Accounting essentials for franchise buyers

Kate Groom | Co-founder and Director Franchise accounting and tax

About the Author

Kate Groom is Co-founder and director of Franchise Accounting and Tax. She has previously worked for franchisors and as a business adviser. Kate’s focus is on helping clients understand the financial aspects of running a business and on business planning and coaching. She is also a director of a number of ‘not for profits’.

Over the years I’ve met plenty of franchise owners who have found the accounting side of their business confusing. Often that’s because they have not established a relationship with the right type of accountant for their business. They might have tried to save money by delaying the decision to retain an accountant or thought that business accounting is just like a simple personal tax return (it isn’t).

But the accounting side of business can be understood. It just takes a bit of focus in the first few months — and the right type of advice. As the months roll by, you’ll become more confident with the accounting side of things and will start to understand what your figures are telling you about how your business is performing.

You can get started with understanding the financial side of business right away — before you even open your business. One of the best ways is to ask questions about the accounting side of business.

To get you started, here are some of the questions we are often asked, and how you can turn your questions into a learning experience that will help you throughout your time as a business owner.

Please note that this is general advice and you should seek advice for your circumstances from an accounting and tax professional.

When should i start working with an accountant?

Business accounting isn’t like getting your personal tax done. It’s not a once a year thing. The right time to find an accountant for your franchise is when you are at the due diligence stage. Work with them to complete your financial due diligence and then to correctly set up the accounting processes for your business. This will help you avoid expensive mistakes and financial stress in your business.

Laura approached and her husband, David, had been in business for three years by the time they approached us. They had already used two different accountants. They were behind with their tax returns, their accounting records didn’t correctly reflect the financial position of the business, and the business itself was unprofitable.

Gerry also came to us. He had been in business for six months. Like Laura and David, his accounting files were a mess. In fact, the records were so far behind that he couldn’t tell whether the business was profitable, and he was late with his ATO lodgements for GST and PAYG. By this stage, he’d spent a lot of money and was starting to be concerned about cash flow.

A wise decision for both of these business owners would have been to find an accountant before they started in business. This would have helped them avoid the financial stress they were now experiencing.

But finding an accountant isn’t just about calling one for advice before you buy — important though that is. It’s about working with them, and with their recommended bookkeeper, to set up the accounting system, prepare a financial budget, and set in place the reporting systems that will help your business become profitable and have strong cash flow.

Some people put off getting an accountant because they don’t know how to work with a finance professional. You might associate accountants with year end tax returns, but in a business, the accounting work is ongoing — not just a year end thing.

So, it’s a very good idea to establish a relationship right from the start of your time in business. That way, your accountant can help you in three important ways.

1. Tax and accounting advice that’s relevant for you: Your accountant will be an important source of information and advice as you run your business. When you are in business, there are many tax and accounting requirements you need to comply with. And as your business grows, the financial issues will change. Your accountant knows how to deal with these issues, and the better they know your business, the better they can advise you.

2. Help you achieve your financial goals. Your accountant can prepare quarterly financial reports and discuss them with you. This will help you focus on your financial goals and make progress towards them. Your accountant can also help with cash flow and budgeting, as well as tax planning.

3. Annual financial statements and tax return. Each year your accountant will prepare a set of financial statements for your business. The accountant will also prepare a tax return for your business, and take care of ATO lodgement. unexciting as these things are, they become stressful and costly if you get behind. Expensive catch up work is never the best start for a relationship with an accountant!

What accounting records do i need to keep?

remember Laura and Gerry from our earlier example? Neither of them set up good record keeping systems. They decided to go with a DIY approach that seemed OK to them. Their franchisors gave them a couple of pointers, then they just did what they thought was right. Only it wasn’t right.

You see, there are specific record keeping requirements for business. And your accountant will want you to follow the best practices they have developed over the years. Good record keeping helps keep your books in order, saves you time, and saves you money. And like so much in life, it’s best to get set up right from the start.

When you set up your business, you’ll need to implement a system to keep track of income and expenses. You do this using accounting software. A few franchises specify the software you must use, but if they don’t, you should follow the advice of your accountant.

