Small business accounting has a steep learning curve. Unless you happen to have a background in accounting, you’re likely to spend hours upon hours studying the subject –and countless more hours trying to get the hang of its applications.
Now, you could always just opt out of learning it entirely and leave the whole mess to your accountant. They should be able to manage it on their own, right?
Learning the ropes of small business accounting is crucial to the average tradie business owner. Not only does it keep you grounded in the health and success of your enterprise, but it goes a long way towards making sure your operation is tax-compliant.
Likewise, understanding your business’ financial data in full leads to much smarter decision-making. You’ll find that you can predict, prepare, and plan with greater accuracy when you begin to spot the trends and patterns in your income and spending.
A savvy tradie business owner can predict peaks and dips through some clever forecasting, and tricks like cash flow analysis can help you spot areas for improvement and optimisation.
We’ve prepared this guide to help you master the ins and outs of small business accounting and cash flow. It’s no substitute for a course in accountancy, but it should provide you with a robust instructional and reference as you manage your tradie business.
Overview of concepts
There’s a lot of jargon surrounding small business accounting that we have to clarify before proceeding to anything else. We’ll translate them into plain English, and illustrate the different ways they factor into running a business.
I. Capital expenses
The ATO describes capital expenses as, “Assets that have a longer life.”
It’s a simple enough concept: if it’s a purchase that your business benefits from over a significant amount of time, it’s likely a capital expense.
Examples would include your vehicles, your equipment, and the cost of setting up (not maintaining!) a website.
As you’re probably aware, most of the expenses that your business incurs over the course of a tax period can be written off as deductions. This small business accounting concept is important when tax season comes around, and you have the opportunity to preserve more of your hard-earned income.
You also benefit from being able to tell the difference between capital and operating expense when making purchases for your business. Tax implications can and should factor into your spending, so familiarising yourself with the concept matters.
Practice identifying whether particular goods counts as a capital or operating expense by familiarising yourself with items and expenses that fall into either category.
Once you have a good understanding of what falls under which classification, use this knowledge to plan your purchases and make accurate cash flow forecasts down the line.
The difference between capital expenses and operating expenses (which we’ll cover in the next section) can be difficult to discern. You can find guides to knowing the difference online, but as a general rule, it’s best to trust your accountant when the classification isn’t clear.
II. Operating expenses
The ATO describes operating expenses as, “The expenses you incur in the everyday running of your business.”
Simply put, these are expenses tracked in small business accounting that are made to keep your business productive and operational, without adding anything new to how your business is set up.
Purchasing fuel for a fleet of trucks, for example, would count as an operating expense. Purchasing a fleet of trucks, on the other hand, would count as a capital expense.
Other common examples of operating expenses include: rent paid on office space, marketing costs, stationery, wages, and legal expenses.
Just as with capital expenses, your operating expenses can be deducted from the income taxes you owe the state come tax season. Knowing the difference can help you make the right calculations (or approve the calculations made by your accountant) and save accordingly.
Like capital expenses, operating expenses factor into your planning and are best used after some practice in distinguishing between the two classifications. And just as with capital expenses, your best course of action is to trust a qualified accountant’s final say.
III. Revenue, profit, and costs
Revenue refers to the sum of all the money made selling goods and services for a given period. If you add together all the cash that entered your business as a result of your sales, you’d have your revenue.
Costs are, as the name implies, the monetary cost of producing the goods and services involved in your trade. They might include variables such as the cost of raw materials, labour, or rent.
Finally, profit (or net income) is what’s left over after you take away necessary expenses such as the cost of producing your goods and services, other operating costs, and debt payments.
If a business made AUD 280,000 in a given year and spent AUD 200,000 along the way, then:
- Revenue = AUD $280,000
- Costs = AUD $200,000
- Profit = [AUD $280,000] – [AUD $200,000] or AUD $80,000
The difference between revenue and profit is intuitive, and by all probability, you’re already aware that your costs offset your business’ total earnings. It’s good to note, however, that all these metrics are useful in their own rights.
Your revenue can be understood as your business’ ability to draw in clients and customers. Low revenue is a sign that you’re likely experiencing cash flow problems. This means it’s time to work harder at marketing, experiment with lower pricing, or otherwise grow your customer base.
Contrary to what some might think, your job as a tradie business owner isn’t to shrink your costs to the lowest possible number. After all, you owe it to your staff to offer competitive wages, and you owe it to your customers to use quality tools and materials.
