Small Business How To: Record Keeping
Welcome to the first in a series of hot topics which will cover the vast array of services offered by Wyrd Accounting. This article will focus on the compliance issues around record keeping, primarily for small businesses and start-ups. It will also question the value you are getting from your record keeping processes currently.
Here is some context to consider. According to the Australian Bureau of Statistics, as of June 2016, there were 2,171,544 actively trading businesses, with an entry rate of 14.6% and an exit rate of 12.3%. So approximately 317k businesses started in 2016, great! But there were also 267k businesses that failed.
Further analysis stated that 59.3% of actively trading businesses had a turnover of less than $200k. Critically, one of the findings noted was that when compared to June 2012, businesses with a higher turnover were more likely to survive.
Why does this matter? Because no matter what the reason for going into business, if you don’t make money you won’t survive! Too many businesses only consideration towards cash flow and how they are performing is based upon how much money is in the bank. There is a better way, but it is a personal choice and will depend upon your personal circumstances.
Accordingly, below is an outline of some key options on how to keep track of your business transactions:
Shoebox method: That is, put everything in a shoebox (or something equivalent) and hand it over to your accountant at year end. Easy for the client, but you are paying an accountant to process transactions and so not only are you not getting the best value from the skill sets that the accountant has, you also have little to no visibility over how your business is performing day to day.
Spreadsheet: This can take many forms, from simple to complex. This works for a lot of small businesses, and functions best when you have a system for keeping it up to date. This takes more of your time to prepare, but if it is set up well and you look at it regularly you can get a bit of an idea of how you are performing with a basic profit & loss. It also can mean less processing time for an accountant, so you are generally going to get better value for the fee paid. Unfortunately, it can also go very wrong if you are not strong in using excel or don’t have appropriate formula checks built in.
Free Software: There are many options in the free space, although if you are registered for GST then those options are limited as most of the systems are designed around the USA taxation system. Wave appears to be one of the better options offering unlimited invoicing, accounting and receipt scanning, making their money through paid services of credit card processing and payroll options (which is currently not compliant for Australia). If your needs are basic, then this might be a good first step into cloud accounting, integrated invoicing and reporting functions. It can be worth starting with the end in mind however, because if you believe you will outgrow your software within a couple of years, it is possibly better to think ahead and chose a package that will suit you in the future. Conversation costs can add up when you consider retraining, downtime and professional fees.
Paid for Accounting Software. If you made it past the statistics in the beginning of this article and kept reading till now, this is obviously the next step. Don’t waste your time with software that needs to be installed on your computer, the pain of computers crashing and losing data has caused too many headaches in the past and are unnecessary. The three big players in the cloud market are Xero, MYOB and Intuit (Quickbooks). Wyrd Accounting is a partner of Xero and so can offer discounted software, but has expertise in all of these software packages. Each provider has strengths and weaknesses, but that is outside of the scope of this article. What is important to understand is how it can benefit your business:
Bank feeds and bank rules/AI: If you are using a separate bank account for your business, then the bookkeeping just got easier with all of the transactions being fed daily straight into the accounting system. You can create rules for regular transactions so completing the bank reconciliation is fast and painless.
Marketplace: Xero currently has over 500 apps for inventory, CRM, payments, POS, reporting and much, much more. Xero itself is a shell which can take care of all of the accounting fundamentals. Previously, accounting systems were often bundled packages that were meant to be a one stop shop, but were often designed to be a comprise trying to find the middle group for most businesses. The success of these new cloud companies is in the ability to tailor the apps to suit your specific needs.
Data is secure and backed up. Enough said. If you haven’t thought about data security and have backup systems in place for your business, you need to!
Information is live: This is the big one, absolutely key to decision making is relevant information. Running reports, comparing to budgets, looking at cashflow, this is not just for big business, this is something every business should be considering.
Access for advisors: Got a question for your accountant or bookkeeper? They can jump straight into your file and give you an answer or fix the problem on the spot.
Packages are scalable. Xero partner plans for non-GST registered businesses start at $5 per month. Say your business grows and you need to become GST registered, then it goes up to $19 per month and you have full transactional history, exactly the same software, and no conversion issues whatsoever.
Cool story, but what should you do?
Well, it depends on your circumstances! The ATO states that by law your records must:
explain all transactions
be in writing (electronic or paper)
be in English or in a form that can be easily converted
be kept for five years (some records may need to be kept longer).
A shoebox or the equivalent paper based system will certainly cover your compliance requirements for record keeping. Excel is a great tool and does work, but is no match for a true accounting system. These are perceived as cheap systems, and sometimes they are all that is required. Never let anyone talk you into something you don’t need. But understand the facts. Circling back to the ABS statistics about failure rates and business size, it is our view that one of the key underlying factors in business failure is not managing working capital and cash flow adequately. The best way to do this is to look at current information to allow you to make the best decisions at the time. Without a doubt, cloud accounting gives you this real time information.
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