Why did you get into business? For 90% of you reading this blog, we can almost guarantee it wasn’t because you love bookkeeping. The other 10% of you? Hello, fellow bookkeepers and accountants!
As a small business bookkeeping is one of those core functions that often can get ignored. We regularly hear stories of small business owners reconciling bank transactions at 11pm on the day GST is due. Does that sound familiar?
With the last few years of experience, we’ve compiled the below 19 essential things you need to know about small business bookkeeping.
1. Keep your personal and business transactions separate
At a minimum, we recommend having a separate bank account for your business transactions to your personal bank account. Not only will this make everything a lot easier to keep track of, but if you operate as a company it also ensures you don’t run the risk of ‘piercing the corporate veil’ (in layman’s terms removing the liability protection you personally receive as a company).
2. Track your expenses – keep all of your receipts
Inland Revenue requires you to keep all records for seven tax years, minimum. Not only this, source documents provide you with an easy reference to figure out what happened at a particular time. Need to find a receipt to return a faulty hard drive? Good news! You’ve got the receipt.
3. Automate what you can
Small business bookkeeping isn’t glamorous or fun. One of the best things you can do for not fun tasks in your business is to automate them. App’s like Receipt Stash practically eliminate data entry by extracting information from your receipts and invoices. All you need to is review their suggestions and push the receipts and invoices through to your accounting software for payment or reconciliation against bank transactions. The time you save can be better used elsewhere within your business.
4. Develop a system
Whatever you do with your small business bookkeeping. Do it consistently. By working through your bookkeeping tasks methodically, you will know that you are keeping on top of things. Not sure where to start with your system? Our bookkeeping checklist will help you cover off the core tasks that need to be regularly completed.
5. If you’re importing, be prepared for import duty/GST
We see a number of small business owners who import stock from China happily under the (current) $400 GST threshold for a while and then BAM! They place an order slightly over the threshold and are shocked when they get stung with import duty and GST on import to pay. Don’t be surprised. Expect to pay these (especially with the upcoming changes) and work them into your cashflow plan and pricing.
6. How do you accept payments?
Cash and bank deposit are two of the most common payment methods offered by small businesses. These are closely followed by Stripe and PayPal. Beyond these is the bountiful selection of part-payment options like Laybuy, Oxipay, Genopay, etc. How do you accept payment in your business? Do you make it easy for your customers to a) make a buying decision (the easier it is to pay, the easier it is to buy) and b) actually pay you (the easier it is to pay, the less likely you are to end up with aged debtors). Make sure you understand any fees involved in the payment options you offer and include these in your pricing too.
7. Put money aside for tax and know when it is due
“Tis impossible to be sure of any thing but Death and Taxes,” – The Cobbler of Preston by Christopher Bullock (1716)
Tax is coming, whether you like it or not. Our recommendation to you is to have a separate bank account that you regularly put a percentage of your earnings aside into in preparation. Your accountant will be able to better advise as to what percentage, but we would recommend somewhere around 20-30%. By taking this approach to your taxes you’re putting aside money from your profit as you make it and also ensuring there are no nasty surprises.
Alongside this, it’s a good idea to be clear on what your tax due dates are throughout the year – Inland Revenue provides a helpful guide to due dates for each tax year on their website. Take some time to go through it and mark on your calendar your GST, PAYE, FBT, provisional and terminal tax dates for the year.
8. Know your numbers
Get to know the reports in your accounting system. At the very least, you should be running your profit and loss and balance sheet reports each month. By regularly keeping in touch with your numbers, you’ll get a feel for the trends in your business and also catch issues as they arise, rather than well down the track.
9. Assets under $500
Inland Revenue’s definition of a fixed asset is something that has a value over $500 and has a useful life of more than one year. A common example of where we see these being treated wrong in a business is when a $40 power cord has been coded to the ‘office equipment’ asset code. Yes, it is office equipment, but it’s not an asset as it does not reach the $500 threshold. This means you are able to expense the full value of it in the year purchased. We recommend setting up an Assets < $500 general ledger code to code these types of transactions to.
