By Wayne Burgan FCPA

Transcription

1 Starting a Business? How to Avoid Losing your Shirt! By Wayne Burgan FCPA Page 1

2 Contents Contents... 2 Introduction... 3 Do you have what it takes?... 4 How well do you understand the business?... 5 What will make you successful?... 5 Do you have the required financial resources?... 6 What sales will you need to achieve? What legal structure will you use? Legal issues to consider What are your physical requirements? Does the Industry have any particular requirements? Pricing Marketing and Sales Cashflow is King Employing People Taxation ABN Income Tax GST Other Taxes Risk Protection Record Keeping Source documents Employees Other PAYG Records Bookkeeping Conclusion About the Author Cashflow Manager Wages Manager 2004 (with 2006/7 tax changes) Cashflow Manager GOLD Rent Manager Cashflow Manager Manual Bookkeeping Systems What do Accountants Say About Cashflow Manager? What do Small Business Owners Say About Cashflow Manager? Cashflow Manager Pty Ltd. This publication is copyright. All Rights Reserved. No part of this publication may be resold, reproduced or transmitted without the prior consent of the author and publisher. Important Disclaimer: Cashflow Manager Pty Ltd, its directors, the author(s), or any other persons involved in the preparation or marketing of this publication expressly disclaim all or any contractual, tortuous or other forms of liability for its contents or any consequences arising from its use. Further more, Cashflow Manager Pty Ltd and/or its directors and/or the author(s) do not accept responsibility for the opinions, advice, or information contained in this publication and intend by this statement to exclude liability for any such opinions, advice or information. We recommend that professional advice be sought before acting in any of these areas. Page 2

3 Introduction So you re thinking about starting a business. Owning and running your own business can be amazingly rewarding. It gives you a new-found independence and control of your own destiny. However, there can be some major pitfalls for the unwary. My experience has been that many people who are thinking about starting a business are not aware of the questions they need to consider in order to have a reasonable chance of success. The statistics show that the number of businesses that fail in a very short time is extremely high. My goal in developing this booklet is to provide you with the questions you need to ask so that you avoid becoming one of those statistics. If you change your mind about starting a business once you consider all the issues highlighted in this book and I have saved you substantial heart ache and losses, then I am also delighted. But it's not that I want to talk you out of going into business. I have had over 20 years of experience in running my own business and I wouldn't change it for the world. But many people looking at starting a business do so with rose coloured glasses and I do believe it's important to consider reality. I must also emphasise that this booklet is not intended to replace professional advice. When you're starting a business you are looking at your future. Getting excellent professional advice is an absolute necessity. Nor is it intended to be exhaustive. The Tax Act alone has multiple volumes and I can only be very general so that you can have an informed discussion with your professional adviser. So I trust that the information in this booklet will help you in your understanding and give you more clarity. So let s start with YOU! Page 3

4 Do you have what it takes? Owning your own business can bring fantastic rewards, but it can also bring a lot of extra pressures that an employee does not normally face. So here are a number of questions to ask yourself to determine whether you have what it takes to go into business. The questions are designed to identify the types of pressures and how you will cope when they come. 1. Are you a leader? 2. Do you like to make your own decisions? 3. Are you prepared to learn from others? 4. Do you enjoy competition? 5. Do you have will power and self discipline? 6. Do you plan ahead? 7. Do you like people? 8. Do you get along well with others? 9. Are you prepared to work long hours, maybe up to hours a day six days a week and even Sundays and holidays, at least in the early days? 10. Do you have the physical stamina to handle the workload? 11. Do you have the physical stamina and emotional strength to withstand the strain? 12. Do you have the emotional strength to withstand criticism? 13. Are you prepared to temporarily lower your standard of living until your business is firmly established (if needed)? 14. Is your family prepared to go along with the strains they will also have to bear? 15. Are you prepared for the risk of losing your savings? By the way, if you answered No to any of these questions, you should think about doing something else other than going into business. Page 4

5 How well do you understand the business? Understanding the business and industry you plan to go into will usually give you a much better chance of success. For example, is the industry in expansion mode or is it in decline? What trends and potential changes (e.g. the economy, government regulation etc) are likely to affect the success of your business? Is there room for another firm or too much competition already? Have you: 1. Had personal experience in the type of business you wish to run? 2. Sought advice from other people in the industry? 3. Sought information and advice from the relevant Business Association? 4. Read the appropriate industry publications? 5. Researched potential customers and suppliers? 6. Researched your competitors? 7. Sought advice from other advisers who have experience in the industry? 8. Studied the reasons for success and failure of firms in the industry? What will make you successful? Knowing how to do the work of a business has nothing to do with creating a business that works Michael Gerber Other than your intentions and your enthusiasm, what will make your business successful? 1. What is the total size of the market? 2. Who are your competitors? 3. What is their market share? Page 5

