Or... how we can save you time, grief and money!
We often have clients ask us why we are particular about source documentation when undertaking work on their behalf, rather than just "taking their word for it", or "it's on the bank statement".
Recently working with a new client who had a $12,000 withdrawal from the bank account. It was a deposit on a new motor vehicle, and they were expecting us to "record it and claim the GST".
We insisted on seeing all the documentation relating to the purchase of the vehicle, including the loan documents.
This enabled us to record the vehicle purchase transaction, and the loan transaction correctly, and to then reconcile any bank transactions that had occurred (mainly loan repayments).
In stepping through this process, we identified that the $12,000 that was paid as a deposit, had not been offset against the value of the vehicle purchase price, and the full purchase price was subsequently financed.
Why does this all matter?
1. The client had essentially over paid for the vehicle - our discovery has triggered the client to request a refund of the $12,000.
2. If we had processed based on the clients "word", we would have been overstating the value of GST credits that could be claimed by the client (>$1000).
3. If the file was reviewed by another bookkeeper or accountant, there would have been no justification for the expense that was made.
4. If the client had been audited by the ATO (and it's not uncommon for that to occur), this is likely to have been a transaction that would have flagged. What may have been a simple audit, may then have triggered a full audit, due to poor record keeping.
So, the moral of the story is..... if your bookkeeper is asking you for source documentation, its not so they can ruin your day. It is because they understand how your accounting records should be compiled and have checks and balances in place to ensure that your records are as accurate as possible, and that you are never in a situation where somebody owes you $12,000!
There are multiple ways we can get hold of your documents - from the old fashioned shoe box or paper bag dropped at our office, or the more sophisticated transmission using online services.
If you want to find out how we can help you streamline your bookkeeping, take care of your paper mountain (yes... you can get rid of it!), or know that somebody has your back, and is looking for that over payment (or sadly, sometimes under payment...), don't hesitate to contact us to find out more.
We can recommend a solution that is the best fit for YOUR business.
It’s not uncommon. We hear it a lot. A client calls us and is in distress. They look at their business numbers, and can see they’re making a profit, but when it comes to paying wages and bills, it’s a struggle……. They’re making a profit, but there is no money in the bank.
Here are a few tips and tricks to start and understand the difference between profit and cash, and understand why your bank balance is what it is…...
Learn to read your Balance Sheet
The Balance Sheet is one of the most important documents in your business (yes… even more important than your Profit and Loss Statement). Your Balance Sheet will tell you what is happening in your business from a cash and financial perspective, and help you understand where your dollars may be.
TIP: If you don’t understand the language or terminology on your Balance Sheet, and it’s just a random mess of numbers, ASK your bookkeeper or accountant to explain it to you. If they are unwilling to do this, then consider changing service providers.
The Balance Sheet is one of the easiest business financial documents to understand, and should be something that can be stepped through, in plain English, to give you clarity and understanding on your business numbers.
Understand your Debtors Ledger
Your Debtors Ledger may also be called Aged Debtors/Accounts Receivables/Trade Debtors. Irrespective of the name, they all represent the same thing - a summary of sales that you have made, where payment has not yet been received from your customers.
If you are short of cash, this is often the fastest way to see dollars hit the bank account.
Start chasing up those customers that haven’t paid you within your terms of trade. Look at the amounts that are outstanding the longest, or those with the highest value, and spend 30 minutes every morning calling the customers and asking for payment.
TIP: Try and find out what the value of your Debtor Days is – this figure represents the average time it takes a customer to pay you. Compare that with your terms of trade – are your debtor days close to your terms of trade, or are they longer than your terms of trade? The shorter your debtor days, the more regularly money is hitting your bank account, increasing the availability of cash that can be utilised.
Most accounting software can calculate the Debtor Days quite simply, and provide you with this figure on an overall client base, and on a client by client basis as well. If you’re not sure how to find this figure, touch base with your bookkeeper or accountant, who can show you the reports.
Get a handle on your Owners Drawings/Directors Loans/Beneficiaries Drawings
Three terms that all basically mean the same thing – the owner or director of the business, is taking funds out of the business for personal use.
Your business is not your own personal bank account, and best practice would recommend that you keep your business spending and your personal/private spending separate.
If you work under a company or trust structure, consider drawing a regular wage, and resist the urge to grab that $50 here and $50 there just because “I have money in the bank”.