Instead, take a granular approach and see which aspects of your costs could be minimised without sacrificing the quality of your services or the well-being of your employees.
Finally, your profit or net income can be understood as a metric for the overall health of your business from a small business accounting perspective. If it grows over time, then your tradie shop is likely doing well. If it’s headed along a downward trend, then take it as a sign that your business needs improvement.
IV. Cash flow
We’ve covered the concept of cash flow in a dedicated article, but here are the basics.
Cash flow is a metric that tracks how money flows in and out of your business. It’s similar to profit in that it can be used as a gauge of how efficiently a business earns and spends cash, but unlike profit, it does NOT count accruals (i.e. money you’re expecting to earn or spend, but haven’t yet).
As a small business accounting tool, cash flow also pays attention to the channels where money enters (inflows) and exits (outflows) your business in a given period of time.
It’s important to keep an eye on your cash flow over the course of your business because it offers you a look at your business’ liquidity (i.e. freedom to spend on bills, purchases, and emergencies). It pays to know precisely where your money is going, how much of it you have to spend, and how easily your enterprise can respond to a crisis.
Calculating your cash flow can be a long and complicated process depending on the size of your business, so it’s best to consult a guide or your accountant for the nitty-gritty of it.
In the simplest possible terms, your cash flow equals the amount of money that comes into your business (via sales, investments, and financing) minus the amount that leaves it. You should be left with a number, either positive or negative, that indicates how much your business earned or lost in the period being considered.
What matters isn’t (necessarily) that end number, but your breakdown. Your statement of cash flow should present you with a comprehensive summary of your income and expenses —perfect for analysis and forward-planning.
V. Goods and services tax (GST)
The Goods and Services Tax (GST) is a business tax of 10% applied to most products and services being traded in the market.
In all likelihood, your tradie business is obligated to remit GST during each applicable tax period. There’s rarely a moment when GST isn’t worth noting or considering, as it affects everything from your profit margin to the way you price your services.
If your business has a GST turnover of over AUD 75,000, you’re obligated to register for GST, provide tax invoices to customers who request them, and remit payments back to the ATO. On the bright side, your business is eligible to claim credit for GST included in business purchases.
It’s important to know when you should charge GST so you know how to price and remit accordingly. Work closely with your accountant to calculate the GST of each product or service you offer, and to track the GST included in your business’ expenses so you can claim credit later on.
VI. Pay as you go (PAYG)
PAYG refers to two systems of the ATO: PAYG installment and PAYG withholding.
PAYG installment is a staggered form of payment that helps businesses pay their yearly income tax in full. These are quarterly payments based on your enterprise’s expected yearly tax obligation, and the ATO notifies you in advance if you fall under the scope of the system.
Broadly speaking, if your business reports AUD $4,000 or more in gross income, you qualify for PAYG installments. Some exceptions exist, such as if your latest assessment reflects tax payable of under AUD 1,000 or if you’re estimated to pay under AUD $500 for the financial year.
PAYG withholding is a system that obligates businesses to shoulder a portion of their employees’ or contractors’ income tax. For as long as you’re a business that has employees, pays other businesses who don’t quote their ABNs, or enters into a voluntary agreement with workers (ex. contractors) to withhold amounts from your payments, you’re obligated to register for PAYG withholding.
PAYG withholding isn’t an added expense to your business. You wind up paying the same amount, only setting aside a fraction to remit to the ATO at a later date.
To find out your precise situation as regards PAYG, your best course of action is to consult with an accountant or await instruction from the ATO (in the case of PAYG installment).
Superannuation, or “super” for short, is a system established by the Australian government to help citizens save for retirement. You pay a part of your worker’s salaries (9.5%) to a super fund chosen by the employee. This covers ordinary working time (regular working hours, some paid leave, allowances, etc.), and does not typically cover overtime.
Assuming your employees qualify for super, or you hire individual contractors primarily for their labour, then you’re obligated to make superannuation payments on their behalf on a quarterly basis.
As an employer, you’re required to have a standard choice form ready for new hires, as well as a nominated default superannuation fund. Compliance here is paramount, as heavy penalties are levied on businesses who wrongly classify employees as contractors, miss payments, and fail to notify their employees of changes to the default super fund.
VIII. Income tax
Everybody’s least favourite financial concept, income tax is the portion of your business’ earnings that are paid back to the state through the ATO.