6 4. Who is your target market? (Are you just taking a shotgun approach or have you identified a specific identifiable section of the market that will help you focus on who your customers are, where they are and why they buy. The better you can identify your target market the greater success you are likely to have.) 5. What is your unique selling proposition? In other words, what makes you different to your competitors? 6. If I am your potential customer, why should I buy from you instead of every other option available to me (including doing nothing)? 7. How are you going to market and sell your products or services? 8. Have you undertaken any business training? 9. What strengths do you have that you can leverage to build a successful business? Do you have the required financial resources? The following questions and worksheets are designed to help you think through your financial requirements. This will help you to determine the level of profit, sales and cash flow your business must generate on an annual, monthly and weekly basis to meet all your personal commitments. You should also consult an accountant who can help you identify potential expenses you may not have thought of and has the expertise required for this important analysis. Step 1: What are your Annual Personal Expenses? Your business will need to generate this income to meet your personal needs. Record your expenses in the column relevant to how often the expense occurs. Then multiply the amount as shown and record it in the Total column. Add up the Total column to calculate your Total Annual Personal Expenses. Page 6

7 Annual Personal Expenses Weekly (x52) Monthly (x12) Quarterly (x4) Annually (x1) Clothing/Grooming Entertainment, Hobbies etc. Food and groceries etc. Health Insurance Holidays House Maintenance House Payments/Rent Lease & Loan Payments Life Insurance & Superannuation Medical Private Motor Vehicle & Transport Costs Rates & Taxes School Expenses Services (e.g. Electricity & Gas) Other Expenses YOUR TOTAL ANNUAL PERSONAL EXPENSES BEFORE TAX ARE: Income Tax suggest 30% of total annual personal expenses for this exercise. YOUR TOTAL ANNUAL PERSONAL EXPENSES ARE: Total Step 2: What are your Annual Business Expenses? These are often called overheads and your business will need to generate this income to cover those expenses. Record your expenses in the column relevant to how often they occur. Then multiply the amount as shown and record it in the Total column. Add up the Total column to calculate your Total Annual Business Expenses. Page 7

8 Estimated Annual Business Expenses Weekly (x52) Monthly (x12) Quarterly (x4) Accountancy Advertising Bank Charges Cleaning Heat, Light & Power Insurance (Business) Motor Vehicle (Business Only) Printing, Postage & Stationery Property Rent, Rates & Taxes Superannuation, Workcover etc Telephone Wages, Salaries etc (not your own) Other Expenses YOUR TOTAL ESTIMATED ANNUAL BUSINESS EXPENSES ARE: Annually (x1) Total Step 3: What are the funds needed to establish the business? Note: Working Capital refers to the money you will need to meet expenses until the business is generating sufficient cash flow to meet the ongoing requirements. I recommend enough working capital to meet at least 3 months business expenses. In fact, usually I would advise to estimate the amount of money you need, and then double it because in my experience this is a more accurate figure. Add up the amounts to calculate your Total Funds Needed to Establish the Business. Page 8

9 Funds needed to establish the business Real Estate Fixtures & Fittings Plant & Machinery Inventory Motor Vehicles Stamp Duty/Legal fees Goodwill Other Assets Working Capital TOTAL FUNDS NEEEDED TO ESTABLISH THE BUSINESS Step 4: Where are you going to get the money from? Here are some of the alternatives: Personal contributions: How much cash do you have available from your personal resources? Family and Friends: Let me warn you that this can put enormous strain on family relationships, so if funds or even physical assistance are to be provided by family members then the terms of the arrangement need to be fully documented in writing. External investors: This involves introducing partners, joint venturers or other shareholders into the ownership of the business. Banks or other lenders: Banks and other lending institutions generally require extra security such as the equity in your home. What security do you have available? You will need to prepare an application for business finance that includes cash flow and profit budgets. Consult your accountant or business adviser for assistance? Your accountant will also assist in evaluating and recommending finance alternatives. Record the sources of funds you have available in the following table. If you have not considered where you will find the funds needed as yet, this will at least highlight the shortfall between the total funds needed to establish the business and the sources of funds you have available. Page 9

10 Sources of Funds to Establish the Business Term Interest Rate Repayment (if known) Own Contributions Loans from Family and Friends % Longer Term Loans % Shorter Term Loans % Overdraft Assume 1 % Year Other Loans % TOTAL SOURCES OF FUNDS TO ESTABLISH BUSINESS Amount What sales will you need to achieve? If you do not yet know what your loan repayments and interest expenses will be then it will be difficult to get an accurate prediction, but you can at least get an idea by doing the following exercise. Step 1: What is your expected average margin on sales? Your margin is calculated by dividing the Gross Profit (Selling Price Cost Price) by the Selling Price. For example, if your Selling Price = $100 and Cost Price = $60 then the margin is 40% (i.e. (100-60) 100). Your expected average margin is % Step 2: Calculate the sales you need to make to cover your expenses and loan payments 1. Total Annual Personal Expenses including Tax 2. Total Estimated Business Expenses + 3. Annual Loan Repayments + 4. Overdraft Interest and Interest on Interest Only Loans + TOTAL = Average Margin Annual Sales Required = =========== Page 10

11 NOTE: This exercise is simplistic in that it has not differentiated between cash flow and profit. But in my experience it does give you a much clearer idea about the potential viability or otherwise of your business so you can then make a decision about whether it is worthwhile working with your accountant to do a more in-depth analysis. By the way, if you know the average price of your goods or services you can take this one step further. Divide the Sales Required by the average price to calculate the number of units required to be sold. Having determined the annual sales required, you can divide by 12 to determine the monthly sales, or 52 to calculate the weekly sales required. Sometimes when you look at the annual sales it can appear to be a bit daunting but by bringing it back to a month or a week gives you a better picture of whether this is attainable. I once did this exercise for a client planning to open a florist shop in an expensive shopping mall. We quickly determined that she would need to make a sale every 10 minutes just to meet her rent expenses. OK, let s change direction If you have come this far and still want to go into business, then the following issues also need to be considered: Page 11

