There is never a wrong time to sit down and analyse your business finances, but unless you are a true numbers nerd, it can be quite daunting.
Where do you start, what reports do you run, and if you manage to run the right reports, what on earth is the information even telling you. What happens if you need to register for GST?
And when is the right time to get accounting software?
On a good day, business owners review their numbers yearly, generally when it comes time to do a tax return. As you kind of have to have your yearly numbers ready at that time. So you do a bit of reflection, and you sweep it under the carpet and continue on. But what changes? What decisions do you make to improve the next 12 months? What didn’t work in the year just gone? What products/services are making a loss? Did that extra staff member increase your productivity and income streams?
Those are all really big, poignant decisions that should be reviewed frequently – not once a year.
So let’s take an opportunity to demystify financial literacy for business owners. What are the “must haves”, what are the “no brainers” for every business owner to get a handle on? But more importantly we will also share the why – why they are important.
1. Profit and Loss
We love this report for a number of reasons, and we run this report in a few different ways to get the most out of it. This report gives us an idea of profitability, margins on products/services, spending trends, sales growth just to name a few things.
We generally run this report on a monthly basis and always run it compared to the previous two periods. This will give you insights into seasonal trends, timing differences and to check things are not getting blown out of proportion compared to prior months. Getting on top of these numbers each month means you can make quick decisions about things that are not working – plugging the leaks so to speak. It allows you to be agile and pivot on income streams that are not working as planned and put an action into place to turn it around. We also run the profit and loss and compare it to a budget.
I mean we all have goals for our business, but how many of us actually work out if we are hitting those targets. By comparing the report to budget, we can instantly see whether we are on track, which areas we are going great guns, and which areas need a bit of TLC.
2. Balance Sheet
Now this is such a powerful report and one of the most underutilised reports by business owners!
You see the Balance Sheet tells us what you own (such as bank accounts and equipment) and what money you owe to external bodies (bank loans, personal loans, ATO). And this is where is becomes a cash flow tool.
Having this report on hand at any time can predict what cash reserves you need to have on hand to pay those obligations.
3. Sales Report
Now this one usually tickles the fancy of nearly every business owner. I mean who doesn’t want to see how many sales they made each month – talk about a morale booster. But the real reason we love this report…. well it tells us what is and isn’t working.
Most business owners have budgets or targets to meet each month (call them goals if you wish), and by splitting out our income into different revenue streams, we can easily see where we are kicking goals, but perhaps where we are slightly missing the mark. But that is not bad thing – you see it helps you then put a plan together to help with marketing those income streams which are perhaps not hitting the mark.
4. GST Threshold
Now when we first start a business, many of us don’t need to register for GST as we are not yet at the $75k per annum GST turnover threshold. However, things can change quickly in business. If you land a few new big contracts, get stocked in a major retail store, do a couple of rounds on the speaking circuits – suddenly your sales could get up to the $70k mark in a blink of an eye.
So why do I review those numbers?
Well generally if you need to register for GST, we like to be thinking 2-3 months in advance. You may need to increase your prices, so that gives you time to inform current clients, gives to time to adjust website pricing, adjust wholesale pricing agreements, update quotes that you are going to be sending out for future bookings when you will potentially be GST registered. Really, switching GST on overnight is not the best option.
5. Bank Accounts
Having a separate bank account for your business (as opposed to a bank account for your personal transactions) will save you so many headaches. It means it streamlines the transaction processing, makes it easier to understand your business income and expenses and it let’s you have a different mindset around your “business money”. It makes it quite distinct from personal money.
Often with personal money we are quite flippant when it comes to spending – $10 here on food, $5 there on coffee. But with separate business banking, we are much more likely to review our spending, our needs and our requirements before we spend the money.
We then take that one step further, and once registered for GST or have employees, we setup a second bank account to move GST and tax on wages money to that second account. Out of mind out of sight is the theory. When it comes time to paying that money to the ATO, it is fully sitting there ready. No scrimping or saving or going on ATO payment plans. Plus by moving it out of your everyday business bank account, your business doesn’t rely on that money (which is not yours to start with) to fund its every day operations.
6. Excel or Accounting Software
What is the right fit? Often when businesses are in the very first startup phase they are running around like headless chickens juggling all 57 roles we place on ourselves as a business owner. It is perfectly normal to track income and expenses in an excel sheet.
However, our word of warning on this is that you need to have a kick arse spreadsheet in order for it to give you reporting, business performance, accurate GST obligations, margin analysis and the like. But it works and it does suit some purposes.
Generally there will be a tipping point – a point in time where your business either outgrows excel, it becomes too time consuming or doesn’t provide any beneficial information for the time spent. That tipping point is when you will need to consider accounting software.
There are many programs out there – but before jumping in bed with the first option – you need to think about how many users you will need, what functions you need it to perform, what apps or programs need to sync with it, your knowledge on accounting software, whether your accountant understands the software, how long the software stores your data for and of course the price.
But price is not the only consideration (nor should it be the most important consideration). We work with clients on Wave (which is free), Quickbooks Online, Myob and Xero for our clients and we assess each business needs on an individual case.
Starting a business means you generally are juggling sales, marketing, website, design, business development, networking, copy writing. Throw financial obligations on top of that, and sometimes you end up tearing your hair out. But knowing where to start, the basics, can help build up the financial sustainability of your business.
And if all that just sounds too scary, then perhaps you need a friendly numbers nerd on your team.
Did you find this post helpful? Share on Socials:
About Stacey Price
A qualified Chartered Accountant, Registered BAS Agent and self-confessed numbers nerd – Stacey Price of Healthy Business Finances specialises in helping business owners to understand their financial information.
But she is no boring, traditional accountant. She embraces cloud technology, is passionate about training and educating her clients, and she loves innovation to streamline processes. With over 20 year’s experience, she loves dealing with business owners and her biggest skills are financial training and education.
Taking on all roles within the financial, accounting, training and bookkeeping function for your business, Stacey is a part of your business and part of your journey, helping your business become financially sustainable.