If you operate as a Sole Trader or Partnership, work out what you need each week to live on, and draw just those amount of funds from the business, and transfer to a personal account.
Review your Drawings or Loan Accounts, and see what the transactions are sitting in there.
Is it a case that there have been business expenses coded to the account in error, or have you been dipping your fingers (and sometimes toes and whole body!) into the business bank account to fund your personal requirements? It’s amazing how quickly these small amounts can build up to larger amounts. You also need to be aware that if you are working under a Company structure, there can be tax consequences attached to any funds you have taken from the business for personal use.
TIP: Work with your bookkeeper or accountant to identify what your weekly wage can/should be from the business, and start drawing funds in this manner, rather than irregularly and on and adhoc basis.
The other advantage of these regular amounts, is you start to get a far clearer picture of your businesses profitability, and the ability for the business to pay you a living wage.
Review your Inventory Levels
If inventory is a component of your business, it needs regular review. If you are operating on a perpetual inventory method, the value of your inventory does not appear as an expense on your Profit and Loss Statement until the inventory is sold.
You may have purchased a large amount of inventory (which must be or has been paid for), however until it is sold, or incorporated into the product or service that you provide, you will not be realising the revenue associated with it.
TIP: Review your inventory on a regular basis. Do random stock takes. It is important to know that your inventory levels on hand, match the inventory you have recorded in your accounting system. If they don’t, and depending on the value, it can highlight many different things, from employee theft, to not invoicing for work that has been completed, to obsolete and out of date stock, to name a few.
Understand your Liabilities
Your liabilities are often one of the most frequent reasons you are cash poor, without even realising it. Have you borrowed money to purchase assets? (we saw a lot of this at the end of the financial year, with many businesses being told that they “could [incorrectly] get a $20,000 tax deduction if they bought vehicles or equipment).
If you are servicing many loans, these will impact on the cash available to you in the bank account. Depending on the reason for the loan, the respective expense may not be seen on the Profit and Loss Statement until end of financial year (when depreciation expense and interest on loans, are often recorded).
Some of the most commonly ignored or mis-understood liabilities, are those associated with your employees and your ATO obligations. Let get this straight from the beginning – GST and Pay As You Go Withholding and Superannuation, are not your funds. They belong to either the employees, or the ATO, and they must be paid. Period…. Not negotiable. Get over it, and learn to see them as a fundamental element of being in business.
Your Balance Sheet should clearly identify what is owed to the ATO or the Super Funds for both GST and Employee liabilities, and you should factor these in when making decisions on financial spending.
TIP: Ensure these items are clearly identified on your Balance Sheet – If you can't see them, then ask why – they should be obvious and easy to quantify.
A key suggestion is to use a “Provision Account” to quarantine ATO and Employee Liabilities funds until you are due to make payment to the ATO or the Super Funds. Essentially this is a bank account, where every time a pay run is processed, the value of the Super and the PAYGW is transferred to this bank account, and on a weekly basis (or more frequently if you want), funds are transferred to cover your GST liability.
Understand your Creditors Ledger
Your Creditors Ledger may also be called Aged Creditors/Accounts Payable/Trade Creditors. Again, irrespective of the name, they all represent the same thing - a summary of purchases that you have made, where payment has not yet made to your supplier.
These amounts are due for payment, and should be reflected in your Creditors Ledger, based on the expected due date for payment by the supplier. Correct setup of your accounting software, and correct entry of these transactions, to ensure that the amounts and expected dates for payment are correctly reflected, will help you understand when you expect cash to be leaving your business.
Reviewing the Creditors Ledger on a regular basis, should provide you with clarity on when your suppliers expect payment. Endeavour to work within your supplier’s terms of trade. If they are offering you 30-day payment terms, use them, rather than paying in 7 days.
If payment terms are 7 days, and you think you can, negotiate longer payment terms, to free up short term cash requirements.
Don’t hold your invoices awaiting payment in a pile on the desk until you are ready to pay them. Get them into your accounting system, ideally daily, so that you have clarity on who you owe, what you owe and when it needs to be paid by.
TIP: Understand your Creditor Days. This is the average time it takes you to pay a supplier’s invoice. Compare the individual Creditor Days with the supplier’s terms of trade. If the creditor days for a supplier are significantly less than their terms of trade, consider not paying as quickly.