10. P&L vs Balance Sheet
Many small business owners don’t understand the difference between their profit and loss report and balance sheet. In fact, many rely solely on the profit and loss to tell them what is happening when both are vital reports.
- Your profit and loss report shows your revenue vs. expenses during a specific period of time. It is the report which indicates whether or not your business is making a profit.
- The general equation to derive your profit and loss report is: Revenue – Expenses = Net Income
- In an ideal world revenue will always be more than expenses – in short, you’re making a profit.
- Your balance sheet shows your assets, liabilities and equity at a specific point in time.
- The general equation to derive your balance sheet is: Assets = Liabilities + Equity
- In an ideal world, assets will always be more than liabilities, meaning you maintain a level of equity in your business.
11. Understand your software
There are a number of accounting software options out there (check out our accounting software comparison for more information), each with their own set of benefits and limitations. In many ways, it almost doesn’t matter which piece of software you choose as long as you’re using it well and you understand what it can and can’t do for you. We highly recommend whatever software you are using, that you get training so that you understand its complexities and get the most out of it.
12. Watch your aged receivables
Cash is King! Keeping an eye on your aged receivables is one of the best things you can do to help manage this. Pull together a receivables process – ensure you’re invoicing on time and regularly following up on overdue amounts.
13. GST and PAYE – it’s not your money
One of the most common complaints we hear from small business owners at GST and PAYE time is that they resent the amount they have to pay in GST and PAYE. And hey, we get it, it’s all cash flow in the wrong direction. However, it’s important to remember that neither of these are your money. GST is a levy charged on top of your product/service fee and as a business, you’re lucky enough to be able to claim the expense side you pay back. And PAYE is your employees’ tax payable – you’ve effectively already paid it to them as part of their salary/wages. You’re just the middle man passing it on to the government. The way we see it, it’s actually a good thing if you’re paying GST as it means you’ve probably (excluding any non-GST expenses like wages which can be quite high) made more money than you’ve spent during the period.
14. Check your accounting software vs your bank statement balance
This is important. How often do you check your bank statement against your accounting software bank balance? Perhaps the answer is ‘I have never’. We recommend doing this monthly. Accounting software isn’t infallible and bank feeds do fail to come through from time to time. Other errors we see regularly around this include unreconciled transactions and putting transactions to the wrong bank account. The easiest way to pick these up is to check the balances each month. It’s also a lot easier to go back through the last 30-days’ transactions to figure this out than the last six months.
15. Know what is deductible
For expenses to be deductible there needs to be a link between the spending and your business’ income earning activities. For example, buying a new iPad for your daughter’s birthday present has no link to your business making money. However, buying an iPad so you can work remotely while you travel does. There are also a number of rules around entertainment and home office expenditure which mean that only a portion of these expenses is deductible. It’s worth taking some time to review Inland Revenue’s guidelines for these and if in doubt, discuss it with your accountant in more detail.
16. Don’t spend money to avoid tax
“I need to reduce my profit so that I don’t have to pay tax”
We would caution against this thinking. Spending $1 to save $0.30 in tax is often a false economy. If you’re looking to invest in products/services to continue to grow your business, it’s not necessarily a bad idea. But to reduce your tax bill, you have to spend (approximately) three times as much in expenses due to tax being roughly 1/3 of profit (note: this varies depending on profit amount and tiered personal tax rates). It’s worthwhile keeping this in mind.
17. Know your area of expertise
Does some of this sound a bit confusing? Just like we wouldn’t hand out optical prescriptions because we have absolutely no idea about optometry, maybe you shouldn’t try and keep on top of your small business’ bookkeeping. The Admin Army team know where our skill sets lie and outsource beyond these. But if it’s bookkeeping assistance you need? We’re your team!