In our experience, it’s vital to get your accounting records set up before you begin trading. This helps you get into good habits and keep up to date with your accounting.

Here are three accounting things to do before you get started in business. These seemingly small things will make a big difference to the smooth running of your business.

1. Get your accounting software properly set up. You don’t just turn on your accounting software. It has to be correctly set up and that takes a bit of time. And as a business owner you need to learn how to use it properly. The danger with leaving this to ‘later’ is that you’ll always be playing catch up when it comes to your ATO lodgements.

2. Establish a system to keep track of bills and receipts. When you run a business, you need a copy of every bill or receipt and they need to tie in to the transactions in your bank account. Thankfully, we have apps that take care of this. However, you need to get into the habit of using the apps correctly.

3. Learn about your payroll record keeping obligations. When you employ people there are record keeping obligations that you must comply with. These include employment agreements, working hours, and records of leave accrued and taken. As an employer you must also comply with superannuation payment requirements. In our firm, we help get set up with software that helps them comply with the law. But still, there’s quite a lot to learn. That’s why we recommend every business owner completes the free online training courses offered by the Fair Work Ombudsman.

What does an accountant do?

Your accountant will do the year end work to prepare the financial statements for your business and also the business tax return. But this isn’t all they can do for you.

As a small business owner, you should be working with your accountant in three key areas:

1. Tax planning: This is usually an annual activity that takes place a couple of months before the year end.

2. Financial forecast: A financial forecast is something that every business owner should have. It is a financial model that looks at what you expect sales, costs, profit, and cash flow to be in the next 12 to 36 months. Even at the start of your business life, you should be looking ahead and using the forecast as a way to help you set goals and move towards them. Your financial forecast can also take into account your personal financial needs and the way you expect to use the profit from the business to build your wealth.

3. Business development: An accountant who knows your business can help you develop and grow it. This might involve helping you improve your financial processes, review costs, or create plans for the future. As your business grows, your accountant can help you manage the growth and save yourself time and headaches. Typically, business development discussions take place quarterly or every six months.

These three services are all about adding value to your business. They are about helping you to get the most from your business, and saving you time on record keeping tasks — so you can get on with growing the business.

What costs can i put through the business?

Despite what some people think, owning a business doesn’t allow you to get tax deductions for a heap of personal expenses. A company structure does give you some tax planning options, but only business expenses that are deductible for tax purposes.

The ATO has clear guidelines for what costs you can put through your business. Their website states, “You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.”

The ATO also says that the expense must have been for your business, not personal expenses, and you must have the records to prove it. Some expenses are not deductible even if they were related to your business, for instance entertainment expenses and traffic fines.

For instance, travel to your franchise conference is a legitimate business expense, while your kids’ school books, your grocery shopping, or haircut are not. If you use your business bank account to pay personal expenses your accountant will make adjustments to correctly account for them.

Your accountant or bookkeeper will help you correctly record business expenses and learn what is a business expense and what is not. Part of the accountant’s review work is designed to identify transactions that may not be business related. They will discuss the items with you if needed.

how does Gst work?

As a business owner, it’s your responsibility to register for GST if your turnover exceeds the $75,000 threshold or is likely to exceed it. Your accountant can take care of the registration on your behalf.

When you commence trading you will then:

• include GST in the price you charge for your goods and services

• claim credits for the GST included in the price of goods and services you buy for your business.

The GST a business charges to their customers is shown on the Tax Invoice. This is an important document because it provides evidence of the GST that has been charged and paid.

Your accounting software or point-of-sale system will need to be set up to correctly show and track GST. You must also keep copies of tax invoices for the purchases you make. A tech savvy accounting firm will get you set up with apps that scan receipts and bills, and send them directly to your accounting software. This means there’s no need to keep paper receipts, instead you scan a receipt with your phone, or send it to the software directly from your email.

What payroll records do i need to keep?

Payroll is a complicated area of business and it’s important to get it right. There are significant penalties for failing to comply with the law regarding employee pay and recordkeeping, and if you don’t pay PAYG and Superannuation as required.