12 What legal structure will you use? Which legal structures will you use? The options are: Sole trader Partnership Company Trust There are significant differences in regards to both potential liability and tax. Seek the advice of an accountant or a solicitor to help you choose the best structure for your needs. Legal issues to consider Business Name Registration: Business Names are controlled by the states, so if you use a business name it must be registered in each of the states and territories in which you propose to trade. Company and Trust formation: A solicitor can form a company for you or you can purchase an off-the-shelf company through an accountant, solicitor or from a company that markets them. If you choose a Trust structure you will need a Trust Deed. These are available in similar ways to companies, and your accountant will be able to organise it for you. Contracts: You should seek legal advice before signing any contract, lease, purchase agreement or any other legal document. If you are entering into any contract, make sure you have a written contract prepared by a lawyer. Franchise Agreement: You should seek legal advice before entering into a franchise agreement and ensure you understand all the provisions, rights and responsibilities before signing the agreement. Partnership Agreement: If you choose a Partnership Structure you must have a Partnership Agreement. A partnership is like a marriage and while everything is rosy now, many end up in divorce. A formal agreement setting out the partners respective rights, obligations and duties, and what happens on termination must be prepared by a solicitor. Page 12

13 Patent Registration: If you have a design or a new product that needs protection from other people copying it, then seek the assistance of a patent attorney. Do this before you make your design public as your rights for a patent diminish once this happens. Property Lease: Your property lease is an important legal document and you need to understand the ramifications of clauses in your lease. Will your proposed activity be permitted under the terms of the lease and government regulations? Is the term of the lease sufficient and what are the rights of renewal? What is the commencement rate and what are the provisions for increases? Who is liable for insurance? Who is liable for outgoings? What are you allowed or not allowed to do? Seek advice from a lawyer to ensure you understand the provisions and how they may affect you. Trademark Registration: Trademarks give added protection to your trading name or product name. You can find more information about Trademarks and Patents at: What are your physical requirements? Your business premises: o o o o Location: Does the location suit the market you are targeting? Are you aware of future plans for the area to ensure there are no unforeseen potential problems e.g. restricted access, zoning changes? Space requirements: Do you have enough space for both your immediate and future needs? Is adequate parking available for customers and staff? Is there adequate access for supplies being delivered to you? Services: Are electricity, gas, telephone and high speed internet access services available and reliable? Lease Terms: Longer lease terms give you potential stability but can also be a yoke around your neck if your business does not do as well as expected. The lease agreement also stipulates the amount of rent as well as rent increases and who is responsible for outgoings such as rates and taxes and insurance. It is important that you understand the terms of this document. Page 13

14 o Other: Does the building meet safety standards along with your requirements for computer and telephone connections and cabling? Does the allowable use of the property as permitted by the government meet your requirements? Plant & equipment, furniture & fittings, motor vehicles o o o o o o o o What plant and equipment will your business need? What office furniture, telephones, fax, computers, printers, photocopiers, answering machines, etc. will you need? What vehicles will you need? Do you already have them or do they need to be acquired? What outside expertise do you need e.g. to install, optimise and operate computer systems, etc? Is finance required and is it available? Do you understand the differences in both finance and tax implications of outright purchase, lease, asset or hire purchase? What security does the lender require? What ongoing costs are there, e.g. servicing and maintenance, insurance and safety checks and have you analysed to ensure the return will justify the investment? How dependent will you be on the equipment? What backup plans will you implement in the case of a major breakdown? Inventory o o o If you are acquiring inventory from a vendor, has an independent valuation been conducted? Does the inventory include any obsolete or slow-moving items? What will you do with these items? Perhaps there is room for negotiation not to take over these items. How will you ensure that you maintain optimum levels of inventory when you run the business? Consumables What other consumables are required? Page 14

15 Does the Industry have any particular requirements? Some industries have particular requirements that may not apply to all industries. For example, the real estate industry requires specific contracts and trust accounts, the building industry and others have license and compensation fund requirements, the food industry has labelling requirements and so on. So it is necessary to consider what, if any, requirements apply to you. Things to consider include Contracts Health and environmental requirements Industry compensation funds Labelling Licenses Professional Association Memberships Stamp Duty Trust Accounts Pricing In doing the financial analysis earlier we talked about how much you needed to sell and margins. How are you going to price your products and services? Do you know your competitors prices? Do you know what your costs are? What positioning do you wish to have in your customer s mind? Do you want to be a premium product with a premium price or perhaps a cheap product with a low price? I often see new businesses making the mistake of under-pricing themselves, sometimes because they are starting from home with low overheads. It is important to look to the future because it is very difficult to substantially raise your prices when you start to incur costs such as employees, rent and other growth overheads. Page 15

