An important part of running a business is establishing good financial procedures and systems to monitor the financial health of your business and ensure you meet your tax obligations.
They could include:
- setting up a business bank account
- creating a budget
- establishing an accounting system
- reviewing your accounts
- procedures for providing credit and collecting outstanding debts.
You might want to seek help from an accountant, financial professional or business adviser.
You are advised to set up a bank account for your business, keeping it separate from your personal finances. This will enable you to monitor your income and expenses, and allow you to easily extract business records for taxation purposes.
If you’re operating a company, partnership or a trust you must have a separate bank account for tax purposes. Sole traders don’t have to open a business account, but it is a good idea. If you are trading under a business name and want to open an account in that name, you will need to provide evidence of your registration to the bank.
Set a realistic budget for your business to help you meet financial goals. A budget allows you to understand your current situation and make projections. Compare forecasts to actual financial results to determine if you are over-spending or have created additional income.
Find out more information about budgets and forecasts.
Accounting (or bookkeeping) is a process of recording the financial transactions of a business. Keeping good records for your business can assist you to apply for finance, review your business activities, manage effectively and comply with tax requirements.
For tax purposes you are legally required to keep records related to your income, GST, payments to employees, superannuation, fringe benefits tax, fuel tax credits and business payments.
TIP: Tax records must be kept for a period of five years after they are prepared, obtained or the transaction is completed (whichever occurs last). These records must be available in English and in a format the ATO can access. For more information visit the ATO website.
There are two types of accounting methods; cash and accrual. A cash-based system records transaction at the time the cash was paid or received, regardless of when the sale transaction occurred. This system suits businesses that mainly rely on cash transactions. An accrual-based system records transactions when they occur, regardless of whether payment is received at the time or at a later stage. An accrual system is the one most commonly used.
You can record your transactions using either a manual or electronic system.
A manual system involves entering your records into a ledger or notebook, available from a stationery shop, newsagent or office supplier
Electronic systems use software or web-based applications and generally have other functions allowing you to issue invoices, receipts, track stock, etc. You can also use spreadsheets to record your transactions.
TIP: The Australian Business Software Industry Association (ABSIA) has a register of commercially available software products that meet their requirements.
There are two basic financial statements of relevance to small businesses:
- profit and loss
- balance sheet
Profit and loss reports on income, expenses, and profit.
A balance sheet reports on the assets, liabilities and net equity of a business at a given point in time.
It is good practice to review your financial statements at least once a month. This will enable you to identify problems and put strategies in place to fix them.
Learn more about reviewing your finances
TIP: Seek assistance from your accountant or financial/business adviser to understand your accounts. Consider attending our Understanding Business Financials workshop.
Ensuring your business has good cash flow and minimal exposure to debt is good financial practice. To manage your credit effectively it is advisable to create policies and procedures relating to:
- terms and conditions for providing goods and/or services
- invoicing and payments.