Ask a mentor – setting up and managing business finances

The information in our Ask a mentor article series is designed to help businesses better understand some fundamentals on each topic. It is not designed as a comprehensive resource or toolkit.

Setting up and managing finances is essential to the success of any small business. Having a clear understanding of your numbers will enable you to make strong and informed decisions and in turn, will help grow your business.

Many small business owners often wonder 'why isn't there any money in the bank, as I know I am making a profit?' There is a big difference between cashflow and profit. Understanding these 2 concepts will help to make any small business owner more successful.

Creating a plan which includes financial forecasts, budgets, and efficient processes, from the beginning, will provide visibility over your finances and will help with stability and growth into the future.

Learn more about finance basics from our Mentoring for Growth (M4G) mentors:

Watch our business finance essentials panel webinar recording where business experts from the M4G program provide information, tips and resources on setting up and managing your business finances.

Bryan Worn—M4G mentor since 2017

Bryan Worn (M4G mentor since 2017)

Bryan's top 3 tips for small businesses when setting up and managing business finances

  1. Always keep business and personal monies separate.
  2. Keep 3 to 6 months payments in a reserve account.
  3. Identify the 3 to 7 key financial figures/financial ratios that will show your business health. Get help from a financial accountant who understands your industry.

There will be items you do not know about, so get help from an accountant or mentor to examine your predictions. Think about logistics, that is, 'what do I need to have to deliver the sales I am projecting?' (e.g. level of inventory, storage requirements). Then, work out how much working capital you'll need to carry inventory and accounts receivable.

  • Reconcile all bank accounts at least weekly.
  • Get your accountant/chief financial officer to check the accuracy of your systems every 3 months, even if you have a bookkeeper.
  • Invoice immediately when a product is sold, or a service is delivered.
  • Pay yourself a regular salary with PAYG deducted.
  • Estimate the amount of GST and income tax on profits for every week or month, and place that money into a separate tax liabilities bank account so that the money is there to pay the taxes when due.
  • Each pay day, transfer the PAYG deducted from wages into your tax liabilities bank account.
  • Keep business money separate from personal money.
  • Transfer surplus cash to a reserve bank account.
  • Avoid spending spare cash to get tax deductions or yourself 'just because it is there'.

Don't use your tax accountant for financial or business advice unless they have a proven service in small business operations. They are usually (and understandably) focused on compliance work. Look at hiring a virtual chief financial officer (CFO) (or part-time CFO) who can help you with financial management and decision making.

Ask prospective CFOs about their experience and the types of clients they provide services to.

Connect with Bryan on LinkedIn.

Canio Muscillo—M4G mentor since 2019

Canio Muscillo (M4G mentor since 2019)

Canio's top 3 tips for small businesses when setting up and managing business finances

  1. Asset protection.
  2. Growth strategy.
  3. Tax planning.

Have at least 6 months operating expenses as cashflow. Determine the minimum you need to draw as a wage to manage living costs.

Start with the end in mind. It's not a job, you need to treat it as an investment.

  • Use bookkeeping software
  • Hire a bookkeeper
  • Be up to date

Use software programs and ensure all business transactions are recorded regularly. Have a separate bank account for GST and tax.

  • Have the right software
  • Try to pay bills as they are due
  • Chase your debtors

Have an open relationship, a clear understanding of your business needs and requirements, and their fees.

Connect with Canio on LinkedIn.

Katrina Brennan—M4G mentor since 2017

Katrina Brennan (M4G mentor since 2017)

Katrina's top 3 tips for business planning

  1. Prepare a budget.
  2. Prepare 3-way forecasts and key performance indicators (KPIs).
  3. Set up meetings to monitor progress and be accountable.

Be investor ready. Have all your costs and projected income estimated as best you can so you are ready for banks and other forms of investments.

  • Review systems and processes to make sure you are utilising all platforms to perform efficiently.
  • Explore cloud-based solutions.
  • Tax planning – always be prepared.
  • Check in with your accountant throughout the year to see if you are still tracking the same.
  • Have a schedule of payments within cashflow.
  • Set goals that are realistic.
  • Review and update to keep on top of any changes.
  • Set key performance indicators (KPIs).
  • Work as if the accountants are on your team.
  • Work together through all issues to plan and be accountable to each other to achieve your goals.

Connect with Katrina on LinkedIn.

