Making sure your business finances are in order

Getting your head around the basics of bookkeeping, accounting and good financial practice may not come naturally to all business owners. But the better you understand the numbers, the more control you'll have over your business and your decision-making.

To get you started, here’s a rundown of some of the main financial terms and how they apply to the financial management of your business.

Revenue and money coming into the business

Most of us understand that revenue is the income you generate through your sales.

If you multiply your average sale price by the number of units sold, this is the top level number you get. It’s a gross figure (i.e. before any deductions) and gives you a clear idea of how much money the business is generating through its sales activity.

Revenue can come from various sources, and each income source is known as a ‘revenue stream’.

Revenue streams could include product sales, income from services you provide, income from intellectual property you own (like patents) or income from assets the business owns, like property you rent out at a profit.

Having several revenue streams is a good idea, as it spreads your income generation across multiple areas and reduces the risk of one revenue stream drying up.

Expenditure and money going out of the business

Expenditure refers to any payments you make (either in cash or credit) against the purchase of goods and/or services.

In a nutshell, expenditure is the money that’s going OUT of the business, so it’s important to have a good grip on these costs and to make sure you’re not spending any more money than you need to.

Costs that would fall under expenses include your supplier bills, your payroll expenses, your operational overheads and the costs of any raw materials and goods you buy to keep the business running.

The less you pay out in these expenses and overheads, the more of your revenue will end up as profit – as we’ll see in the next section.

Profit and loss (P&L)

Your profit and loss statement (usually referred to as your P&L) is an incredibly important financial report to get your head around. 

The P&L summarises your revenues and expenditure over the course of a period – usually for the month, quarter or year that’s just ended – and gives you a breakdown of the profits and losses the business made during that period.

If you make more in sales revenues than you spend in outgoing expenses, you make a profit (and that’s vital to your success).

For any business to be financially viable, your financial model MUST be able to generate profit.

Without profits, the business can’t make money, you can’t reinvest back into the company to drive growth, and you (personally) won’t get paid anything.

Cashflow statements and positive cashflow

Your cashflow statement is another vital tool in your accounting toolbox. 

To keep the lights on in the business, you need enough available cash to cover your everyday expenses. Your cashflow statement shows you the cash inflows (money coming into the business from revenues etc.) alongside the cash outflows (payments to suppliers, or operational overheads etc).

For the business to have enough cash in the pot, your cash inflows MUST outweigh your cash outflows. This is called being in a ‘positive cashflow position’ and it’s a level of financial health that every startup should aim for.

By tracking inflows and outflows, and projecting them forwards in time to create forecasts, you can make sure there’s always available cash in the business.

Improving your understanding of the numbers

It takes time to pick up the financial jargon and accounting terms that will help you understand your accounts.

But don’t despair. As your business journey evolves you’ll gradually begin to get your head around the important business finances, numbers, metrics and reports.

Other important finance terms to understand include

• Turnover = the total sales revenue made in a period. It’s also sometimes called ‘gross revenue’, as it’s the number prior to any deductions being made.
• Assets = the things you own in the business, like equipment, property or cash etc.
• Liabilities = the things you owe to other people, like bills, debts and loan repayments.
• Balance sheet = a snapshot of your assets and liabilities on a given date.
• Working capital = your current assets minus your liabilities. In common usage, it’s the capital (money) you have in the business to keep the company operational and trading.
• Funding = bringing additional capital into the business, usually in the form of business finance products like loans, or through private investment from outside sources.
• Credit score = a rating given to the financial health and risk level of the business. The bigger the score, the lower the risk – and the better your access to funding.

If you’re planning for your business, get in touch. We’ll help you set up the ideal accounting system, so you’re in complete control of your finances.

Keeping your business cash liquid – the difference between cashflow and profit

The foundational goal of any business is to make a profit.

As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise.

But how does profit differ from cashflow? And why is cash king?

How do profit and cashflow differ?

To really understand the difference between generating profit and managing cashflow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cashflow is an invaluable business skill.

Let’s take a look at the differences:

What is profit? 

Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It's driven by creating a profit margin and generating value from your products and/or services.

What is cashflow? 

Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.

Why is positive cashflow so important?

‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cashflow then the business may not survive as long as the end of the year.

What’s needed is good cashflow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.

A business can generate high revenues and big profits, but still be cashflow poor. In other words, it can have profits at the end of the period, but have very little liquid cash to fund it's day-to-day operations over the course of the period.

Talk to us about improving your cashflow management.

Good cashflow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cashflow’ you need to proactively work to keep your inflows higher than your outflows.

As your bookkeeper and BAS Agent, we’ll help you set up detailed cashflow reporting and forecasting, so you can keep the business in that ideal positive cashflow position. And we’ll also look at key steps for keeping your revenues high, margins profitable and meeting your financial targets.

Get in touch to talk through your cashflow management.

ATO Line of credit ending

As new reporting powers come into play, businesses are being warned against using the ATO as an alternative line of credit.

Debt Reporting Powers

In 2019, the ATO was afforded new debt reporting powers. While this took a backseat to the Covid-19 pandemic, the ATO is now cracking down on outstanding tax debt. 

Businesses without a payment plan, that are more than 90 days in arrears, and who owe more than $100,000 in tax are more likely to be reported to credit agencies by the ATO.

