Bookkeeping is one of the most essential components of a well run small business. Whether you do your own bookkeeping or outsource it, it is very important to at least understand the basics.
When I left high school my first jobs were in a variety of trades working for small business owners who worked on the tools and had very little time to manage their own paperwork. Too many times than I would care to admit did I see businesses not realise their full potential or even worse go under due, to mismanagement or complete neglect of their bookkeeping.
In this article we will cover the key areas a Small Business Owner must understand to have a good grasp of their bookkeeping responsibilities. Let’s all try and avoid having our own war stories and get on top of this essential part of Business Management!
Ownership Structure/Start-up Phase
Getting your ownership structure right is first and foremost. There are 3 main types of ownership structures for Small Businesses in Australia (other countries may differ but essentially these are the main forms of ownership of small businesses worldwide. NB I have left out for the purposes of this discussion the many and varied trust structures).
Sole Trader – “This is the simplest and most inexpensive form of business structure to set up. As a sole trader you can trade under your own name. However, if you wish to have other words in the title of the business then you must register a business name. Registration of a business name does not make the sole trader a separate legal entity. You will still be responsible for any actions of the business and personally liable for all business debts.”
Partnership – A partnership is defined by the Partnership Act 1892 (NSW) as the relationship which exists between persons carrying on a business in common with a view to profit. It involves an agreement between two or more parties to enter into a legally binding relationship and is essentially contractual in nature.
It’s wise to have a formal written partnership agreement because it sets out each partner’s responsibilities and reduces the likelihood of disputes. For example, one partner may be contributing more money or time to the business and therefore be entitled to a greater share in the business. An agreement can also cover what happens if the structure is dissolved or changed, for example, through the retirement or death of one of the partners.
Pty Ltd Company – A private company is a more complex business structure formed by one or more people who wish to have a business that is a separate legal entity to themselves. When you form a company, you could become an employee, director and/or shareholder of the company.
Private companies are regulated under the Corporations Law which sets out substantial obligations for company directors. Establishment and ongoing administrative costs associated with Corporations Law compliance can be high. This is why the structure is generally considered to be better suited to medium to large businesses.
Source – NSW Office of Fair Trading
For a full explanation of the different types of ownership structures available to Australian Small Business Owners check out this link
Now you have your Ownership structure right, your ABN & Business Name registered you are ready to set up your bank account. Here is a good site to compare what bank account is the right one for you.
What I recommend is every month you do a bank account reconciliation. Essentially what this means is going through each transaction on your bank statement and ensuring you have appropriate paperwork (tax invoice/receipt etc) to show as a record for each transaction.
I strongly recommend that you check out Shoeboxed where for a small monthly fee their team will professionally scan and correctly allocate each invoice for you in a secure online portal you can share with your accountant and/or portal. I personally use this and I guarantee it will save you a lot of time!
If you have employees, including if you personally pay yourself or your partner an income from the business you will need to manage your payroll. The last thing you want is disgruntled employees not getting paid on time! Also, not keeping up to date with your superannuation obligations can lead to heavy fines from the ATO.
To effectively manage your payroll I highly recommending investing some money in a good payroll management system. The best Payroll/HR management system that I know of is Subscribe HR. It would be well worth checking out if you are looking for an efficient, web-based platform to manage your payroll.
Depending upon which state you are in Australia, (or equivalent laws in other countries) you may also be required to pay payroll tax. The payroll tax kicks in when your staff’s wages reach a certain threshold. For a full state by state rundown of your potential payroll tax obligations check out this article at My Business Resource Centre.
Regardless of whether you have to pay payroll tax or not if you have any employees at all you will be obligated to pay Pay As You Go Withholding Tax (PAYG). For a full rundown of what your PAYG obligations are take a look here.
Business Activity Statement (BAS)
If you are required to pay or are eligible to receive any of the following you are required to complete a Business Activity Statement:
- PAYG installments
- PAYG withholding
- GST & related obligations
- Fuel Tax credits
- FBT installments
- Company and/or Super Fund Installments
Check out this very useful BAS Guide at My Money Calculator.
Depending on your business your BAS can be lodged monthly, quarterly or annually. The Taxpayers Association of Australia has an excellent resource for you to review in order to ensure your compliance with your BAS obligations.
End of Year Tax Return/Financial Accounts
Your end of year reporting obligations will differ depending upon your ownership structure. In almost all cases Australian Small Businesses will be required to complete an Annual Tax Return. If you are a Proprietary Ltd Company you will also be required to submit Financial Accounts to the Australian Securities & Investments Commission.
To read about your Tax return obligations check out the ATO website.
For Proprietary Ltd Companies required to lodge Financial Accounts with ASIC visit their website here.
If you are on top of these important bookkeeping responsibilities in your small business you will be miles ahead of the vast majority of your competition. If this is not your skillset though I highly recommend you get some qualified help in this crucial area of business management.
If you need some help you may wish to check out my article on Bookkeeping Resources for Small Businesses.