Income tax is computed by taking your business’ gross income, applying any deductions for which you qualify, and applying the appropriate rate to your net income, net capital gains, and other assessable income. Note that debts owed to you, while they may be noted in your small business accounting as part of your earnings, are not taxed.
Certain values such as expenses incurred over the course of running your business, superannuation contributions, and collected GST are deducted from your assessable income, lowering the financial burden that income tax poses on your business. Consult with an accountant to assess your deductibles, and to compute for your assessable income.
Like any tax, your business is obligated to pay income tax in full, on a timely basis. PAYG helps ensure this, and so would the help of a good accountant, but it’s good to be aware of your pending income tax liabilities as a matter of thorough planning. Work them into your business forecasts, and do what you can to minimise your dues.
IX. Fringe benefits tax
Certain non-salary perks offered exclusively to employees as a function of your employee-employer relationship are considered fringe benefits by the ATO. If you provide these fringe benefits to your employees, you may be obligated to pay a fringe benefits tax (FBT).
The tax rate varies depending on the benefit in question, and most benefits come with a set of concessions that can reduce your tax liability (sometimes to nil!). To avoid confusion, you can consult the ATO’s website and scan through for any benefits that your business may offer.
Important small business accounting devices
I. Cash flow statement
The document that details your cash flow is called a cash flow statement.
As we’ve mentioned, analysing your cash flow allows you to study an itemised list of your income streams and expenses. This is good for businesses that want to spot patterns and trends in the way their money moves and plan for seasonal highs and lows.
To create a cash flow statement, you want to set up a spreadsheet that tracks your:
- Month’s opening balance — the sum of your business’ cash at the start of the month
- Cash incoming — the amount of money you earned from your various income sources:
- Asset sales
- Debtor receipts
- Other income sources
Cash outgoing — the amount of money spent on business expenses:
|Purchases (inventory, etc.)||Rent & rates|
|Accountant fees||Motor vehicle expenses|
|Solicitor fees||Repairs & maintenance|
|Ads & marketing||Stationery & printing|
|Bank fees||Membership & affiliation fees|
|Credit card fees||Insurance|
|Utilities (electricity, gas, water)||Superannuation|
|Telephone bills||Income Tax|
|Lease / loan payments||Wages (including PAYG)|
- Monthly cash balance — your total cash incoming minus total cash outgoing
- Closing balance — your opening balance plus your monthly cash balance.
To maximise the use of your cash flow statements for small business accounting, compare each month’s numbers against your older data and keep an eye out for trends like peak months for income, and spikes in your expenses for a particular product or service.
We’ve written a longer guide to cash flow analysis that you can consult at your leisure, for a clearer idea of the different uses of the metric.
Invoices are among the most frequently used small business accounting devices you’ll be working with as the owner of a tradie business.
We’re sure you’re aware that billing your clients takes more than a number and an agreement. There are a number of details that must be present on your invoices in order for them to be compliant with federal tax law. The ATO lists them on their website, but we’ve compiled them into the following table:
For sales of less than $1000, include:
- That the document is intended to be a tax invoice
- The seller’s identity
- The seller’s Australian business number (ABN)
- The date the invoice was issued
- A brief description of the items sold, including the quantity (if applicable) and the price
- The GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’
- The extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST)
For sales of $1000 and above, include items above and:
- The buyer’s identity or ABN
To make the most out of your invoices, there are a number of tips you should consider.
First, note that you’re within your rights to include your payment terms on your invoices, to ensure that your clients and customers know precisely how and when to pay. This helps you avoid confusion and keeps your cash flow healthy by reducing the risk of delayed payments.
Second, cover your bases when sending invoices by sending them via email. This can be done in tandem with sending out physical copies of your invoices to make sure your clients are informed of their dues and payment term. Moreover, digitising your invoices helps keep your business compliant with law: since you’re required to hang onto your business records for a minimum of five years, it makes sense to keep copies on digital file or on the cloud.
Finally, treat your invoices as a safety measure against disputes. Be thorough when describing the products or services included, and make sure all details are correct. Any typos and errors may invalidate your invoices, potentially leading to trouble with the tax office or a harder time settling disputes in your favour.
III. Receipts and other proofs of purchase
A receipt is a specific kind of document used in business accounting that records a transaction between your business and a client or customer. These are commonly used for your clients’ personal record keeping, and in the event that they need a refund or a warranty claim.
