Guest post by Tahlia Sinnott, Tax and Business Advisor
So, you have a great business idea but have no experience in operating a business. Where do you turn to next? An accountant. But why?
At this point, an accountant can provide you with a constructive evaluation of your business idea. They act as an independent reviewer of the business idea – they take the emotion out of it.
The below points, highlight areas where an accountant can provide you with independent advice on the establishment and financial viability of your business.
Are you ready to have your own business?
Your accountant can help you understand the risks and responsibilities of having your own business. They will have a wealth of experience and examples of the pros and cons of having your own business. They can help you to critically evaluate your skills, expertise and personality to ensure you feel you are confident and ready to take the plunge into being a business owner.
Break even analysis.
Most prospective business owners have usually had a chance to consider their set up and ongoing costs, the next step is to consider the break even analysis of the business. Break even analysis determines the point at which revenue received equals the costs associated with receiving the revenue. It will help you determine the sales in dollars or sales in numbers you will need to earn to cover your ongoing variable costs. In the case of opening a laundry mat, how many times will the machines need to be used per day to cover costs? For a gym, how many clients will have to walk through the door per week to cover costs? Once this analysis is conducted, it provides a realistic idea of what the business needs to do just to cover costs. It can give the future business owner comfort that there is potential behind their business idea. It can help them understand their cost structure and highlight areas where they may need to cut costs. For other business owners, this can be the point where they realise their dream of running a business is not financially viable as there is no way they will generate X amount of sales per day/week/month to cover their costs.
Budgeting can include a number of considerations:
- Personal/family circumstance – how much do you/your family need to live off? With starting the new business can you quit your job all together? Does your partner need to earn more money in the short term? Will you have time to get a part time job? Or a combination of all of the above?
- Start-up costs – what are the start-up/one off costs of the business? Can these costs be spread over the first period of trading? Do you need to incur them all straight away, are some items just ‘like to have’ items?
- Start-up time of the business – how long will it take to build the business up to the break-even point? Have you got equity/reserve of cash to assist in the short term – how long will this last?
- Seasonality of the business – once you do get the business up and running, is there seasonality in the business? How much cash do you need to put aside over the peak season to cover the costs in the off season?
- Taxation – how much do you need to put aside for tax? When will this need to be paid?
Your accountant can help you work through the above considerations. They can help you put monetary thoughts/concerns onto paper to provide a realistic review of your financial circumstance.
Does the new business require equipment and how is this going to be funded? If you currently have a full time job, you will soon find that obtaining finance as a start-up self-employed business is a different ball game. There is no point quitting your job if you will actually not be able to finance the equipment required to make the business function. Your accountant can assist you with understanding the different financing options and the pros and cons of each option for your business. Generally they will have contacts within the finance industry to assist with the discussions and hopefully be able to arrange the finance for you.
Once the business idea is agreed as financially viable, the accountant can work with you on your long term financial goals and ensure the business is set up in the correct trading structure. This may be as a sole trader, partnership, family trust, company… When determining the structure of the business it is not just based around taxation, a key consideration needs to be around asset protection for your family. The key here is to determine the appropriate structure for your family circumstance and look long term – just because your friend has a family trust, doesn’t mean that’s the most appropriate option for you/your family.
Your accountant will be able to facilitate the setup of the chosen structure – whichever entity structure was decided on. They will also be able to ensure you have all the necessary taxation registrations such as TFN, ABN, GST registration, PAYG withholding, fuel tax credits.
Once the structure is determined, it’s important you understand the fundamentals around the structure chosen for taxation purposes. This includes things such as:
- Am I registered for GST? If so, how do I calculate this, when is this payable?
- Who has to pay the income tax? How much tax do I need to put aside for income tax? Again, when do I need to pay this?
As well as knowing the key fundamentals of the taxation structure, it is worth knowing how to minimise the businesses taxation liability. This can come from understanding the small business entity concessions, what an allowable deduction is and when a deduction is available. I strongly suggest you have these conversations with your accountant and not with a friend at a dinner party as just because your friend claims a deduction for something, it doesn’t mean it is right.
During the analysis of the business idea, it would have been determined if employees are required to assist in making your business a success. While employees can be the lifeline of your business there are many rules around employing staff and it is imperative that you ensure you are aware of your responsibilities. While your accountant is not a human resources expert, it is likely they can point you in the right direction of key considerations for employing staff such as but not limited to:
- superannuation rules and regulations – forms to be completed, timing of super payments
- worker’s insurance
- ATO forms – TFN declarations
- employees versus contractors
- recruitment and orientation
- contracts, pay rates
Once the decision is made to start the new business, you want to be able track the performance of the business. This is even more important if cashflow is going to be tight and you need to ensure you are meeting targets. Your accountant can assist you in determining the most appropriate book keeping system/program to use. The key is to get a systemised book keeping process from the inception of the business and to stay on top of the book keeping. Some business owners will elect to the do the book keeping themselves – this is fine, so long as you have training on the program and you attend to the book keeping in a timely manner. Others will elect to employ a book keeper as they know they don’t enjoy the administration work. One thing to always consider when determining who will do the book keeping – is your time better spent generating sales for your business or doing the book keeping?
Time commitment and responsibility.
As you would be aware there is a dramatic change from being an employee to running your own business. There will undoubtedly be things that will pop up over the first year of trading that you won’t have considered during set up stage. Your accountant will help you work through the understanding of the time commitment and additional responsibilities required when you are the business owner as opposed to employee.
Your accountant will generally have connections to assist you with other considerations when starting up a business such as:
- Business insurance
- Workers insurance
- Personal insurances (income protection as being self-employed you will generally not be covered by Worksafe )
- Marketing guru including website, social media, reputation marketing
Overall, your accountant can help you put ideas, number and thoughts on to paper so there is a planned approach to the new business. They will help you objectively assess the fundamentals of your business to ensure you have covered all bases.
From an accountant’s perspective, generally we see the more successful business owners are those who are willing to be critically evaluated on their business proposal. They are proactive in seeking advice prior to making ‘big’ decisions. Most accountants will offer an initial consultation for free to discuss some of the basics of your business proposal.
Should you have a ‘great’ business idea and would like the opportunity to discuss your idea with an accountant; I’d love to hear all about it.
Tax & Business Advisor
(03) 5228 2222