Finance

A small businesses owner’s guide to business finance

- August 4, 2020 4 MIN READ

A lot of people dug deep to get through the initial wave of COVID-19 and used a lot of their mental, physical and financial reserves. Now, they are trying to cope with a second wave but with massively depleted reserves. It’s tough, really tough; and we know people will struggle to get up again and again. It’s times like this that you just have to keep repeating Winston Churchill’s wise words, ‘if you’re going through hell, keep going.’ writes Ben Thompson, CEO and co-founder of people management platform, Employment Hero.

With the federal government announcing stricter eligibility criteria for the JobKeeper scheme come September, nearly two-thirds of businesses are expected to lose the wage subsidy in a matter of months; this is a daunting prospect for many small business owners.

We’re already knee-deep in uncertainty with more of it ahead. My advice is to focus on the things within your control right now; including setting up the right financial infrastructure for your business to survive beyond JobKeeper.

There is no universal qualification to become a business owner; many of us build a company based on a passion or innovative idea, not a desire to learn the ins and outs of finance. While you’re not expected to be an expert, there is a basic level of understanding required to run a financially healthy, sustainable and compliant business.

Here is a basic guide covering financial terminology, technology and useful practices to help your small business prepare for September’s wage subsidy cut-off:

Bookkeeping basics

Put simply, bookkeeping is the recording and classification of financial transactions within your company including all money spent and earnt. The purpose of bookkeeping is to determine your cash position, in other words, whether your business is profitable or not.

The role of a bookkeeper and accountant is often confused; the major difference, however, is that an accountant interprets the financial information provided by a bookkeeper, whereas a bookkeeper’s role is to classify and record data.

For business owners that don’t consider themselves ‘numbers people’, bookkeeping can be a complex (and boring) undertaking, but an important one no less. Having an understanding of your company’s financials is essential to long-term success, as it allows you to make informed business decisions.

If that’s not enough of an incentive, it’s also a lawful obligation to supply up-to-date financial records for levy and tax purposes. Clean financial records make what can be a complicated process, relatively easy.

If you’re an early-stage business without significant revenue coming in and out, managing the books yourself is doable. Although it does require a basic understanding of common business accounts. A few key terms include:

  • Assets – what your business owns, for example, accounts receivable and inventory.

  • Liabilities – what you owe, including loans and accounts payable.

  • Equity – the revenue left after subtracting liabilities from equity.

  • Expenses – the money used to pay for an item or service, such as utility bills and staff wages.

  • Income – what your business earns.

As your business begins to grow, you may want to consider outsourcing your bookkeeping. Software, like Xero or Quickbooks Online, can be a low-cost option. These cloud-based programs allow you to build a general virtual ledger (GL) to record transactions, speeding up the financial reporting process and removing human error, while creating clear audit trails.

Cashflow management

Similar to bookkeeping, cashflow refers to the movement of money in and out of a business. It’s important for business owners to understand cashflow, because you need to make sure more money is moving into your business, than out. This is especially important for small companies that don’t have huge cash reserves to fall back on, as a late payment or unexpected expense can lead to dire consequences. I recently read that  72 per cent of businesses don’t have access to enough cash flow to cover them after 3 months. This statistic is particularly concerning when you consider the times we find ourselves in.

When it comes to managing cashflow, start by gathering data on your assets, liabilities and overheads. If you’re struggling to gain control of your purchasing, consider what is fundamental to keep your business running, and try to cut back on nonessential spending.

Reviewing financial transactions can be tedious, but with the help of a good bookkeeper or accounting software, the process can be made a lot easier.

If collecting late payments from customers is an ongoing problem for your business, look at automating accounts receivables with technology such as GoCardless. These platforms provide greater predictability around when you get paid to keep things like budgeting and forecasting accurate.

Once you have a hold on your purchasing, you can start planning ahead with ‘financial forecasting’. This is a plan, anywhere between three to six months, that predicts what your business expects to make, and what it will spend. If you’re unsure where to start, websites like Eloquens offer a range of free financial forecast templates.

If you’re an established business, you can usually rely on data from previous months to predict future performance. But during turbulent economic times, you will have to use a degree of informed guesswork. Lean towards conservative estimates, and try to build a plan for the worst-case scenario; while this can be uncomfortable to think about, it will give your business the best chance of survival.

Payroll

It’s no secret that businesses have a hard time navigating Australia’s complex payroll system.

If big enterprises like Woolworths and Qantas can’t get it right with their teams of legal and HR professionals, small businesses are bound to struggle. With so many awards, penalties and rates applying to different employees, payroll can feel like a labyrinth where one wrong turn leads to serious reputational and financial damage.

The key to avoiding a payroll error is compliance, and the simplest way to do this is by outsourcing your payroll to an expert or using a trusted compliance-software provider.

A good payroll software provider should have a team of dedicated experts and lawyers constantly monitoring awards and updates. This automates the whole process, giving you peace of mind in knowing that your team is being paid accurately and fairly.

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