Impact on credit rating

In the past, business owners have sometimes used the ATO like a ‘line of credit’ by not paying their ATO commitments on time.

Taking this road is much more likely to have an adverse impact on your credit ratings and credit insurance limits. This, in turn, makes it more difficult to maintain or extend credit terms with suppliers.

Therefore, it's important to maintain a high level of communication with your creditors. 

Staying on the front foot

As business owners, if you owe tax, it's vital that you stay on the front foot with this ATO crackdown. We suggest you seek the advice of your BAS agent.

First Class Accounts Ovens and Murray, as your BAS Agent, are able to advocate on your behalf to deal with the ATO.

As Busy01 Consulting, we can also to assist with:

• preparing a business plan
• management advice
• cash-flow planning and projection
• systems development
• business expansion
• budget development
• trading-structure planning.

Get in touch to discuss which options are best for your business. 

Direct Debits and Online Payments

Do You Have Direct Debits and Online Payments Set Up for Your Business?

Making it easy for your customers to pay you is vital to business success. Getting direct debits and alternative payment methods linked to your business is so easy these days there's no excuse not to give your customers multiple ways of making payment.

Many service-based businesses choose direct debit arrangements with their clients to avoid late payment. If you’re often chasing overdue payments, consider implementing direct debit arrangements to reduce your administration time.

If you’re already using online accounting software, check the add-on solutions and choose one that integrates with your accounts. This means that the payment platform information feeds directly into your accounting software to be easily matched to customer transactions.

Make it Easy

You probably already have bank transfer information set up, but adding several other methods such as PayPal, debit cards, and credit cards allows customers to choose the method most convenient for them at the time. Many customers appreciate the automation and simplicity of direct debits.

Make sure your payment terms and conditions are clear on your website and invoices and don't forget to include all your chosen payment methods for customers!

Worried About Costly Fees?

You have the option to choose whether you will absorb the cost of the payment gateway processing fees or whether you will add the cost to your invoice and charge the clients extra. Your accounting software will then allocate the funds accordingly to invoice payment and fees received.

Better Transaction Recording

When you integrate direct debits and online payment methods with your accounting system, you dramatically reduce errors in recording customer payments – which means less time spent on your accounts!

Not Sure Where to Start?

If you’d like to make it easier for customers to pay you, talk to us about which solutions are best for your business. We can discuss which platforms have the best and most secure integrations with the accounting software you use.

We’ll help streamline your payment systems.

Keeping debt low

Credit control: Having a large amount of debt in your business is bad for cashflow, weakens your overall financial health and brings down your credit score as a business.

So when customers don’t pay on time, that ‘aged debt’ is bad news for your finances. Aged debt can begin to stack up, adding to your liabilities and reducing the health of your overall balance sheet. So, it’s important to tackle late payment head on.

Get effective with your credit control

Being proactive with your debt management helps you speed up payment, reduce your debtor days and rein in your overall debt as a business

To improve the efficiency of your credit control:

• Make your payment terms clear – state your payment terms on all invoices and create a policy that’s part of the terms & conditions that customers sign up to.
• Run regular debtor reports – check your list of late invoices to see which customers are the late payers, and where the big debts are that need to be collected.
• Be proactive in chasing late payment – don’t be shy about asking a customer to pay their bill. Set up notifications and schedules to remind yourself to chase late-payers.
• Automate your credit control tasks – cloud accounting platforms have built-in tools or automated credit control integrations that can automatically chase your late-paying customers as soon as an invoice is overdue.

Talk to us about enhancing your credit control

If late payment and aged debt is weighing heavily on your balance sheet, we’ll help you set up the debtor reports and credit control processes needed to reduce this debt.

Get in touch to improve your credit control.

How do you get your outstanding invoices paid?

Do you dread following up outstanding invoices?

It can be frustrating when you have customers who haven’t paid their invoices. Not to mention the impact on your cash flow.

Getting paid on time is essential to good cash flow. But how do you get paid?

Here are some simple, effective techniques that can help you get your outstanding invoices paid.

Make sure your terms are clear

Write into your terms of service that you will charge a late fee for overdue invoices. Make sure you your customers are aware of your terms of service before you do the work.

Also, we recommend doing a credit check before you do business with a new customer. This can help reduce the risk of late payments and defaults, as well as minimising the need for follow-ups.

Reminders

Often, the payment is a simple oversight. By resending the invoice or sending a simple payment request an outstanding invoice will be paid. Start there, and you might be surprised by how many outstanding invoices are paid.

Better still, set your accounting software up to send automated reminders to customers with outstanding invoices. Talk to us about how to do this.

If the above action doesn’t achieve the desired result, ie your outstanding invoice being paid, it’s time for firmer action.

As uncomfortable as it can be to make a phone call to ask for payment, it can be one of the most effective ways to get paid. Perhaps start with asking are they aware that their invoice is outstanding.

A stronger stance

So, what do you do if your customers don’t respond to your polite requests?

If you have been waiting for payment for months, it’s time take a stronger stance.

This could include:

• stopping your services until payment is made
• using a professional debt collector
• bringing in your lawyer

While you will likely get paid by taking this stronger stance, you do need to consider the potential impact on the relationship with your client. How important is it? Do you want to continue to do business with them? Is it worthwhile continuing to do business with them? 

If you need help managing your outstanding invoices, get in touch for expert support and guidance.