You’re required to issue receipts for any transactions worth AUD 75 and above –though as a general rule of thumb, it’s a good business practice to offer receipts for exchanges of any value.
Proof of purchase, on the other hand, is a more general term for the set of documents that record transactions. These include: debit or credit card statements, lay-by agreements, reference numbers for online transactions, warranty cards, etc.
Whatever form your proof of purchase takes, some details must be included:
- Your business name and ABN or ACN
- The date of supply
- Details on the product or service, and
- The price.
Customers have the right to request for itemised bills for services from service providers (which, as a tradie business owner, you likely are) for up to 30 days after a service was rendered. Businesses are required to send the bill within seven days, at no cost to the customer making the request.
These itemised bills must include:
- A breakdown of the price you charged for your services
- If relevant, the number of labour hours & hourly rate, and
- If relevant, a list of materials used & the amount charged for them
IV. Profit and loss statements
Profit and loss statements are similar to cash flow statements in that they provide a look at your income and expenses. They differ, however, in that they also take into account your accounts payable and receivable (i.e. debts or credit you’ve incurred but haven’t received in cash).
While it’s generally better for a business to pay and be paid as soon as possible, you’re likely to close months with these “floating” numbers in your small business accounting.
Comparing your profit and loss statements against your cash flow statements should give you an idea of how well your business is making and receiving payments. The bigger the gap between your gross profit and the ending balance on your cash flow statement, the more effort you should be putting into paying off your debts and collecting payments sooner.
Writing a profit and loss statement is almost identical to the process of creating a cash flow statement, but with the inclusion of unpaid debts and invoices (i.e. your total sales and expenses).
V. Business activity statements
Business activity statements (BAS) are forms that compile your business’ tax obligations for a given reporting period. They cover your GST, FBT, PAYG instalments, PAYG withholding taxes, and other taxes applicable to a business.
BAS can be lodged through a certified tax agent, via a phone call (in cases where you have nothing to report), via mail, or through a number of methods online.
Your BAS are record-keeping documents, primarily for the benefit of the ATO. As such, the data you can gather from consulting them should be easily found in your other reports and small business accounting documents –assuming you’ve done a good job of keeping your records in order.
Hiring an accountant
While using the right suite of small business accounting tools can give you an easier time with keeping track of your finances, hiring the right accountant is still a necessary step to keep your business tax-compliant and growing. Any tradie enterprise looking to thrive needs a qualified expert on its payroll.
As with most things, of course, hiring the right accountant is easier said than done. This section will cover the vital qualifications, places to look, and things to check for when evaluating a new hire.
What kind of accountant?
There are many different types of accountants, so step one is recognising that most small businesses don’t need to take on the expense of hiring one dedicated staff member to handle taxes, one to handle the books, and another to assist with pricing.
Insofar as the job title is concerned, your tradie business should do just fine with a staff accountant. These are the generalists of the accounting world, capable of handling bookkeeping, taxes, financial reports, and other areas important to small business accounting.
At minimum, a staff accountant needs a bachelor’s degree to qualify. This guarantees that even fresh graduates have gotten their hands on a few years of dedicated learning and practise. A master’s degree in an accounting field is a plus, but not a requisite for becoming a competent accountant.
When fielding candidates for a technical position, working experience is the most important factor to consider.
Experience separates the good-in-theory from the good-in-practise. The most promising graduate with the highest grades may do well in a testing environment, but stumble when working for a business with genuine stakes on the line. Prospects with experience in small business accounting are more likely to have already made their rookie mistakes, learning from the process and developing the right work habits along the way.
If we had to put a number on it, we’d say that 3 years of continuous working experience is the hard minimum when hiring an accountant for an SME. Setting the bar at 3 years guarantees proof of the ability to commit to an employer and sufficient exposure to the demands of the job, without raising their asking price beyond a level that makes sense for the task of small business accounting.
When you’ve narrowed the list down to a handful of promising candidates, or once you’ve touched base with the right referral, it pays to carry out a formal interview for the sake of assessing their attitude. This is because while background matters, so too does the right outlook. All the technical brilliance in the world would be moot if the person you hire treats the job like a mindless chore.
As you field candidates, get to know their motivations for applying. There’s nothing wrong with wanting a job for the salary, but the most valuable hires are those who can see the bigger picture: a job with you as learning experience, or as a chance to get involved in growing a business.