16 That is one reason why it is important to know your competitors prices. Of course, you don t have to match them either if you have a unique selling proposition that allows you to successfully charge a higher price. The other thing I will comment on is that a strategy of winning business by being the cheapest only works until someone cheaper comes along. Think carefully about your pricing and seek advice from a competent professional. Marketing and Sales You can have the absolute best product but if people don t want it, it is a waste of time and money. Marketing is the process of getting your potential customers to want your product or service. Every business is a marketing business so study marketing as if your business depends on it it does! A good starting point is to go onto the internet and type Marketing into Google. The trouble is that there is such much there you will probably find it overwhelming. Special Offer: Send an to info@cashflow-manager.com with your contact details and I will be delighted to send you a free CD titled Secrets to Marketing a Small Business with marketing guru Chris Newton. I learnt a lot about marketing from Chris in the early days of my business and you will find this a great resource to get you started. Cashflow is King One of your goals in business is to make a profit. However, Cash flow (money coming in and money going out) is the lifeblood of a small business. In my opinion it is more important than profit because most businesses will survive longer making a loss if their cash flow is positive than they will making a profit if their cash flow is negative. (Of course you will not survive long term making a loss). Page 16

17 Managing cash flow is not difficult but it does require discipline. From my experience, one basic area that many small business owners do not manage well is making sure they get paid by their debtors for goods and services provided on credit. If you provide goods or services on credit you must firstly have a system for determining to whom you give credit and how much. Then it is vital that you invoice as soon as possible, stipulate your terms, and follow up. People will often delay payment for as long as possible and pay the person who shouts the loudest first. Make sure it s you! It is also important to think about the relative costs when managing tight cash flow. For example, some people delay paying employer superannuation contributions but this can have substantial extra cost because of the Superannuation Guarantee Charge. If you know when cash flow is going to be tight you can talk about it with your bank and your suppliers in advance. You will get much better results than you will by waiting until the crunch hits. Employing People One of the most challenging aspects of going into business is when you become an employer. A good team around you can help you build a great business. But employing people also brings with it a number of obligations and challenges. It is important to get it right, both to build a strong team and to avoid the potential consequences that could otherwise result. As an employer you need to be aware of your obligations under: government laws, e.g. taxation, superannuation, fringe benefits, occupational health and safety, equal opportunity, anti-discrimination and WorkChoices, industrial awards and agreements, contracts of employment and workers compensation insurance (workcover, workcare etc.) Page 17

18 It is important to keep excellent records and to ensure that you withhold the correct amount of tax from your employees wages. Wages Manager is a program designed to make the record keeping chore easy for employers, to help them withhold the correct amount of tax and pay the correct amount of superannuation. It is uniquely designed to protect employers by automatically selecting the correct rate for withholding tax from the employee s wage, and takes the complicated tax rulings into account when automatically calculating the required amount of superannuation. Even when you only have one employee Wages Manager is a great investment because it not only saves you time but also gives you peace of mind that your calculations are correct. Wages Manager is available as a stand-alone product or as part of Cashflow Manager GOLD. For more information go to You can find our more about your obligations as an employer at: Taxation The taxation system is unbelievably complicated and even accountants can struggle to keep up at times. However, meeting your taxation obligations is an important part of running a business and ignorance is not considered to be an acceptable defence. There are a number of taxes that may affect you including: Income Tax Goods & Services Tax Capital Gains Tax Fringe Benefits Tax Depending on your business you may also be affected by other taxes such as: Page 18

19 Excise Tax Fuel Tax It is important to develop a relationship with a good accountant who can advise you on your taxation obligations and assist you when making decisions that have potential tax consequences and with your registrations when you are getting started. ABN The first thing that you will need is an Australian Business Number (ABN). The ABN is a unique 11 digit identifying number that you use when dealing with other businesses and in certain dealings with the Tax Office and other areas of government. It is not compulsory to register for an ABN, but if you don t have one, other businesses are required to withhold 46.5% tax from any payment to you for goods and services you supply. You will also need an ABN to register for the GST and to obtain an Australian domain name for your internet site. Income Tax Federal income tax applies to your taxable income, which is generally calculated on your assessable income less any allowable deductions. Assessable income is generally income your business earns, not including GST payable on sales you make, or GST credits when you are registered for GST. Allowable deductions are deductions for certain expenses that you necessarily incur in relation to your business. However, different legal structures for your business will affect the way tax is levied. For example, a company is a person for tax purposes and pays tax in its own right. If you operate as a partnership, you will pay tax on your share of the partnership taxable income. And if you operate in a trust, you will pay tax on the amount distributed to you as a beneficiary. Page 19

20 Sound complicated? Well that s why it is important to have a good accountant assist you in setting up your business structure in the first place. And by the way, any expenses you incur prior to actually starting your business are NOT tax deductible. So, if you decide that starting a business is for you, make sure that you talk with an accountant as soon as possible. To find an accountant who can help you get started, go to /australia Type your postcode into the Accountant Search box and click on Search. A list of accountants will be displayed together with their suburb and their phone number. Some may also have a profile listed so you can find out more about them. GST The Goods and Services Tax (GST) is a 10% tax on most goods and services sold in Australia. When you are registered for GST you have to collect GST on your sales and send this amount, less the GST credits you can claim on your purchases, to the Tax Office. Most businesses do this quarterly, but some do it monthly, and some smaller businesses send it annually. You must register for GST if: your business has an annual turnover of $50,000 or more, or From $0 if you provide taxi travel as part of your business. If your annual turnover is less than $50,000 and you choose not to register for GST, you will not be able to claim GST input tax credits on your purchases. The GST is complicated by the fact that there are some items where GST is not collected. Some of these such as basic foods, certain health and care services, medicines, education programs and exports are GST-free, which means that you can claim GST input tax credits even though the item you sell does not collect GST. Page 20