Ideally, your Debtor Days should be less than your creditor days, meaning that funds are being received by the basis, more frequently than funds are being paid out by the business. If the reverse is observed, start to investigate the reasons behind it. What can you do to change the status quo?
Talk to your bookkeeper or accountant about the best strategies to manage creditors in your business. Set a specific day of the week where you make payments to suppliers, rather than paying every day – become more efficient at how you work with the data that you have available to you, and maximise the trade terms that are available to you.
Review your Cash Summary
So, you’re right, this isn’t part of the Balance Sheet, but is a great document to review in conjunction with the Balance Sheet.
Quite simply, your Cash Summary outlines the movement of cash through your business. Opening balance of the bank account(s), money coming in, money going out, closing balance of the bank account(s). It presents the information, not just from a revenue and expense (operating) perspective, but also from an Asset, Liability and Equity (non-operating) perspective.
At a glance, you can see where your cash is coming from, and where your cash is going. It’s particularly useful in identifying the non-operating movement of cash, particularly the Owners Drawings or Directors Loans, and your employment and ATO Liabilities, and the timing of these payments in your financial cycle.
TIP: Start talking to your bookkeeper or accountant about reviewing your cashflow summary. If you can start to understand where and how cash moves through your business, you can work with your advisor to implement strategies to manage your cash more effectively
Hopefully the above points have provided some insight into what can affect the difference between profit, and cash, and you can start to implement some of the strategies in your business.
If these are areas that you want to know more about, or that you need support in working through, we would love to work with you to provide clarity and direction on your numbers. It’s about empowering you as the business owner to take ownership of your numbers.
Contact us on 07 3879 2090 or via our contact form to chat further.
Bookkeepers come in many variations - not size or shape, but business structure and the way that they operate. There are sole traders, companies, partnerships, trusts. The principal may work alone in their practice, or may employ staff or subcontract out work, either locally or overseas.
One of the key challenges that seems to face many owners of bookkeeping practices, is their inability to step away from the desk, for more than a few hours at a time.
A recent article by MindHealthConnect, stated that "there is a tendency for work to have a negative impact on other areas of life" and "that certain groups are more affected than others by work-life interference".
Included in the list of groups were:
I often hear when bookkeepers are talking about the relationship they have with their clients "I feel like I'm their b*&$@%y mother [suffixed with a sob, sigh or a giggle]". Ah, that sense of caring and nurturing the extended family!
There is often a perception when working with clients, that we are indispensable to them, and we are continuously faced with the challenge of taking time away from our business, to go on that long weekend, to deal with a sick family member, or take the 2 month overseas holiday to [insert your bucket list location here].
If we don't start to put ourselves at the front, the stress and burnout caused by poor work/life balance will have severe consequences on our own health, and the ongoing health of our businesses, relationships and families.
It can be a challenge. It can be terrifying. It can be done!
It is easier to beg forgiveness than ask permission
What do I mean by that statement? You are a business owner. You are in control of your business. You make the decisions. I'm assuming that your bank manager, accountant, mechanic, dentist, hairdresser or doctor doesn't seek approval from you or their client base, when they decide to take some time off.
I'm also figuring that your clients don't [always] inform you that they are going away either (I know with some of mine, it's only when I see the transactions through the bank account that I'm aware of it).
They schedule in the time. They buy the tickets. And then they [sometimes] inform their client base that they will be away.
I'm certainly not advocating that you drop everything and rush out that door with your sunhat and bikini right now, but what I am saying, is that with forward planning and preparation, it will easily become a reality.
Pretty self evident really - you need to plan your exit strategy. This can be a challenge because we all have a sense at times that the world wont go on without us. Newsflash, and a burst to the bubble - it does and it will. Get over it.
Start having conversations with your clients in advance. Tell them that you will be heading away, and that this is how you will be managing the work you need to do in your absence - take control of the conversation.
Planning starts even further back, by including statements in your Letters of Engagement (which of course, you all have), that indicate that you have other staff (even if you don't) or you may utilise subcontractors or third party services (even if you don't).
I know that the Australian Bookkeepers Network has some great wording around this, and I assume that the other professional associations have similar resources available. This also meets some of the Code of Conduct requirements from the Tax Practitioners Board regarding confidentiality.
