Article by Jane Tweedy, Business Advisor, Western Sydney Business Centre
Profit gets talked about by small business owners, but often incorrectly! Being over a month past financial year end, ideally business owners should have a good idea of their profit for the year, but for small business that is regularly not the case! How can we fix this?
Separate bank accounts
As a company or trust you must maintain a separate bank account, but for a sole trader it is optional as you are the legal entity. Best practice is to maintain separate accounts, because it makes your accounting easier. No more going through all your accounts to find your transactions. If your banking is primarily electronic/EFTPOS, many banks offer base fee free accounts, so there is no excuse!
Bookkeeping and administration
The key is to keep up with your administration and bookkeeping. How often depends on the transactional volume – this may mean daily, weekly or monthly reconciliations. Regardless, do not leave longer – our memories fade the longer we leave it, especially when the name means nothing to you! Catch up on the backlog and keep up this year. With regards to system, if your volumes are small, spreadsheets are fine, but for higher volume specialist systems are best. Remember systems alone don’t fix poor bookkeeping, people do!
Make sure all expenses you can legally claim for are being deducted. For instance, don’t claim laundry if you don’t have a uniform, unless you must undertake washing for your business. Do claim part of your home internet and electricity costs if you work from home. Log your car travel and claim for valid business trips – it’s amazing how quickly this adds up!
This is often forgotten when calculating profit. Your time should be covered in the price charged.
In simple terms, this happens when your income less all valid deductible expenses (including overheads) and your labour cost are removed (even if nominally as a sole trader). The balance is your real profit on which you are then taxed. As a sole trader the income is taxed at your tax rate, including your ‘nominal’ salary.