21 Other items such as financial supplies and residential rental property are called Input Taxed. With these types of income you do not collect GST but you cannot claim GST input tax credits either. It is important to understand how GST applies to your business. Once you have registered for the GST, there are a number of rules you need to be aware of, such as supplying valid tax invoices, and not claiming a GST Input Tax Credit unless you have received a valid tax invoice. You can find out more at the ATO website at but I recommend that you also discuss this with your accountant. Other Taxes If you have employees and provide some of their remuneration in the form of benefits you may also be subject to Fringe Benefits Tax. An example would be a company car, or their mobile phone, but Fringe Benefits Tax can also extend to entertainment expenses and Christmas gifts. If you have employees (or you are employed under a Company legal structure), you can find out more at the ATO website at but I recommend that you also discuss this with your accountant. There may also be other taxes that apply to your business depending on the industry you are in and the size of your business. For example, as your business grows you may become liable for payroll tax, a wonderful tax that is levied by the state government to reward you for taking the risk of becoming an employer. Does that comment sound sarcastic? I think that people who are prepared to put everything on the line to go into business and then add to that risk by employing people should be rewarded and not penalised. My feelings are compounded by the fact that I employ people in the state with the lowest threshold, South Australia at $504,000 per year (2006/7), whereas some other states and territories have thresholds of a million dollars or more. And these days it does not require all that many employees to reach the threshold. So beware! It might not apply to start with, but as your business grows you need to be aware of payroll tax. Page 21

22 Probably the best place to find out more information on payroll tax is the Business Entry Point, which is at Risk Protection I have tried to identify the risks you need to be aware of when thinking about going into business. But once you are in business there are new risks for which insurance protection should be considered. For example, in most small business start-ups, the person starting the business is essential to the earning potential of the business. If you are out of action there is no income. So income protection insurance is something you should consider. Then there is Public Liability, Product Liability, Property, Contents, Loss of Profits etc. I recommend that you consult with an expert in the risk protection field to consider insuring against these risks. Record Keeping Keeping good records is an essential part of business. Firstly, because it s a legal requirement, but good records also help you to monitor how your business is going, minimises non-essential accounting fees and makes it easier to keep on the right side of the Tax Office and other authorities. Source documents A good filing system is essential, as you need to keep the documentation that verifies how you have arrived at your annual taxable income and also your GST returns for at least 5 years after the returns have been lodged. Page 22

23 These records include: bank account statements, bank deposit books, cheque butts, cash register tapes, credit card statements, sales and purchase invoices, and receipts All sales and purchase documentation should meet the GST invoice requirements. You must also be able to show how you calculated any private use component on any business purchases also used for private use. The Tax Act also has provisions relating to such things as motor vehicles and travel that have special record keeping requirements. There are a variety of ways to claim your motor vehicle expenses depending on the legal structure that you use, who owns the vehicle and how many business kilometres you travel. To ensure you have the information needed to maximize your claim, in the first year you should keep: a logbook that meets the ATO requirements for a continuous period of at least 12 weeks receipts and invoices for vehicle expenses starting and ending odometer readings for the logbook period odometer readings at the start and end of the financial year. If you travel for business you also need to keep a travel diary and records in accordance with the special tax travel rules. At the end of the financial year you will also need to have a list of the customers who owe you money for sales on credit (your debtors) and a list of the suppliers to whom you owe money (your creditors). You will need the total without GST, the total GST and the total with GST. Page 23

24 If you have trading stock and not using the Simplified Tax System, you also need to do a stocktake at the end of each financial year for income tax purposes. Finally, you also need to keep other important papers such as legal documents, contracts and records of asset purchases and retain them for a long period of time, so make sure to set up a filing system that stores them safely and enables you to retrieve them easily when they are needed. Employees If you have employees you also need to keep: tax file number and withholding declarations, employee details such as name and address as well as their commencement date of employment, contracts of employment, choice of superannuation fund elections, employee payment records, leave entitlements and payments, records of fringe benefits, PAYG payment summaries, annual reports, and superannuation records If employees are subject to awards you should also have the Awards available. These can generally be obtained through your local Chamber of Commerce. You will also need to keep Workcare/Worcover and Payroll Tax Records as well. Other PAYG Records You are required to withhold Pay As You Go (PAYG) tax when a supplier does not quote an ABN and when a supplier such as a subcontractor makes a voluntary agreement for you to do this. Page 24

