What are the essential bookkeeping basics business owners should know?

Running a business takes more than passion and commitment (and a degree or two of stubbornness). For small business owners, it also takes some understanding of bookkeeping and accounts. These are essential to any industry, from hair and beauty to allied health and professional services.

But, especially for business owners who don’t have a finance background, this can be really challenging. So what are the essential bookkeeping basics any business owner should know?

Your chart of accounts might just be the most important tool in your business, but it’s often undervalued.

The chart of accounts is a source of truth that contains all the accounts your business uses to record financial transactions.

It should outline every category and subcategory you’ll need for recording everything from income and expenses to assets and liabilities. This makes it far easier to track and analyse your finances as your business grows.

You’ll also used the chart of accounts to prepare financial statements like the balance sheet and income statement, as well as to maintain compliance with tax laws.

Trying to run a business without adequate budgeting and forecasting is like trying to drive in the dark with no headlights: impossible to see where you’re going.

Your budget is one of the first financial activities you should be doing, as this is the roadmap that should help you get to where you want to go.

A concise, strategic budget will allow you to plan short and long-term goals, control finances more effectively by setting revenue, profit and expense targets and align your business activities with what you can realistically afford.

There are several effective techniques to budget-setting, like zero-based or historical budgeting, but regardless of how you create your budget, it’s not just something you can set and forget.

You should revisit your budget periodically to ensure you’re on track with your targets and aren’t at risk of any budget blow-outs.

This will also support you with cash flow forecasting, which helps you estimate future cash coming in and out of your business.

Proper cash flow forecasting allows you to assess the liquidity of your business, project and monitor sales and identify any impending gaps in your cash flow.

Without a solid budget or cash flow projection, a business owner is at risk of financial instability, issues meeting payments on time and unclear knowledge about where and how far they can take their business.

Keeping on top of tax obligations can make even the most seasoned business owner feel nervous.

Having confidence and security in what you’re required to do with your tax is highly important if you want to avoid consequences of non-compliance (like penalties, fines and even legal action).

Tax obligations and compliance needs vary depending on the structure of your business, but for many small business owners, there are three main tax areas to understand.

Income tax

This is a tax every business pays unless they’re exempt (like a charity, for example). The amount you pay depends on your turnover and profit, and it’s crucial to get that amount correct. Incorrectly reported income tax can lead to underpaying, which results in a bigger tax bill once it’s all reconciled.

GST

If you don’t expect your business to reach an annual turnover of more than $75,000, GST isn’t applicable to you. But if you’re over the GST threshold, you’ll need to register for GST and begin factoring the standard rate of 10% into your servicing fees. This allows you to collect GST from clients and pay it to the ATO through your periodic BAS (Business Activity Statement).

Payroll

Payroll tax is payable for businesses with more than $1,000,000 of wages and salaries payable in a financial year. While this sounds like a lot, once you begin hiring employees and seeing team growth, you can hit that threshold faster than you anticipate.