Every trade business needs to know the concepts of managing its financial accounting. This guide is intended for startups and small trade and field service businesses who want to know about the fundamentals of financial accounting without needing to become an accountant. You will learn about budgeting, reducing debt, tips for dealing with the Australian Taxation Office (ATO) and the advantages of financial management software.
Why should business accounting be paperless?
The first step to more efficient accounting is to go paperless. This means digitising your financial records to access them anytime, anywhere. Going paperless is particularly important for tradies constantly on the road and may need to bill clients onsite. When everything is stored in the cloud, it’s much easier to stay organised and find data with a simple search query. Going paperless also helps you reduce clutter and allows you to protect your records from physical damage, theft, or loss. You can even password-protect sensitive financial documents for additional peace of mind.
How do you create and manage a budget?
When creating a business budget, you need an accurate income and expense statement. Examine your sources of revenue and account for debts, fixed costs (e.g., rent, payroll, taxes), and variable expenses (e.g., materials and utilities). Then, determine your monthly profit margin goals and allocate the appropriate amount of money and resources needed to achieve those goals.
To stay within budget, you must constantly monitor your revenue and expenses. Financial management software helps you produce profit and loss statements to see if your company is on track. These statements reveal what components are driving up costs, allowing you to make smarter spending adjustments. Here are five steps on how to create a budget:
The first step is working out how much money your trade business brings in each month and where that money is coming from. Start with your sales figures, then add any other sources of income. Account for all income flowing into your business, then calculate all those sources to get a clear picture of your total monthly income.
Fixed costs are your business expenses that stay the same from month to month, such as:
- website hosting, and
- payroll costs.
Review your bank statements to see which costs have stayed the same from month to month. These are the expenses you need to categorise as fixed costs. Once these costs are determined, add them up to get your total fixed cost expenses for the month.
TIP: For trade businesses that don’t have financial data to review, use projected costs. For example, if you’ve signed a lease for storage or office space, use the monthly rent you will pay moving forward.
Variable costs don’t come with a fixed price tag and vary every month based on your business performance and activity. These can include:
- usage-based utilities (like electricity or gas),
- shipping costs,
- sales commissions, or
- travel costs.
Variable expenses change from month to month. When your profits are high, you can spend more on the variables to help your business scale faster. When your profits are low, consider cutting these variable costs until you get your profits up. At the end of each month, calculate your variable expenses. Over time, you will know how these expenses fluctuate with your business performance or during certain months. You can then make more accurate financial projections and budget accordingly.
Protect your trade business from sudden financial burdens by factoring into your budget spending on one-off items such as new laptops or hardware. Consider adding a buffer to cover unplanned purchases or expenses, like fixing a damaged mobile phone or repairs to a vehicle.
Calculate your total income and expenses by adding your total fixed costs, variable expenses, and one-time expenses. Then, compare cash flow in (income) to cash flow out (expenses) to determine your overall profitability.
It would also help if you also created a financial plan for the year to come. Include these items in your plan:
- Forecast for your business.
- Review of your overhead expenses.
- Review of your cash flow position.
- Plan out your workflow and capacity for the financial year to come.
You may want to consult with a financial advisor to help you create a financial plan. Find out if financial planning fees are tax deductible in Australia.
How to automate bill payments
Many cloud-based accounting software can automate the month-end closing process. You simply have to upload vendor or supplier invoices, and the software will instantly capture the information. Accounting software uses artificial intelligence to generate a digital bill with appropriate line items and payment details. The bill is then automatically routed to an approval manager for review and payment scheduling.
Alternatively, you can set up an autopay system if you have fixed expenses such as rent, equipment licences, and debt payments. This feature allows you to schedule payments at the same time every month to ensure all your bills are paid on time.
How to separate business and personal finances
Here are some simple ways to establish a clear separation between your business and personal finances:
- Open a separate bank account – With a dedicated business bank account, you can more easily track company-related expenses.
- Get a business debit/credit card – A business debit or credit card prevents you from using personal accounts for business transactions. Paying business credit card bills on time also boosts your credit scores and increases your company’s borrowing capacity.
- Save and organise your receipts – Logging your personal and business expenses on separate archives makes it easier to track your spending during a tax audit. This will also be useful when claiming tax deductions on specific purchases.
- Pay yourself a salary – Getting a normal wage sent to your account will make it easier to determine how much you can spend on your personal needs. It also prevents you from dipping into the company’s savings.
- Track personal items used for business – If you use a personal vehicle, phone, or computer for work, track the time and money you spend on them during business hours. You’ll be able to claim a tax deduction for the business portion of these personal items.
How can you follow up client payments?
Late payments can slow down your company’s cash flow, so following up on past-due invoices is crucial. Reminding clients that their payment is overdue via an automated email is a great way to quickly get the money you’re owed. Your follow-up emails should include the following details:
What information should go in a client follow-up email reminder
This information will ensure your customer has all the information needed to pay the overdue invoice. It’s also worth creating email templates for when clients are 7, 15, 30, and 60 days late for the payment. Modern accounting software can help you customise these email templates and automate the follow-up process.
