The Sunshine Coast boasts having over 36,000 businesses, with small business being the lifeblood of the regional economy. Unfortunately, around 60% of small businesses in Australia will fail within the first three years. There are multiple reasons for this, some of the most common reasons include cash flow issues, poor or no budgeting, and pricing or cost issues. In addition, the ASBFEO (Australian Small Business and Family Enterprise Ombudsman) reports that 43% of micro and small companies are not profitable.
These statistics clearly show how crucial robust financial management is for staying in business and succeeding. As your local specialist small business accountant, we want to help you avoid some common financial pitfalls to ensure your long-term growth.
1. Review your financial statements regularly
We recommend you review your financial statements regularly. When new clients come to ABA Advice Beyond Accounting they often tell us they spend too much time trying to understand their business finance and accounting statements. As a result, they put off regular reviews because it all feels too hard.
The reality is that by doing regular checks of key financial indicators, you are in a better position to understand your business' financial status. You can quickly identify trends and take decisive action, rather than being surprised by a financial crisis which is harder to manage. This is also why we are committed to partnering closely with our clients to help them master their finances.
We recommend that every business owner reviews their profit-and-loss statement, balance sheet, and cashflow statement every month. Ideally, setting aside a recurring time in your calendar when you know you can work with minimal interruptions, like the last Thursday afternoon of every month.
Leverage your accounting software to give you an overview of your financial health at a glance. For example, in Xero, you can set your dashboard up to suit your financial priorities. Read more about setting up your Xero dashboard. You can also create custom reports to show as much or as little information as you want and save the format to reuse in future. See how to create Xero custom reports.
Ask your accountant to explain your financial statements to you in plain language. Implement the review process and then feed your analysis back to your accountant at your next meeting. They can then help you stay on track and improve you interpretation of the information.
2. Understand the basics of cash flow
As a business owner you need to understand that there are multiple elements that go into assessing your cash flow. Many business owners only review their bank balance as an indication of their cash flow. Making decisions without a comprehensive view of their financial position. With cash flow issues being one of the key reasons businesses fail.
To accurately measure your cashflow, you need to have included outstanding invoices, upcoming expenses, and any other liabilities in your financial assessment. In particular, your ATO obligations as an employer and any tax liabilities. As well as your current bank balance
In addition to having a comprehensive view of your current financial situation, it’s important to forecast your cashflow. This helps you anticipate how much money you will need for upcoming expenses and will help you avoid situations where you must take our emergency loans.
In addition to this, it’s equally important to review your accounts receivable and payable. Ensure that your timelines for receiving payments remain within your acceptable limits. As well as making timely payments to your creditors so that you are not under pressure to come up with cash at short notice. It’s your legal obligation as a Director to remain financially fluid.
3. Split Business and Personal Finances
All too often we see business owners combining their business and personal finances. We all think we will remember expenses and activities far better than we actually do. Combining expenses also makes it difficult to get a clear picture of your cash flow. As well as making it hard to track business expenses for tax purposes and then prepare accurate financial statements. Splitting business and personal finances give you greater clarity on your business health.
We recommend you have separate business and personal bank accounts. Then record all your business transactions regularly and accurately in your accounting software. This makes reconciling expenses and payments easier. Accounting software like Xero has automatic reconciliation functions like Bank Rules. This allows you to save time and reduce reconciliation errors. You can use this function for recurring payments like rent, motor vehicle loans and subscriptions.
You work hard for your money so it’s important to also pay yourself a salary. Receiving a regular income will help you keep your business and personal finances separate. It’s also vital when you are applying for finance as you will be required to clearly show your personal income, not just that of your business. In addition, this will make it easier to do your personal budget, in the same way you plan for your business cash flow.
4. Invest in Professional Advice
Most business owners are experts in their chosen field however, they don’t necessarily have extensive financial expertise. When money is tight, it’s also tempting to think that one can save money by managing all your financial matters yourself. Unfortunately, often the time that this takes and the potential errors that are made, may cost you more in the long run.
Engaging an accountant is an investment in accelerating your financial knowledge, as well as receiving timely and accurate advice. Accountants are experts in understanding complex financial information and able to provide strategic business advice that will help your business grow and operate profitably.
Along with this, they can advise you on effective tax strategies that will not only save you money but improve your overall financial position. The ATO continues to crack down on non-compliance and your accountant will play a crucial role in ensuring you meet your tax obligations.
