions, reconcile cash movements and provide detailed reports on outstanding debts.
- Set-up automated bank feeds, to have ongoing and real-time visibility on your business’ updated cash position, with direct updates to the accounting software.
- Make it easy for customers to pay, thus faster and safer revenue flows through direct payment technology such as point-of-sale software, online technology systems, mobile card readers.
Take care of your taxes
Particularly if you’re coming out of a paid job, you’re probably used to getting your taxes deducted straight from your pay packet by your employer.
But now you’re in business on your own account, you need to proactively manage your cash flow to set money aside for future tax bills.
This might seem obvious but unfortunately failing to set money aside to pay tax is one of the most common pitfalls that new businesses fall into.
There is also need to register for GST. For most businesses, there is need to register for GST if turnover from the business exceeds $75,000.
It’s possible to claim back GST incurred on business purchases. There is need to report GST sales and purchases at least quarterly by lodging a Business Activity Statement with the ATO.
Being self-employed comes with extra tax obligations. You’ll need to look after your own taxes. But being self-employed also comes with some tax perks.
For instance, you have access to all the tax concessions available to small businesses, including the full-expensing of capital assets, which is available until 30 June 2022.
That means you can immediately deduct the cost of any plant, tools or equipment used in business, such as computers and most motor vehicles.
Mark Chapman is the Director of Tax Communications at H&R Block. H&R Block know that with the right Bookkeeping systems and support, we can get you back to focusing on what matters most to you – building your business by providing solutions to save you time and money, while giving you peace of mind.