How can small businesses reduce debt?
To put your business in a healthy financial position and ease cash flow, you have to minimise debts as much as possible. Here are four best practices to do just that:
- Review what you owe – Evaluate all sources of debts, including credit cards, business loans, vendor leases, and other outstanding payments. Then, prioritise debt payments with the highest interest rates, so you can quickly relieve financial burdens. You can also try to negotiate lower administrative fees, payment schedules, and interest rates with your lender.
- Promptly pay your debts – It’s important to pay your vendors, suppliers, and bank as early as possible. This will not only help you avoid past-due payment penalties, but you may also get early payment discounts down the road.
- Streamline customer payments – Shortening your receivables cycle will help you pay off your debts sooner. This can be accomplished by invoicing customers immediately after a job is completed and offering them multiple payment options.
- Increase your cash flow – Generating higher revenue will help you pay your debts and turn a profit so you can pay yourself a decent wage. Tradies can generate revenue with more targeted marketing campaigns and offering new services to a broader client base.
How do you build financial projections and analyse cash flow?
A financial projection leverages historical data to forecast expected revenue, expense, and cash flow trends over a certain period. By creating an accurate projection, you’ll be able to make informed investments and decisions to drive your business forward. Here are the basic steps to creating a financial projection:
- Use your accounting database to produce balance sheets, income statements, and cash flow charts of the current financial year.
- Gather past sales figures from your financial statements. These may uncover seasonal trends, which you can use to predict future sales performance.
- Consider external factors that may affect profitability, such as economic downturn due to pandemic outbreaks or sudden shifts in market trends and popular services.
- Project your expenses based on fixed and recurring expenses such as payroll, loans, utilities, and equipment rentals. You should estimate the cost of materials and labour based on how many jobs you take on every year.
- Choose the time frame for your projection. This can be anywhere from 1 to 10 years.
- Evaluate all financial reports to forecast future cash shortfalls and windfalls. For example, if previous financial reports show revenue surges during the summer months, you can better anticipate your busy seasons.
- Use your predictions to justify your business decisions. For instance, you may hold off on major investments in the second quarter of the year if you tend to collect lower revenue because it’s tax season.
- Review your projection with other executives and make changes as necessary.
How can tradies save for retirement?
Tradies saving up for retirement can put their money in a superannuation fund. This is a fund where you can invest a portion of your salary into a retirement plan. The super fund is managed by a super provider, who ensures that your contributions are invested in the right places so you can enjoy a high yield by the time you retire. Any earnings you make within your super fund will only be taxed at a maximum of 15%. What’s more, your contributions will give you access to lower tax rates.
Tradies usually have three options when choosing a super fund::
- Industry funds – Most tradies’ money is invested in industry funds such as CBUS, Host Plus, and Australian Super. These funds tend to have low fees, are not for profit, and make steady returns.
- Retail funds – These funds are typically run by banks and investment companies, and they offer people a broad range of investment options. Retail funds usually incur advice and platform fees, and super providers may retain some profit gained from investments.
- Self-managed super funds – These are for self-employed tradies who want complete control over how their super funds are managed and invested. These funds don’t require a minimum investment, but tradies must shoulder setup costs, running expenses, and compliance responsibilities.
Trades business owners will need to decide how much their employees and the company must contribute to a particular super fund. This process can be tricky, so it’s crucial to consult with an accountant or financial advisor.
What are your end of financial year (EOFY) priorities?
The most important documents you need to update and have lined up by the end of the financial year include:
When preparing tax returns, understanding what expenses you can claim as deductions will help you save money. For trade businesses, you can generally make a tax deduction claim under the instant asset write-off and temporary full expensing schemes on the following expenses:
- Commercial vehicles (e.g., vans and utes)
- Vehicle expenses (e.g., fuel, oil, car loans, and servicing fees)
- Machinery, equipment, and tools
- Computers and tablets (for work use only)
- Protective clothing and equipment
Trades businesses must hang on to work-related receipts and invoices for expenses as written evidence for a tax deduction claim. Receipts must clearly display:
- the name of the supplier,
- amount of expense, purpose of transaction,
- nature of goods or services,
- document dates, and
- payment dates.
Keep in mind that bank or credit card statements may not include all this information.
Employee tradies who don’t have receipts for small expenses that are $10 or less can still make a claim provided that they’ve logged it in work reports and databases. If they’re claiming depreciating assets worth more than $300, like a smart tablet, they must keep purchase receipts and calculations on how the assets’ value declined over time. Also, it’s good practice to keep a log of work trips, fuel receipts, servicing fees, and other travel expenses for business-related vehicle deductions.
Purchase receipts and logbooks of work expenses must be stored for up to five years. This way, if any claim is questioned by the ATO, you’ll have written proof of work-related expenses in a dispute case and avoid hefty fines. You should also store electronic copies of receipts in accounting platforms because paper records create clutter and are easily misplaced. This will enable you to quickly upload expense records to the ATO’s myDeductions app to make lodging tax returns a breeze.