Natalie Kidcaff—M4G mentor since 2021

Natalie Kidcaff (M4G mentor since 2021)

Natalie's top 3 tips for small businesses when setting up and managing business finances

  1. Create a business plan, including financial forecasts such as revenue projections and cashflow projections to help you understand what resources you will need to make your business run smoothly.
  2. Create efficient administration processes from the beginning so that you have visibility over your finances.
  3. Use a good accounting system as soon as you can, a popular program for this is Xero.

It is important to understand all your start-up costs and what could be required for your business. Do as much research about your industry to make sure you are covered for key things like insurance, licences, or registrations, etc. By gathering all the information, you should be able to create a more accurate budget.

Overall business planning is key to setting up your business and managing your finances well.

  • Set up a new, separate business bank account and where possible get a debit visa card attached to the account so that you can pay business expenses easily. Use this account to pay for all your business expenses.
  • At minimum, set aside a finance hour of power each week to stay on top of your financial record keeping – if you have a simple system to follow it will not feel as onerous.
  • Make sure you are keeping records for all your business related expenses, not just your receipts/invoices but also proof of your business travel and motor vehicle expenses.
  • Spend the time to understand your obligations, including when you need to be registered for goods and services tax (GST), payroll tax, pay as you go withholding (PAYGW), fringe benefits tax (FBT) and income tax instalments.
  • Set up a separate bank account for setting aside your GST, PAYGW (for tax on employee wages) and income tax that will be payable on your profits. Put aside amounts for this monthly to ensure it doesn't sneak up on you. Set yourself a reminder in your calendar to do this so you don't forget.

Keeping an updated cash flow forecast including knowing what your monthly expenses are and when they are expected to be paid, will help to understand your cash flow movements. It will also help you understand when you might require further capital contributions or loans to grow your business.

Send out invoices to your customers as soon as possible on completion of the job, service delivered or prior to the product being sent out. This will help to maintain a steady income stream.

By spending the time early in your business to learn about managing your cash flow, it will provide the foundations you require to help you make business decisions when you are growing or scaling your business.

  • Find someone who understands your business, your industry and who can deliver the assistance you require.
  • Make sure that you feel confident and comfortable with them from the beginning, this will help you to feel supported when starting your business and create an excellent working relationship.
  • Be sure to understand what the costs are and how often they will bill you so that you can build this into your business expenses.

Connect with Natalie on LinkedIn.

Tracey Rubens—M4G mentor since 2022

Tracey Rubens (M4G mentor since 2022)

Tracey's top 3 tips for small businesses when setting up and managing business finances

  1. Accurately track your business cash flow by keeping your business and personal expenses separate. Do not fall into the trap of using your business bank account to pay for personal life.
  2. Always have money set aside to pay your liabilities when they become due. Set up a separate bank account to save your GST, taxes and employee super, then move money into this account as you incur the cost.
  3. Accurate data equals power in business so make sure your data is always up to date. Set up systems to ensure your record keeping is accurate from day 1. It's much easier to take control and adjust if you know where you are.

It's true that every start-up needs a budget to give them a plan to work towards. But be aware that things change quickly.

For a start-up, an annual budget set in July, might be out of date by September. You may be better advised to set a new forecast every 3 months for the first year based on all the current information. And don't forget to build in a level of contingency for the inevitable unforeseen costs in any budget or forecast. Better to be pessimistic with your budgeting so you can ensure you can cover all costs.

The Australian Taxation Office (ATO) has a great free resource for business owners and advisers to use for cash flow tracking. It's called the Cash flow coaching kit and provides a step-by-step health check of business finances with helpful explanations of what levers can be adjusted to improve cash flow. It includes an interactive show-me-how introduction webinar with practical case scenarios.

If you are using a cloud accounting package, there are a range of applications that you can purchase and connect to your accounting package that will provide you with regular cash flow reports. Some of the best ones are Spotlight, Fathom and Float. Your trusted business adviser can suggest 1 that would work best for you.

The Business readiness health check is a great free resource offered by this Business Queensland website. It gives potential owners practical advice to assess whether they and their finances are up to the task of starting a business.

It is a given that accurate financial records are required by the Australian Taxation Office. But that is not the only reason you should focus on them. Think of accurate financial data as one of your business tools to help make your business a success. Search for the insights in your data to soar to new heights. And if you need some help to interpret the insights, reach out to a professional. They will be delighted to help you.