Ask your candidates about their long-term plans and see if they match your vision of a valuable employee. Get a sense of how they deal with problems they can’t solve given their present limitations. Find out if they have an interest in generating new ideas, or are content with following orders.
An interview is a powerful tool, and a safety net to make sure that you have a clear idea of who you’re trusting with your business’ finances –use it wisely.
This all leaves the question: where does one find applicants who are likely to fit the bill?
Our top recommendation is to keep an ear out for referrals: prospects whom your acquaintances and associates would recommend for their skill and work ethic. Referrals help you bypass a lot of the guesswork that comes with hiring an employee; hearing reports about their talent and character first-hand gives you an instant advantage.
Take the initiative and ask around about leads the next time you’re having a chat with a friend in the industry, and ask your employees the same. It doesn’t hurt to collect a handful of prospects if they come with reviews.
If referrals are unavailable, or if they simply don’t work out, your next best bet is to put up a listing. When advertising a vacant position, capture the interest of your ideal candidates by writing a quality job description that describes what you expect out of your applicants, and what they can expect should they be selected.
Newspapers and listing sites are always an option, and the government has its own ways of connecting job-seekers to hiring businesses.
How to tell if your accountant is worth keeping
What happens after you’ve hired an accountant matters just as much as the work that goes into selection. You need a clear set of benchmarks for performance, else you risk the consequences of hanging onto someone unfit for the job of small business accounting.
Consider the following when evaluating your accountant:
We’ll start with the most obvious metric: professionalism. Count it as a big red flag if your accountant can’t deliver requirements on time, act and look professional around the office, or admit error like a decent worker.
Punctuality, ethos, and a professional attitude are requirements for any employee –all the more so for the one in charge of making sure you’re compliant with tax law.
One or two mistakes on the job are to be expected, and nobody’s worse off for having taken some time to read up on their area of expertise. However, take it as a sign for concern if your accountant routinely files the wrong papers or lists the wrong classifications when drafting your reports.
It’s hard to measure an expert without having any expertise yourself. If you can’t have your accountant’s output vetted by a third party, then be on the lookout for any mistakes and inconsistencies in your numbers.
When it comes to keeping your small business accounting in order, there’s no room for a job half-done. Between the value of curating and analysing your financial data and the importance of complying with the state’s requirements, you can’t afford to miss a beat.
Keep a list of the different financial reports and documents your business needs to generate in a given year, and be strict about compliance. The ATO may not be quite so understanding when it comes to late or missed submissions –why should you?
This last entry is likely the most debatable. Some tradie business owners are perfectly fine running the show on their own, without the need for their employees’ input –and there’s nothing wrong with that if it works out for the best. However, there may be value in employees who have the initiative to make suggestions and offer more than what’s asked of them.
If you’re running your business like a team, measure the quality of your hires by their interest in seeing your enterprise succeed. Where an accountant is concerned, this means hanging onto one who makes the effort to suggest better ways of managing your cash flow and finances, and letting go of ones who do little more than churning out papers for you to review.
Dealing with an underperforming accountant
Should you find yourself unsatisfied with how your accountant is performing, there are a number of steps you can take to try and remedy the situation.
As with any employee, communication is vital to maintaining a good working relationship. Flagging any areas for improvement should be the first course of action when dealing with an underperformer. In clear terms and with a constructive tone, let your employee know how their performance could be improved.
If possible, take steps to help them recover from underperformance. Once you’ve narrowed down their problem areas, it’s a simple matter of pointing them to resources, learning opportunities, and work habits that address their deficiencies.
For example, before terminating an accountant for failing to submit their deliverables on time, consider setting soft deadlines and following up on a more regular basis. It’s a bit more work than an employer should put in, but it can wind up cheaper than replacing an employee.
Running a business takes intellect and discipline, and this applies especially to handling a business’ finances. Without them, you’ll have a difficult time mastering the associated computations, forms, and requirements.
If you’ve read this far, then you have a good idea how small business accounting works in a broad sense. As always, we highly recommend sourcing a quality accountant to help you get through the worst of it and keep current with your reports and obligations.
For further reading, have a look at some of the other articles we’ve written on the subject. You’ll find that we write a lot about cash flow, as it’s one of the more troublesome concepts that tradie businesses have to contend with.
Read more about small business accounting and cash flow on the Tradiematepro blog
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