From an accounting point of view, you need to record gross wages, tax and super obligations. Your accountant or bookkeeper will help you set up payroll software to track these things, However there are also specific requirements relating to, for instance, recording of hours worked, leave entitlements, pay rates and pay slips.

As an employer you’ll also need to use the ATO’s Single Touch Payroll (STP) system to report each wages payment, and the Superstream process to pay Super.

Your accountant will be able to advise you on the accounting side, including STP and Superstream. As an employer, it’s your responsibility to understand the employment paperwork and payroll aspects of business. Your franchisor may provide guidance, or you can find information on the Fair Work Ombudsman’s Website (www.fairwork.gov. au), or use the services of an employment and Hr specialist.

Each time you pay an employee, you are required to withhold PAYG from their pay. This is then paid to the ATO as part of the BAS process. Each quarter you pay Superannuation on behalf of your employees.

What is a bAs?

Your business will need to submit a Business Activity Statement (BAS) to the Australian Tax Office (ATO), usually quarterly. Your accountant will do this for you as part of their service.

The BAS shows the sales your business has made, the GST charged to customers and the GST paid to suppliers. It also shows wages paid to employees and the PAYG tax withheld from their wages.

You will then pay the ATO the difference between the GST you collected from customers and the GST you paid suppliers, as well as the PAYG withheld from wages. If you paid more GST than you collected, you’ll receive a refund from the ATO.

It’s important to lodge and pay your BAS on time, as penalties apply for late lodgement and interest is charged on overdue amounts.

Do i need a bookkeeper?

You may need a bookkeeper to help you stay on top of your financial record keeping. It’s definitely a good idea to use one in the early stages. A good bookkeeper can help you get your accounting systems running smoothly, which saves time and money later.

A bookkeeper typically takes care of matching bank transactions to bills, receipts and invoices. They can also help with payroll processing. They can also set up the various accounting apps that you will use.

Ideally your bookkeeper will work closely with your accountant. The accountant may be able to recommend a bookkeeper, or may provide that service from within their firm. If you use the accountant’s bookkeeping services, you can avoid the need to recruit, manage and instruct the bookkeeper.

Your accountant should be able to provide advice as to whether a bookkeeper would be helpful in your circumstances.

how can i get money out of the business?

“How do I pay myself?” This is one of the earliest questions a business owner asks. We all have living costs, so the business needs to provide us with a living.

Owner’s Wages

Your first goal is to pay yourself for the work you do. We call this ‘Owner’s Wages’. Depending on the franchise, it might take a bit of time before there is enough business income for you to take a wage. But you should ‘go on the payroll’ once you see that the operating costs are being covered each month. This means you’ll be paying yourself every month and can stop living on your savings or your partner’s wage.

Whatever franchise you buy, your initial investigations should help you identify whether the business can pay you a decent wage for the work you do. This is a bare minimum requirement. For instance, if you are managing a hospitality business, you’ll want to see that the business can generate enough to pay you a manager’s wage. If you’re a handyman or pool technician, you’ll want to receive an amount appropriate for your skills and experience.

Towards the end of the financial year, you and your accountant can assess whether it makes sense for you to receive additional payments on top of the wages you’ve already received.

It’s important to understand that you’ll need to pay PAYG tax and Super on your wages. Just because you’re the owner of the business doesn’t mean you can just take money from the business and not deal with the tax system.

Other ways to get money out of the business

As your business progresses, your accountant will help you decide on tax effective ways to repay any money you have invested in the business.

This might include loan repayments or dividend payments, depending on the structure of your business and your personal circumstances. These payments have tax consequences beyond regular PAYG tax, so it’s important to get advice before you take money out of the business.

this seems like a lot of stuff to know!

Yes, there is quite a bit to the accounting aspects of running a business. remember, an experienced business accountant and their advisory team have spent years developing their understanding and skills. Your goal is not to become an accountant but to learn how to work well with your accountant, bookkeeper and advisers.

Today’s accounting technology reduces much of the record keeping burden and allows you and your adviser to focus on profit improvement and business growth. And by getting things done right from the start you’ll be well placed to progress towards your goals.