My top tip for financial record keeping is to create systems to automate the process. Since the advent of cloud accounting, record keeping has become simpler and more convenient. There is no longer a reason for a business to keep all their receipts in a shoe box. They should be using all the appropriate app tools at their disposal to make this process seamless because you can guarantee that their competitors will be. And if you don't have the confidence to set up automated, efficient systems, you should seek advice from a professional. The advantages in using accurate financial data for business decisions are enormous.

The best tip for managing business tax obligations is to create a separate bank account for goods and services tax (GST), tax and employees superannuation and pay as you go (PAYG). Move cash to it as you incur the expense. If you remember that it is not your money, you won't be tempted to use it for any other purpose and will always be able to meet your obligations. The other tip is don't get behind in your lodgements. Many small business owners ignore their lodgement obligations until they are overdue and are hit with penalties from the ATO. Instead, if there is a problem, talk to the Australian Taxation Office before you are overdue and ask for an extension. They are often helpful and usually obliging.

My top tip for managing cash flow is very simple advice. Stay on top of it every day. Track what is coming in and out of the bank today and check what is on the horizon to ensure you know when you are going to be short and start planning for that day in advance. Sticking your head in the sand and pretending you don't have a cash flow issue will not solve the problem.

I have 3 top tips when choosing and working with a trusted business adviser:

  1. Choose one that is a registered agent. You can check if they are registered on the Tax Practitioners Board website.
  2. Choose someone that is a good communicator. They will be passing on a mountain of information and knowledge in both a written and spoken form. Being able to transform their lifetime of financial experience to you into digestible portions is the skill you should be looking for in an adviser.
  3. Find someone you trust that can become part of your team. The ideal advisory situation is where the accountant, the bookkeeper and the business owner are all working together like an unbreakable triangle, moving towards the same financial goals. The more collaborative they are, the more successful the business.

Connect with Tracey on LinkedIn.

Peter Peterson—M4G mentor since 2020

Peter Peterson (M4G mentor since 2020)

Peter's top 3 tips for small businesses when setting up and managing business finances

  1. Know your products and services.
  2. Know your target audience.
  3. Have a realistic cash flow forecast.

Be honest and don't try and run before you can walk. Be aware it may be months or a year before you realise a profit you can take home.

I promote a combination of, and to all my clients as the different language/perspectives across all 3 usually hits a chord with clients.

Work with your financial advisers and bank. Act quickly when required.

  • Be accurate.
  • Use an online bookkeeping system.
  • Always ask for help when needed.

Always have an accountant as 1 of the 4 pillars needed in business.

Create a cash flow document and use it as a budget and monitor it weekly/monthly.

Don't hold back any information. Help will only be useful if professionals have the full picture.

Connect with Peter on LinkedIn.

Ian Judson—M4G mentor since 2021

Ian Judson (M4G mentor since 2021)

Ian's top 3 tips for small businesses when setting up and managing business finances

  1. Keep your data up to date. You can't make good decisions on old data.
  2. Work out what are your minimum and maximum investment amounts to operate the business now.
  3. Profit is an opinion. Cash is king.

Most owners love to start with a profit forecast. I'd start with cash as it covers both income and expenses and asset acquisitions.

Top reads for cash flow understanding:

  1. The Cashflow Quadrant – Robert Kiyosaki.
  2. The Barefoot Investor – Scott Pape.
  3. Profits First – Mike Michalowicz.

A dollar of capital is worth more than a dollar of income. The tax system rewards people who are patient with receiving their wealth via capital rather than income. Only take out of the business what you need, not what you want.

  • Focus on recording the spend or receipt. Whether it is tax deductible or assessable is a secondary consideration. Get it in the system. Let the accountant decide its tax status.
  • Regular maintenance and reconciliation of your data is critical. Monthly record keeping is generally too long a time to produce data. Go for weekly, even daily if you can.
  • Invest just as much in finance systems as you would sales or operations systems. Finance is just as critical as the other 2.
  • A separate bank account to keep your GST set aside will enable you to sleep at night.
  • If you're paying tax, you're making profit. Stop believing the urban myth that wealthy business owners pay no tax.
  • The Australian Taxation Office ask for amounts in lumps. It can be a shock. Manage your own cash flow and set aside amounts more regularly and be aware as to payment dates.
  • Pay creditors when they ask for payment and not before time.
  • Be understanding yet firm with your debtors. If you provide a valuable good or service it is reasonable to be paid promptly.
  • Automate your follow up activities as much as you can. Don't let lack of time cause you to not follow up cash receipts.

Discuss your needs and your goals first. Your advisor can help you work out the best way to get there but they need to know your destination.

Connect with Ian on LinkedIn.

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