4 EOFY habits of highly effective small business owners
End of financial year (EOFY) is a stressful time for small business owners and their tax agents alike. Make things easier for you and your accountant by taking up the following four habits.
Recently there have been considerable studies on the habits of small business owners and, without fail, those who follow the best practices around record keeping and tax essentials consistently outperform their competitors when it comes to annual revenue and satisfaction with their business overall.
Leanne Berry, founder of business consulting firm Love Your Numbers, says the best advice she can give to small business owners is to be prepared.
“Don’t wait until the last minute and stress over things not done,” Berry said.
“Instead, create good habits early on and make sure everything is reconciled and you have all your supporting documentation ready.”
But what is the best way to go about being prepared for EOFY? Below are a few tips on how to be prepared and to make EOFY as stress free as possible.
1. Record everything
The number one response accountants give when asked about the most important thing in small business EOFY preparation is to record everything.
In order to prepare an accurate tax return and support the claims you make; you need to keep careful records.
You should record all information relating to receipts and correspondence around payments you have received (income), receipts and correspondence around anything you have spent on the business (expenses), any assets you have acquired or disposed of (such as equipment), gifts or donations, GST and payroll information (if relevant).
Berry also recommends her clients go digital: “Get accounting software and go digital or paperless with all your paperwork,” she said.
“We recommend clients use a program like MYOB and a receipt capture app linked to your accounting software to ensure that everything is stored digitally.”
That way, all your important financial records are easily shared with your accountant or the tax office when needed.
While many accounting programs help you keep track of the day to day sums and finances, ensuring you keep physical or digital copies of original receipts, invoices, logbooks and other expense-related material is essential in case you are audited. In fact, legally, you must keep full account records for up to five years.
2. Get help
Good record keeping will ensure that the EOFY tax process each year is quick and easy. Unfortunately, if you’ve kept poor records and need extensive help from a tax professional, things can get pretty costly, pretty quickly.
The recurrent tax mistakes small business owners make when it comes to recording information are generally down to a lack of understanding. Berry notes that most clients do not understand “all the requirements of EOFY, payroll, inventory, bad debts, financing, super, director loans, dividends, and director fees”.
To assist with this, Berry suggests working with a bookkeeper or BAS agent to take the stress out of EOFY.
“It is a good idea to engage with a professional bookkeeper or BAS Agent.
“They have the knowledge and skills to assist you to stay compliant in a complicated tax world and will always prove to be the best investment in your business.”
3. Put some aside
One of the biggest financial mistakes small business owners make is forgetting to put aside money for GST and tax. It’s essential to remember that GST you collect is not your money, and that taxes are accrued every time a customer pays an invoice.
If you are an employer, you also have to remember your PAYG liabilities, which enable your employees meet their end-of-year tax liabilities. Each time you pay staff, you are withholding tax from staff wages which needs to be paid to the Government. Unfortunately, this money doesn’t leave your account with the wages, so it’s essential to check your PAYG debt each month and stay on top of what you owe (but if you’ve made the switch to Single Touch Payroll, this may no longer be an issue for you.)
A good habit is to put aside around 30 percent of all income you receive, or at least 90 percent of your previous year’s tax bill to ensure you’ve got some cash set aside and your tax bills don’t come as a shock.
4. Audit your year
Once your tax has been finalised for the year and you have a complete picture of your financial activity, it’s time to review your business results. Speak with your accountant and ask for any tips on better record keeping. Also, audit your results and see if there’s any other areas of business you could be performing better in.
The ATO publishes small industry benchmarks to assist in the comparison of a business performance against potentially similar businesses in the same industry. The benchmarks are calculated from income tax returns and activity statements from over 1.3 million small businesses.
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These benchmarks account for businesses with different turnover ranges (greater than $30,000 and less than $15 million) across more than 100 industries and are published as a range to recognise the variations that occur between businesses due to factors such as location and the businesses circumstances.
For more information on the benchmarks, visit the ATO’s Small Business Benchmarks page.
While EOFY can feel like a very daunting time of the year if you’re unprepared, ensuring you’ve kept good records and have been planning for it each month in line with the above advice, there’s no reason it should cause any extra stress.
Bonus tip: The fifth habit of highly successful small business owners ahead of EOFY is to acquire and implement an effective online accounting software in their operations. With MYOB Essentials, you can capture receipts and send invoices on-the-go, and share vital financial information with your bookkeeper and accountant in real-time. Start a FREE trial today.