Find an accountant who will meet with you regularly over the financial year. Someone who is willing to share their knowledge and identify opportunities for you to grow your business. Someone who will work in close partnership with you to solve problems, and who is equally invested in your success.
Don’t wait until you are struggling to manage your financial situation. It’s always harder, more time-consuming, and more costly to rectify problems. Reach out early and be on the front foot from the start.
5. Invest in Tax Planning and Compliance
Tax compliance is another key area where businesses struggle because they haven’t put any tax planning in place. The ATO is aggressively pursuing business owners who are not meeting their tax obligations. The leniency of the COVID years is over. Whether it’s GST, superannuation, PAYG or other taxes, the ATO is cracking down on tax debt. This can result in cash flow problems if liabilities are called in and penalties applied.
In the first instance we recommend planning for your tax liabilities. Your accountant is in the best position to advise you of your tax obligations and how to minimise your risk while achieving the best tax result for your specific circumstances.
We recommend that you set up a separate tax savings account so that you have sufficient funds to meet your tax obligations when they become due. If for some reason you are struggling to meet your tax obligations, speak to your accountant as soon as possible. They can help you set up a payment plan and work on a strategy to help you improve your financial position.
That said, don’t overly rely on payment plans or become complacent and let them lapse. The ATO charges interest on overdue amounts and the interest is calculated daily! Also consider that if you have tax lodgements that are outstanding, any applications you make for finance will be denied.
Leverage your accountant’s knowledge and expertise. Tax laws are complex, and your accountant is in the best position to save you time and money when managing your tax obligations.
6. Budgeting or Financial Forecasting
Preparing and maintaining a budget or financial forecast is a powerful way to maintain control over your financial situation. Having a budget in place will ensure you are prepared for the expenses and revenue you are expecting in future months. This clarity will support your decision-making, help you identify both positive and negative trends, as well as let you plan for risks or growth.
Your accountant can help you get your budgeting process started, and you can build and expand on this as your confidence grows. They can help you work through different scenarios that may impact on your business operations in the short and the long term. You will also be better prepared for the normal business cycles in your industry, e.g. quiet periods over Christmas or booms when clients spend up just before the end of the financial year.
It’s important to remember that budgets are not static. They are a living document that you need to update regularly as your circumstances and the business environment changes. For more information read our budgeting and cash flow article.
7. Monitor Specific Financial Metrics
Financial metrics each provide specific and valuable information to help you understand how your business is faring. They can be an early warning system to flag when your business may be getting into financial difficulty and by the same token, when things are going well, and you can plan for expansion and growth.
Your accountant can help you identify the most important metrics to monitor in your business and your industry. The most common metrics that we recommend you review are:
Gross profit
Understand overheads
Understand outgoings that don't show on your P&L (i.e. loan repayments)
Break even
Liquidity
Net assets
Budget vs Actual results
In certain industries, like building and construction, the governing body may set specific ratios and reporting requirements for businesses. In Queensland, the Queensland Building and Construction Commission (QBCC) determines the financial reporting and requirements for licence holders. You can read more about these financial ratios in our articles: Demystifying QBCC Phrases and Calculations and What are the Key Financial Ratios and KPIs for Construction and Trade Businesses?
With regular review of these key metrics, you will gain valuable insights into your financial situation. Ultimately putting you in a better position to make strategic decisions that will improve your business outcomes.
How ABA Advice Beyond Accounting can help you master your finances
Acting on these 7 items is the key to building a thriving business and not becoming another statistic in the list of business failures. It’s easy to list what business owners should be doing to monitor and manage their financial situation. However, implementing these activities may not be as easy when you have limited time and financial knowledge. At ABA Advice Beyond Accounting, we are committed to guiding and coaching our clients to achieve their financial goals.
We speak your language so that you understand each part of the process. Layering up your knowledge and your financial skills so that you master your finances and take control of your financial future.
Our service goes well beyond seeing you once a year and simply crunching your numbers. We offer service packages with regular structured meetings to ensure you are effectively managing cash flow, budgets and operating costs. Our service packages also remove financial barriers to advice versus the pay for time model that many accountants use. You have unlimited access to free advice so that you can access accurate information in a timely manner.
We have many vibrant business communities on the Sunshine Coast, and having a trusted accountant near you can make all the difference. We cover key business areas like Maroochydore, Kunda Park, Kawana, Birtinya, Caloundra, Sippy Downs, and Buderim. Don’t leave your success to chance; book a free discovery meeting with us now to build a strong financial foundation to ensure your business thrives for years to come.
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