You will find with most clients, they are not concerned that you will be going away, but are more concerned that there will be continuity of service. Allay those fears, talk to them about outcomes and solutions, and it becomes an easier exit.
But I'm the only person in my business - I cant possibly leave!
Develop a network of trusted peers and professionals that you are happy to work with. Be there for each other and start talking sooner rather than later about the strategies you will employ to provide coverage while you are away.
I've provided this support to two separate bookkeeping practices, over the last 12 months. One was a sole trader, based interstate, that I had never met before, but who was a member of the Bookkeepers in Practice (Australia) Facebook group that I administer. The second was a well established practice in Brisbane, with 3 staff who needed BAS Agent support across end of financial year, while they were overseas for 4 weeks.
The sole trader bookkeeper reached out, explaining that they were going away for two weeks, and had one particular client that needed routine support during that time.
In this situation, the bookkeeper had communicated fully with the client about who I was, and the client was happy to sign a letter of engagement with me for the two week period. I had a formal agreement with the bookkeeper, that this was for two weeks only, and that I would have (nor want) any ongoing claim to the client. Based on trust, absolutely, but we spoke through these issues in our initial conversations so that we were both comfortable with the arrangements.
The principal of the second practice also reached out almost 12 months in advance of when they would be away. We met, and discussed the methodologies that we both used to undertake the EOFY requirements (mainly around preparation of the Payment Summary Annual Reports), and agreed on a process for dealing with the work that was to come through. Again, we had open discussion about the relationship with the clients, and how we would communicate with staff.
This year, I spent just over two weeks away from my office, and the principal of the second practice, was available to my staff if they needed support while I was away - quid pro quo.
Systems and processes
Having good systems and processes in place makes the transition to another person much easier to achieve. If you don't have them, then your desire to step away from the office can be a catalyst to their development.
Speaking from experience, once you start to document and implement systems to support what you do, there are other benefits that start to flow on from it. One of the key ones I found was that as I started to employ staff, it was far easier to delegate the routine work to them, as I had the systems in place to support it.
If you are a sole operator, and struggling with getting away from the desk, or overwhelmed by the volume of work, staffing is often a viable solution, but may be delayed because we don't know how to bring somebody new into the business. Systems... systems... systems.... need I say more!
Empower your people
Whether you have staff, or you choose to get an external resource to support you during this time, the greatest benefit you will receive is if they are empowered to make decisions that would normally be left to you.
If you are using an industry peer, then I'm assuming you would select them based on their skill, knowledge and professionalism. If a decision needs to be made while you are away about work for a client, give them the flexibility to make that decision (obviously within reason) - you selected them for a purpose.
Additionally, give your staff the ability to make decisions (again within reason). If you've set your systems up, and have great protocols regarding communication and process, empowering your staff to make decisions within this framework will enable you to walk away with confidence.
Don't just wait until you are gone to empower them, start doing it now, so that by the time you do need to step away, they and you have the confidence to operate without your micro-management.
Unless you are heading to the remote highlands of Timbuktu, and the ability to get wireless is completely impossible, technology will be your friend.
I'm not suggesting that you use the technology to do the work that you would normally be doing (that is not a holiday!), but use it to stay in touch with your staff, or your nominated person.
During my recent trip to Cambodia (who's internet speeds are far better than in Australia!), I made a point of checking messages (not emails) from my staff once a day.
All my emails had been forwarded to a central email account where staff could manage and deal with as required.
Staff knew to only send me a message (we use Microsoft Teams) if it was something that absolutely needed my input or direction on (they had been empowered to make decisions already, and had an industry peer to contact if there was something curly).
I did no work while I was away - none, zilch, zip, and slept soundly every night (except for the one where we were in a village, and the roosters didn't realise that 1 am in the morning was not considered dawn, but that's another story)
In the past 6 years or so, I've managed to travel to Dubai, Bali, Japan, Vanuatu and Cambodia. In the next few years, I've got other locations on my radar, and will not be letting work take away the opportunity for me to achieve those goals - isn't that why we work? To find the balance is important, and critical to our and our families ongoing health and well-being.
If you have clients that get pissy with you that you are taking time for yourself and your family, it beg's the question as to whether you really need them as a client.
It will be daunting the first time you do it. But hell, it will be worth it!
(Originally published on LinkedIn - 18 May 2017 )
is the Director and Senior Bookkeeper at Laurus.