25 Of course this means you must keep records such as: records of amounts withheld from payments where no ABN was quoted a copy of any PAYG withholding voluntary agreements records of voluntary agreement payments PAYG payment summaries, and annual reports Bookkeeping Good financial management is absolutely critical to the success of a business and in particular, the management of cash flow. Dun & Bradstreet, the number one credit agency for businesses, identified in a study that 90% of businesses that fail do so because of a lack of skills or knowledge on the part of the owner. Nowhere is this more apparent that in the area of financial management. Keeping on top of your bookkeeping is critical. Bookkeeping is that task that no-one loves but it is essential. Many small business owners struggle with the bookkeeping but often this is because they are trying to use a sledgehammer to crack a nut. You need a program that does what you need it to do, but one that you can also understand. So, before you go out and buy an off the shelf accounting program, simply because you have heard of the brand name before, you need to consider these questions: 1. Who is going to do the bookkeeping and how much training have they had in accounting? Let me explain why this is important. Accounting programs generally require you to understand double entry accounting concepts such as debits and credits, journal entries, why increases in assets and increases in expenses are both debits, and more. Page 25

26 When you read the comments from accountants later in this report, you will notice that Michael Osborne from McMahon Osborne in Victoria says that only 10-20% of clients using off the shelf accounting programs provide them with records that are reconciled to their bank accounts. That means 80-90% are not! Reconciled Records means that the receipts and payments in your records match your bank statements and indicate a degree of accuracy. When your records are not reconciled, either your accountant needs to find out why, which means a lot of extra unnecessary cost for you, or there is a significant risk in the event of a tax audit. I mentioned that lack of skills is a major contributor to business failure if you are planning for you or a family member to keep your books, your choices are to either make sure the program you use is not beyond your skill level, be prepared to spend a lot of time and money doing training, or paying someone else to do your books. By the way, there is a program that is very easy to use and meets the requirements of 90% of small business owners. It is called Cashflow Manager and more information is available at the end of this report. 2. What features do you need in an accounting or bookkeeping program? Here is a list of features to consider. 1. Receipts and Payments The first requirement for any business is to easily record receipts and payments and reconcile to your bank statement. 2. Sales Invoices/Accounts Receivable Do you sell goods or services on credit and issue invoices to a range of different customers or clients? If so, your program needs to be able to issue invoices and assist you to manage the money owed to you. 3. Purchase Invoices/Accounts Payable When it comes to goods and services on credit, most small businesses can develop a simple system to easily manage the payment of supplier invoices. Page 26

27 In fact, for most businesses it is as simple as placing all new invoices into a folder as they are received and then paying them as they become due. A list of unpaid invoices at the end of the month is all that is needed if the business reports their GST and income tax under the accruals method. (Businesses with a turnover greater than $2 million are required to use this method. Other businesses may choose to. Essentially, accruals means that transactions are recognised when invoices are created rather than when cash changes hands.) So unless you have a need for a computerised inventory tracking system, or there is an industry specific reason, an accounts payable or purchase invoice software system is usually not worthwhile unless you have a lot of purchase invoices. 4. Inventory Tracking Some businesses need to track inventory. This may be a simple case of tracking items purchased and sold while other businesses may require a more advanced tracking system because they use components in the manufacture of a new item. 5. Point of Sale Retail businesses and restaurants often use Point of Sale software that enables easy creation of invoices with the use of barcodes and scanners. Point of Sale software is normally a software package in its own right but some packages will communicate with accounting packages. 6. Time Tracking If you conduct a professional business where you charge for your time then you may need software that enables you to track the time spent on various activities. 7. Payroll If you have employees, a program that enables you to manage wages and salaries and superannuation requirements is an invaluable tool. This is a very regulated area of business and software to help you manage it is essential. Page 27

28 Accountant Mike Crowley from Mike Crowley & Associates in Orange, NSW was instrumental in developing The Six Levels of Recordkeeping. It may assist you in reviewing the level of software you need. Page 28

29 It is important to consider what you need in a software package as the wrong choice can be extremely costly. As I have already mentioned and as you can read for yourself, accountants say that the majority of their clients using popular double entry accounting packages do not provide them with reconciled records. Not only is this costly (as accountants charge for the time it takes to get the records in order) but it also clogs up the accounting practice so they are unable to provide you with the help you need to improve your business. Conclusion The aim of this report is to help you think through the issues you need to consider in starting a business. The next step is to consult a professional. If an accountant has provided you with this report, it is important to seek his or her advice once you have considered these issues. If you have received this report via alternative sources, you can search for an accountant at the following website: /australia If you do decide to start your own business, I wish you every success and trust that the things I have suggested that you consider will help you to avoid losing your shirt. Dedicated to your success Wayne Burgan Page 29

30 About the Author Wayne Burgan is the founder and CEO of Cashflow Manager Pty Ltd, a business focussed on helping small business owners by providing them with the simplest tools on the planet. Wayne is an accountant by profession and a Fellow of CPA Australia. He worked with the Australian Taxation Office for 10 years prior to commencing his own accounting practice so he has had experience with small business owners from both sides of the fence as well as operating his own businesses along the way. Wayne has always had a passion for small business and has represented their concerns on behalf of CPA Australia in meetings with other business organisations and government. When Wayne commenced his accounting practice he discovered that many people were crying out for a simple system to help them keep excellent records they could understand and also make their accountant s job easier. So Wayne developed Cashflow Manager firstly as a manual record keeping system and then as a software solution. And because he felt that accountants were (and still are) the best people to advise clients on keeping records, the Cashflow Manager solutions have been primarily distributed via accounting firms. The software version of Cashflow Manager has now sold more than 100,000 copies in Australia alone via accountants, and the products are now sold in the United Kingdom, the United States and Canada as well as in Australia. Information about the various Cashflow Manager products is on the following pages, or to find out more, go to Page 30

