12 minute read
ChaPter 3: aCCountinG asPeCts to Consider For your business
ChaPter 3
ACCountinG AsPeCts to Consider For your business
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’.
You’ve decided on the franchise to buy and you’re getting ready to do your training. Now it’s time to think about the accounting aspects of business. A little thought before you get the business going will save many headaches later.
As a business owner, you don’t need to learn accounting, or even much bookkeeping. In fact, it’s best to leave the complexities of this to your bookkeeper and accountant so you can concentrate on growing and running your business day-to-day. Accounting, especially tax and GST, is a specialist area, so turn to the experts for this.
In this article we assume you will operate your business through a company. This is the most common structure used in franchising, though your circumstances may mean a trust is appropriate. Occasionally a franchise may be operated through a sole trader structure. However, most of the points below are relevant for any structure you use.
Please note that this is general advice and you should seek advice for your circumstances from an accounting and tax professional.
Once you become a business owner you become responsible for keeping proper books and records, and for preparing annual financial statements and a company tax return. Record keeping for your business is very different from the financial records you need as a PAYG taxpayer. You will need to keep detailed records and use accounting software such as Xero, as well as payroll software and digital storage of supplier bills. You don’t need to know all the requirements and rules though! Your accountant and tax agent will help you understand what’s required and deal with the financial reporting and tax. Still, it’s important to take your obligations seriously, and that means understanding some of the basics of business accounting.
Here we answer some of the questions frequently asked by new business owners.
Yes, you do need an accountant, and you should get one before you start off in business. In fact, your accountant should provide advice when you’re evaluating the franchise. You should also ask them to set up your business structure. Then, once your business is up and running, the accountant will advise you on the best way to keep your records up to date, and about your obligations for GST and tax matters.
It’s important that your business accountant is qualified, not simply someone who calls themselves an accountant. Your accountant should be a member of one of the accounting professional bodies, such as a CPA or Chartered Accountant and have a practicing certificate from that body. They also need to be registered as a Tax Agent.
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.
Each year your accountant will prepare a set of financial statements for your business. These are required to be in a specific format and prepared according to specific guidelines. The accountant will also prepare a tax return for your business, and take care of ATO lodgement.
But a proactive accountant does much more than your year end work. They will prepare quarterly financial reports and discuss them with you, so you know exactly where your business stands financially. They can also help with cash flow and budgeting, as well as tax planning. A proactive accountant will get to know you and your business, they will ask about your goals and help you achieve them. Accountants usually charge a monthly fee for their services. This means you know exactly what your accounting and advice costs will be and there’s no big bill at the end of the year. You should expect the fee to increase as your business grows and your advice needs become more complex.
What accounting records do I need to keep?
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.
It’s important 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.
The accounting set up is something your accountant or bookkeeper will do for you. It involves:
• Choosing the right accounting and payroll software for your business • Setting up the Chart of Accounts. This allows you to break down all the transactions that your business made during a specific period into different subcategories.
Accountants have a specific way to do this. • Connecting the bank feeds, which bring records directly from your business bank account to the accounting software. • Setting up apps that help you keep digital copies of bills from your suppliers. • Connecting other apps that you may use in the business, if needed.
Your accountant or bookkeeper can train you in how to use the software the right way.
What costs can I put through the business?
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 minimise your exposure to penalties if your records are audited by the ATO. 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.
There are three things to think about:
• Owner’s wages - Money paid to you for the work you do in the business. • LOan repayment - Repaying the money you lent to the business to cover setup costs • BOnuses aNd dividENdS - A return for the risk you have taken.
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.
sharehOLder LOan repayment
The next step is to repay the initial loans made by the shareholder(s). This is the money you put into the business when you bought the franchise. It’s a good idea to repay this money before the end of the initial franchise term. Franchise owners are generally keen to get their initial loan to the business back into their personal bank account. However, there may be potential tax consequences when shareholder loans are paid, so a high level of care needs to be taken. These tax consequences mean that your accountant will need to work out the tax position of the business before you decide when and how much of the loan to repay. Before you start the business it’s wise to get advice about shareholder loans from your accountant. Your accountant will be able to advise you on the correct documentation, a loan repayment schedule, and the rate of interest to charge on the loan.
BOnuses and dividends
The third category of payment from the business is the extra return for the risk you’ve taken. It’s a payment over and above the regular wage for the work you do. We think this is an important distinction of owning a business. A business owner can receive these payments in a number of different ways. The most appropriate one for you will depend on your business structure, financial situation and business goals. Again, this is an aspect of business to discuss with your accountant when you have the annual tax planning meeting.
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 franchise 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.
kAte Groom | Co-founder and Director Franchise Accounting and tax
ph: 0466 376 386 e: kate.groom@franchiseaccountingandtax.com.au
