Streamlining Your Accounting

Cleaning up your accounting

Vacuumed floors. Freshly ironed clothes. Newly folded laundry. What do these have to do with running a small business?

They’re about a disciplined approach to everyday tasks. Keeping clean accounting records is no different. It takes commitment and determination, supported by good processes.

In turn you save countless hours and stop yourself from drowning in a sea of untracked expenses. Streamlined accounting also makes it more pleasant when guests come around. Namely, the ATO and financial services companies when you want to reorganize your finances.

Follow our guide to streamline your accounting as an SME.

Setting the scene

Research shows us that well-organised accounting records are they key to productivity and achievement. It allows better future planning, greater flexibility when faced with new opportunities, and more confident strategy.

Don’t underestimate these benefits. They can transform your business into a dynamic and resilient one, capable of outlasting the competition.

If that wasn’t enough of a sell, there’s a legal imperative to get it right. Businesses with poor accounting records will have to face the music with the ATO. You can be served director penalty notices, be referred to external debt collection agencies, or be forced into administration. You might not like the song that plays at you.

Watertight expenses are the crucial first step.

As a small business, it is essential to separate your personal and professional expenses. This comes from a tax and strategy lens.

Personal expenses are not tax deductible. As such, any business expenses made with a personal account does not reduce your tax liability. Why forego a discount when you have a right to one?

You can claim a tax deduction for most expenses you incur as a business if it directly relates to earning your assessable income. This includes operating expenses, products and services, and major capital expenses like depreciation.

The ATO outlines 3 golden rules for acceptable tax deductions:

  • The expense must be for a business purpose, not private use.
  • You can only claim the portion of an expense used for business purposes.
  • You need records to prove your claims.

There are also stringent guidelines on the apportioning of expenses. For example, if you run a business from home and claim occupancy expenses, you must apportion based on the floor space and time allocated for your business. Be precise with the detail.

From a strategic perspective, clear business expenses show you the true profitability of your business. This is essential for good financial management. You know exactly which parts of the business are making money and where you should allocate capital. Throwing personal expenses into the mix paints a muddy picture.

Separating personal and professional expenses

(1) Open a business debit or credit card. When both are used solely for business purposes, it creates a log of expenses in one accessible spot. Furthermore, a credit card will help you build a stronger credit history if you pay your expenses on time. This can improve your borrowing power and give you more leverage in negotiations with financial services providers, who typically reward strong borrowers.

It also creates an immediate separation, as you are only ever using business cards for business expenses.

(2) Open a business checking account. This is a no-brainer for small businesses. It brings all your transactions together, giving you a complete picture of expenses. Like the credit and debit cards, it ensures you only use business accounts to cover business expenses.

You’ll thank yourself at tax time. Calculating your expenses becomes a simple task of reviewing your bank statements.

(3) Pay yourself a salary. While it seems unnecessary, it is an important practise for maintaining good financial records. Write yourself a check each month from your business checking account and transfer this to your personal checking account.

Then pretend you’re an employee. Wait until next month to pay yourself again.

Receipts are the name of the game.

As we mentioned before, the ATO expects evidence of every transaction that you claim. This will look like a formalised system for processing receipts.

It can be as low-tech or highbrow as you want it to be. On the lower end, you can set up monthly folders to upload scanned receipts and keep a numerical log in Excel. This will allow you to process your business activity statement at the end of the financial year.

If you want a more advanced system, you can use software like Xero or MYOB, which can automatically match purchases to bank transactions and store your expenses. This paperless management works better for businesses with complex financial needs.

Your choice of software should be supported by formal accounting processes. For example, you may have a person or team dedicated to processing receipts and invoices at the end of each month.

Clear receipts also enable better bookkeeping. It is a bookkeeper’s job to categorise, organise, and present financial information. A complete transaction log (from a business bank account or card) and accessible receipts allow them to reconcile accounts more efficiently.

If they have all the information available to them from the get-go, they can work more quickly and expand their role within the business. This might involve more time spent on forecasts for your business, helping you better prepare for the year ahead.

Never skimp on the detail.

Detail unlocks deep insight into your business’ performance. But without a background in accounting, it can be difficult to make sense of them. The three most common are income statements, balance sheets, and cash flow statements.

(1) Income statements show how profitable your business is. It has three parts: total revenue, total expenses, and net income. The income statement highlights whether your business is generating a positive cash flow or not.

This makes it one of the most important statements to get right. In your accounting you should keep a record of everything that affects your bottom line, even the things you believe are immaterial. Make note of recurring revenue and non-recurring items. Highlight the assets and liabilities used in the operations of the business.

Offer detail and you’ll end up with a useful and valuable source of accounting gold.

(2) Balance sheets provide a snapshot of your business’ financial position at a given moment in time. It covers assets, liabilities, and equity – giving stakeholders and directors a view of your company’s health, flexibility, and resilience.

Businesses with staying power are those with strong assets, productive liabilities, and good reserves of investor capital. But don’t fear if your business doesn’t look like this. Represent everything on your balance sheet accurately, with total disclosure and precise amounts. An accurate balance sheet might get you to refocus on different areas of the business or shift your priorities. It is a strategists’ Magna Carta.

(3) Cash flow statements highlight how much money is coming in and out of your business in a period. It includes cash flow from operations, investing, and financing. All these areas can be either negative or positive.

  • Cash flow from operations is the money received and spent on the day to day running of the business. It includes revenue, expenses, and taxes among others.
  • Cash flow from investing is money received and invested into growing the business. This section details spending on capital goods like new equipment or working space. But it can also account for the money earned from selling old equipment.
  • Cash flow from finance is any money received in loans or paid out to investors in dividends.

Each of these areas relies on accurate accounting records. They highlight the net change in cash position for your business. This makes it a valuable barometer for how efficiently you are operating.

Use these insights to make important strategic decisions. Are there efficient parts of your business that are under-funded? Are there outputs generating a lower ROI than you expect? Are your debts running away from you and begging for a refinance?

Remember that informed decisions rely on good information. Good accounting records are essential for any strategic or operational pivot.

Final thoughts.

Clean, sharp, and precise accounting are the holy grail for SMEs. It enables good financial management and sets you up well to manage the challenges that will inevitably come your way.

Don’t compromise on good systems, good processes, and good people.

Making an investment in your accounting records is the key to achievement and will unlock a new level of financial success. After all, if you know where the money is, you know how to make more of it!

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.