31 Cashflow Manager 2004 Cashflow Manager is simple! This is attested to by its many users and by independent media such as The Age who described Cashflow Manager as breathtakingly simple, BRW: simpler than MYOB, Australian CPA: the simplest program tested, Australian Personal Computer Better than erecord and The Australian: one of Australia s best kept secrets. Cashflow Manager is designed for non-accountants so while other accounting programs require you to have an extensive knowledge about accounting debits, credits, journal entries and understand the distinction between assets, liabilities, income, expenses and equity, you don t need to know any of that with Cashflow Manager. While Cashflow Manager does the double entry in the background, you simply record your receipts and payments transactions in columns and match them to your bank statements. GST is automatically calculated and the reports give you and your accountant everything you need to prepare your BAS and tax returns. Cashflow Manager features include: A unique spreadsheet or column format that makes recording your transactions amazingly simple The columns are automatically customised for your business Each column has a GST type that automatically calculates the GST Unlike other programs where your data disappears from the screen, your receipts and payments stay in columns so you can see exactly what you have received or spent Easy step by step process to match your records to complete the Bank Reconciliation If you use internet banking you can download your bank statement details and import the transactions directly into Cashflow Manager to quickly and easily reconcile to your bank account(s) The GST Report mirrors the Tax Office GST Calculation Worksheet to make completing your BAS a breeze You can lodge your BAS electronically You can your backup file to your accountant Your accountant can export your Cashflow Manager information straight into their general ledger program to save both time and money If you need computerised invoicing or you have employees, Invoice Manager and Wages Manager are optional add-on modules. Cashflow Manager s goal is to provide the simplest bookkeeping solutions on the planet. In fact, we provide a 90 day money back guarantee because we believe that we should take the risk, not you. If you are unhappy with Cashflow Manager in any way, return it for a full refund of the software purchase price. Page 31

32 Invoice Manager 2004 Invoice Manager makes it very easy to prepare invoices and control the money your customers owe to you (Debtors) You can then send Statements to your customers and print a series of reports that analyse your sales by product, customer and profit margin. You can also use it for Purchase Orders and Creditors (invoices from suppliers). Invoice Manager has the following features: Your Customer List is the central screen in the program. Simply select the customer then click on the function button you require. For example, to prepare an invoice, click on the Customer and then on the Invoice button. If a customer calls about their balance, click on the Customer and then on the Customer Enquiry button Prepares Tax Invoices, Adjustment Notes, Statements and Receipts Print invoices using the layout supplied, or customise your own layout with your business logo. You can also print them using Microsoft Word, avoiding the need to purchase special stationery. Inventory pick lists including item descriptions and prices help prepare invoices quickly Transfers your receipts and payments back to Cashflow Manager Create up to 5 different Customer Types each with different prices Customer/Supplier Diary to keep notes about customers and suppliers Creates job numbers and allocates invoices to specific jobs to track profits Reports how much money is owed to you (Debtors) and their ageing Reports that help you if you lodge your GST/BAS on an Accruals basis As well as preparing invoices and controlling debtors you can also use the Purchases section to create Purchase Orders and manage invoices from suppliers (Creditors) Unlike other programs, Invoice Manager does not have a complicated end of year rollover procedure and you can still access invoices from previous years. Full 90 day money back guarantee Invoice Manager is not sold as a standalone program. It is available as an optional add-on to Cashflow Manager, or is included in Cashflow Manager GOLD. A demonstration version of Invoice Manager is automatically installed when you load Cashflow Manager so you can try before you buy. The extra module can then be purchased directly from Cashflow Manager by phoning Page 32

33 Wages Manager 2004 (with 2006/7 tax changes) Wages Manager will save you time and worry whether you have 1 employee or 100. In a recent survey Wages Manager users indicated the average time saved per business in producing end of year PAYG Payment Summaries and Tax Office information was approximately 5 hours. The average time to prepare this information was as little as 2 minutes per employee. Wages Manager is designed to make processing pays and end of year information very simple and to protect employers from any potential tax penalties. To protect employers Wages Manager also has some unique features such as: Automatically calculates the correct tax withholding scale based on the tax instalment declaration forms completed by employees. (Other programs make the employer choose from one of the more than 30 different options.) Automatically calculates which allowances require tax to be deducted and which allowances are Ordinary Time Earnings for superannuation purposes in accordance with all the Tax Office Rulings Automatically calculates employer superannuation contributions using the Tax Office definition of Ordinary Time Earnings Other features of Wages Manager include: Pay employees individually or process multiple employees at the same time Pay employees by cash, cheque, or electronically and into multiple bank accounts Inbuilt special tax scales for Actors, Horticulture Industry and Shearers Custom Rates for employees with multiple pay rates e.g. food and hospitality Caters for Rostered Days Off, Allowances, Deductions, Bonuses, Commissions etc Employee Diary to keep notes about employees such as warnings, sick days etc Manages employee sick leave and annual leave entitlements Automatically calculates the grossed up value of fringe benefits for PAYG Payment Summaries Transfers payments for wages and superannuation back to Cashflow Manager. All the reports you need to manage employee pays, superannuation and end of year tax information including PAYG Payment Summaries (Group Certificates) Full 90 day money back guarantee Wages Manager is sold as a standalone program or as an optional add-on to Cashflow Manager. It is also included in Cashflow Manager GOLD. A demonstration version of Wages Manager is automatically installed with Cashflow Manager so you can try before you buy. The extra module can be purchased direct from Cashflow Manager Pty Ltd by phoning Page 33

