EOFY: 5 bad habits small business owners should break in 2021
Looking to stay on top of your bookkeeping ahead of EOFY and minimise your tax burden? Start by dropping these five habits.
The way a business operates internally generally impacts how they appear on the outside.
Robust internal practices give an organisation the agility that it needs to stay a step ahead, while the opposite leads to inefficiencies that cause a constant stream of headaches and challenges across the board.
Bookkeeping is an example of one of those internal business practices.
Maintaining organised records of your business’s financial transactions can make significant differences to the way it operates.
Clean books mean less time spent looking for specific transactions and invoices, and more time focusing on important elements like growth, employee experience and customer success.
Keeping financial records in order also allows a business to quickly adapt to sudden changes in pace or direction. Receiving a clear picture of the business’s short- and long-term financial position through up-to-date financial statements affords the business the ability to pivot with confidence as circumstances alter.
It all comes down to discipline
Organised books require a strong sense of discipline from all those involved in the record keeping process.
For many business owners though, strictness in this area tends to fall to the wayside. With myriad distractions and conflicting priorities, poor bookkeeping habits are developed and can turn into a negative cycle.
But the value of good bookkeeping practices cannot be understated, which is why avoiding the typical habits that business owners tend to develop is crucial, especially in the current climate where change is constant.
According to Kara Harrison, startup accountant at LUNA, staying away from the following five bad bookkeeping habits is key if a business is to keep its financial records as pristine as possible.
1. Quit mixing business and personal affairs
For many small business owners, the lines between personal life and company operations can be blurry. To keep the books clean though, Harrison encouraged these business owners to avoid dipping their personal pens in their own company’s ink.
“There are so many bookkeeping issues that arise when clear boundaries between personal and business affairs aren’t identified,” Harrison said.
“If you’re operating as a sole trader, keeping a separate bank account for all business transactions will prevent confusion and make business bookkeeping easier.”
Harrison also encouraged small business owners operating under standard corporate structures to be aware of the compliance issues surrounding director drawings, including the implications of Division 7A of the Income Tax Assessment Act 1936, which outlines the rules of such drawings.
2. Stop delaying bank reconciliations
Making sure that company transactions have been recorded correctly requires for payments to be viewed against the company’s banking ledger – a process commonly referred to as bank reconciliation.
Bank reconciliation can be time consuming and often feels repetitive but is a necessary task to undertake in order to keep financial statements up to date.
According to Harrison, delaying reconciliation can create a host of problems for small business owners that may seriously hinder their ability to make important decisions.
“In the startup world, businesses need to be ready for an evaluation at the drop of a hat, and without having done your reconciliation work properly, accurate evaluations are impossible to conduct.”
Harrison suggested that business owners set up a process where reconciliation takes place consistently.
“It can be once a week or once a fortnight, just make sure your books are always up to date and reconciled.”
3. Don’t forget to attach invoices and receipts to transactions
The next bad habit to be aware of is not remembering to attach invoices to each transaction.
Based on her experience in bookkeeping for small businesses and startups, Harrison emphasised the importance of putting systems in place that make the process of receipt attaching easier.
“Having the invoice on hand will give you all the details you need to know about a particular transaction and attaching it to the relevant transaction streamlines the process and places all financial data in one spot.”
Harrison also highlighted that requesting an email copy of the receipt from a supplier, or at least sending a picture of the paper copy to a designated email address right away helps keep receipts on record, making it easier to upload them to the business’s accounting software on the go.
4. Stop putting off the setup of automation tools
One of the biggest challenges associated with running a business is relying on memory to get things done, which is why so many businesses are turning to automation.
Harrison shared some examples of the types of tasks that small business owners may look to automate, including the generation of recurring invoices, invoice reminders, setting up bank rules for reconciliation and invoice uploading.
“The key is to critically analyse the way your business operates and identify the areas that need to be automated,” she said.
“Automation comes down to working smarter, not harder.”
5. Start customising chartered accounts
The final habit that Harrison implored small business owners to drop was the use of template profit and loss statements that aren’t customised to the specific needs of the business.
According to Harrison, the most common presentation of this habit is when business owners use a ‘general expenses’ account as a dumping ground for random expenses.
“These accounts are never helpful and tend to make life difficult when it comes to preparing a company’s BAS, tax return, or applying for government incentives,” she said.
“If you’re unsure of which category an expense falls into, create a new account.”
Another tip that Harrison suggested was to split out different revenue streams into separate accounts on the company’s profit and loss statement.
“Grouping all of your revenue into one line item makes it difficult for someone to gain true insight into your business’s financial position.
“By separating the various streams of revenue, the company’s gross profit margin becomes more accurate, and creates a much clearer picture of what is actually taking place.”
Give your bookkeeping the attention it needs
In sum, virtually all of a business’s operations depend on a quality bookkeeping strategy, and as a result of its significance, bookkeeping should always have a place on a business’s overall agenda.
Whether you’re a business owner who does their bookkeeping in house, or if you’ve outsourced it to a professional, always keep in mind that bookkeeping is not a task to downplay, but an area of the business that requires ongoing attention and respect.
If you would like assistance getting your accounts under control as we approach the end of financial year, call us today on 1300 780 570.
Source: MYOB April 2021
Reproduced with the permission of MYOB. This article by Benjamin Kluwgant was originally published at https://www.myob.com/au/blog/bad-bookkeeping-habits-to-break-2021/
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.