What you should know about your small business’ finances

Chartered accountant and owner of Healthy Business Finances, Stacey Price believes many small business owners fail to truly understand their finances.

They get caught up in only looking at their bank balance but don’t have a long-term plan for how they will keep their business’ finances healthy.

As part of a three-part series, Work Wise spoke to Stacey and two other successful small business owners – Greg Chapman and Kathy McKenzie – about the journey they’ve taken to establish healthy, profitable business practices.

In part three of the series, Stacey Price explains what you need to know about managing your small business’ finances.

Know your numbers: how to get a grasp of your small business’ finances

Nearly two decades working as a chartered accountant and running Healthy Business Finances has shown Stacey Price the numerous financial mistakes small business owners make.

In the age of Cloud accounting systems, such as Xero and MYOB, Stacey says people assume the systems will do the hard work for them, while they continue to be unaware of what the numbers mean.

“They’re using an accounting system which has amazing features but they’re only doing what they need to for day-to-day transactions,” Stacey says.

“They should run some reports at the end of each month to really assess how their business is going, what’s happened in that month – was it a good or a bad month – and then what can you do to make sure the good things continue and the bad things don’t continue.”

Run multiple financial reports and pay attention to what they’re telling you

“Reporting identifies a lot of errors” small business owners make with their finances, Stacey says.

But many of her clients have shown her they don’t understand how to holistically review their financial situation.

They might run a report that doesn’t give them all the information they need, or they might even fail to read a report they’ve created.

“If they don’t learn what to look out for, that’s when businesses starting getting in trouble,” Stacey says.

She commonly sees clients who run a single report – such as a profit and loss – which alone cannot truly identify actions to take, or errors made.

Completing regular and holistic reporting can identify things such as needing to pay GST or superannuation, and how cash-flow fluctuations correlate to stock, debt and other financial factors.

You need to set a budget for your small business

Stacey stresses the importance of small business owners each year setting, and sticking to, a budget.

As part of the budget, small business owners should consider:
• How many sales you need to make a profit; 
• How much stock to purchase and how often to purchase it (in the case of a retail business);
• How much money to set aside for tax and employee-related costs (such as wages and superannuation);
• How much money is needed to pay back loans each month;
• How much money is available to spend on technology or supplies.

Stacey advises people should “automatically halve” incoming money and save it for costs which arise later.

“If you make a sale for $100, think of $50 as ‘not yours’. Put it in a separate bank account and don’t touch it. You can only spend on your business the remaining $50.

“That way when it comes time to pay your GST or superannuation, you’ve already got a slush fund in that separate account. Then, the stress of bills is not quite as big because you’ve already got the funds set aside.”

People often fall into the trap of failing to set or pay attention to their budget, spending money unnecessarily on courses they’re “too busy” to attend, or frivolous frequent purchases like fashion stationery.

Don’t make assumptions about your knowledge of complex financial processes

People often make “the biggest errors” when they assume they understand the correct processes for paying GST or hiring and paying staff, Stacey says.

“GST is such a complex area and even if you’re using an accounting system, you need to understand what that system is doing with those transactions.”

Stacey says she has had many incidents where clients have over-claimed GST, only to have to pay it back when they might not have money to cover the cost.

“They thought they were doing the right thing because the software ultimately did it for them but they haven’t set up their systems correctly.”

Stacey also says: “Payroll is quite a tricky area: You have to be registered for the correct thing with the tax office.

“People often miss that step altogether and they just hire someone without doing the groundwork.”

Get professional help to better understand your small business' finances

Get professional help when you don’t have expertise in a key area of business

Stacey freely admits she doesn’t have expertise in areas such as marketing and legal, so she outsources those tasks to trusted professionals.

“If you need to understand something that’s not your forte, you need to build relationships with someone who has that strength, and get them to help.

Stacey recalls during the first six months of starting her business she thought she could do everything by herself and was hesitant to entrust others with tasks.

But by failing to engage professionals who were skilled in areas she wasn’t, she almost reached a point where she wanted to quit her business.

She says business owners who struggle to understand and manage their finances should seek help from a chartered accountant.

“Don’t spend six hours trying to analyse those numbers, because that’s a waste of your time.

“Spend money paying someone who can get the job done properly, rather than getting to the stage in your business where you don’t want to work in it,” Stacey advises.

Also, read how Dr Greg Chapman believes you can build a ‘profit machine’ for your small business.