34 Cashflow Manager GOLD Cashflow Manager GOLD is the complete small business package for business owners wanting to keep excellent financial records, prepare computerised invoices and manage their debtors and creditors as well as their employees. Cashflow Manager GOLD includes Cashflow Manager, Invoice Manager and Wages Manager in one complete package and offers the following features: Record your receipts and payments using Cashflow Manager s unique column format that looks just like a manual cashbook Calculate and report GST using the simple GST type allocated to each column Match your records to your bank statement using Cashflow Manager s easy step by step Bank Reconciliation process, or Import your bank statement details straight into Cashflow Manager to quickly and easily reconcile to your bank and then transfer items on your bank statement straight into your Receipts and Payments records Prepare computerised invoices and manage money owed to you by your debtors for goods and services sold on credit Issue Customer Statements Prepare Purchase Orders and keep track of supplier invoices (Creditors) Simply and easily manage employee records Save amazing amounts of time on pay days Calculates all the tax to be withheld from employees pays Calculates all your employer superannuation contributions Save amazing amounts of time when processing year end PAYG Payment Summaries and Tax Office information All the reports for your BAS and managing your business Cashflow Manager GOLD is designed to be a comprehensive small business system and the simplicity of Cashflow Manager GOLD helps you keep excellent records and maximises the effectiveness of the relationship between you and your accountant. Cashflow Manager s goal is to provide the simplest bookkeeping solutions on the planet. That s why we provide a 90 day money back guarantee because we believe that we should take the risk, not you. If you are unhappy with Cashflow Manager GOLD in any way, return it for a full refund of the software purchase price. Page 34

35 Rent Manager If you own an investment property Rent Manager will keep all your rental property tax records in one place to give you peace of mind in the event of a tax audit. Rent Manager keeps both your purchase and sale records for capital gains purposes, and all the information you need to prepare your annual tax returns. It also allows you to analyse potential investment property purchases and make informed decisions. Rent Manager includes the following features: Record property purchase, sale and improvement details so you don t get caught when you need this information for Capital Gains calculations Record the rental income and expenditure for your investment property Record information from real estate agent monthly summaries Keep track of any mortgages including interest and bank charges Keep car records for collecting rent and conducting property inspections All the information for completing your annual tax return is summarised in the Annual Summary Keep records for multiple properties Calculate Depreciation of furniture & fittings Calculate Tax Deductible Building Allowances Calculate the portion of Borrowing Costs that can be claimed as a tax deduction A full record of cost details as well as any loans you have used to finance it. Easy to follow manual and online help plus telephone support to assist you Print reports containing all the information your accountant needs to complete your tax returns Full 90 day money back guarantee Rent Manager s Property Analysis Module Use Rent Manager s comprehensive Property Analysis Module to evaluate the attractiveness of a rental property. Simply key in the variables on the property and you can produce a series of reports and graphs that provide a 10 year cash flow projection, taxable income estimates and equity forecasts. This feature helps you make an informed decision and minimise the risks you take in purchasing rental properties. Rent Manager is the perfect tool to manage your property, make lodging your tax returns easy and give you peace of mind that you have the information you need when you finally come to sell the property. Page 35

36 Cashflow Manager Manual Bookkeeping Systems The Cashflow Manager manual systems have been helping accountants get better records from their clients since The unique step by step instructions were revolutionary in helping small business owners understand how to keep their books. Accountants also report a high percentage of clients who reconcile their records. More than 260,000 manual Cashflow Manager systems have been supplied to small business owners by their accountants and thousands continue to still use them even now. (The manual systems were so successful that we based the Cashflow Manager software program on exactly the same format!) In fact, if you have clients who need a manual system, Cashflow Manager is still the solution! Cashflow Manager includes: Step by Step Instructions that make bookkeeping a breeze Sections to record Receipts, Payments & Petty Cash A simple step by step Bank Reconciliation process Easy GST breakdowns and GST Worksheet Sections to record Wages and Superannuation, Asset Register plus end of year Stock on hand, Debtors and Creditors There is even a section to prepare a Cashflow Budget The special FARM VERSION has different standard column headings tailored to primary producers and also has additional sections for the Milk Reconciliation, Savings/Investment Account, Stock Agent Account and Livestock on Hand. Page 36

37 What do Accountants Say About Cashflow Manager?! " # $##"% $&$&' () * (" +'&, ')&-). $/ % 0 &1 $) &2 ) * / $/ % #&#3 ) &4-5 ) / % 1 - &0 4 &5 ). $&/ "5 "% - 4 $&4 $) &-) $$#& "% 4 6#&) 0, &5 ) 5 7 $ & $ 8 "9 ) $ : ;&- *&' Page 37