It is also important to note that when purchasing large assets you will need to take the invoices and loan details to your accountant to claim the correct depreciation, GST and interest.
Work and personal use
Consider what is work use and what is personal use. Collect records on the business portion of an expense in case an asset is used for both business and private purposes. Take into consideration the private use % of an asset if relevant.
You will also need to gather expenditure on asset improvements and repairs to calculate how an asset’s value depreciated over time. Also consider stock and asset records, including their values
Every quarter, your business is legally required to pay at least 9.5% of your employees' earnings as contributions to their superannuation fund or retirement savings account. Payment for super contributions is due on the following dates:
- 28 October: Quarter 1 (July to September)
- 28 February: Quarter 2 (October to December)
- 28 April: Quarter 3 (January to March)
- 28 July: Quarter 4 (April to June)
Companies that promptly pay for super contributions are entitled to tax deductions, provided they meet certain annual turnover thresholds. However, super contributions are only deductible for the specific financial year they were submitted. This means if you approve super payments on 28 July, your company won't be able to get the tax deduction for the 2020-21 financial year. To maximise the deductions available, you must ensure the super fund's contributions are paid and received before 30 June.
As for the super contribution process, SuperStream will allow you to send payments and manage fund information electronically. You'll also have to keep records to prove superannuation compliance, including details such as:
- the amount paid,
- date of payment, and
- the retirement plans offered to employees.
A profit and loss statement includes a company's revenue minus expenses for running the business, such as:
- cost of goods,
- freight, and
Each entry on a profit and loss statement provides insight into the company's cash flow and shows where money is coming from and how it is used.
Get a free profit and loss statement template here.
The best way to set your business up for success is to perform a thorough end of financial year review. Look at your company’s financial goals and evaluate how close you came to achieving them. Significant indicators for measuring business growth and financial stability are:
- profit margins,
- return on investments, and
- cost per work order.
If you find that any of these are not in line with your company’s goals, this will help you make course corrections on spending and revenue streams for the coming year.
Forecasting your cash flow by analysing historical financial data will allow you to anticipate potential shortfalls and schedule your spending more strategically. For example, if you know your company goes through cash deficits during certain seasons, you’ll know when to slow down your capital investments and hiring. By understanding the patterns throughout your financial year, your business can avoid costly mistakes and continue growing.
Business activity statements (BAS) record how much goods and service tax (GST) you collected on sales and how much GST was paid on purchases. The ATO uses this information to work out whether you owe GST payments or if you’re entitled to a refund.
Failing to lodge BAS reports by the deadline may result in hefty fines unless you have a good reason, so it’s crucial to be diligent with your submissions.
For startups and small trade businesses, your annual turnover will likely be less than $20 million, so you'll need to lodge your BAS every quarter. Here are the BAS lodgement due dates for each quarter:
- Quarter 1 (July to September): 28 October
- Quarter 2 (October to December): 28 February
- Quarter 3 (January to March): 28 April
- Quarter 4 (April to June): 28 July
The key to staying on top of your BAS submissions is to keep your accounts organised. Accounting software like Xero, QuickBooks, and MYOB Online can help you set up a chart of accounts to track your paid and collected GST. They also allow you to process GST reconciliations, lodge your BAS, and make direct payments to the ATO.
It’s important to stay up to date on the latest tax breaks and legislative changes so you don’t miss out on thousands of dollars in claimable expenses every year.
Check the Australian Taxation Office (ATO) website for key changes and new measures to be aware of when completing your tax return.
You may lodge your own return or get a professional accountant to lodge it for you.
You can lodge your tax return:
- with a registered tax agent
- online with myTax- external siteif you're a sole trader
- with standard business reporting enabled software if you're a company, trust or partnership
- by paper.
You can lodge your BAS:
- through a registered tax or BAS agent
- online- external site(online services in myGov, online services for business or SBR-enabled software)
- by phone (for nil BAS statements only)
- by mail.
Tips for dealing with the Australian Taxation Office (ATO)
What records the ATO requires
By law, your records must:
- explain all transactions,
- be in writing (electronic or paper),
- be in English or in a form, and
- be kept for five years (some documents need to be kept longer).
Penalties can incur if you do not keep the correct tax records.
How to keep records
You can keep invoicing, payment, and other business transaction records electronically or on paper. Maintaining records is easier with financial software so that you can:
- automatically calculate amounts,
- provide ready-made reports,
- produce invoices, summaries and reports for GST and income tax purposes,
- keep up with the latest tax rates, tax laws and rulings,
- report certain information to the ATO online, and
- back up records in case of flood, fire or theft.
Keeping a good record of your trade business makes it easier to manage your cash flow, meet tax obligations and understand how your business is performing. Below are some tips for dealing with the ATO.
How to seek advice from a tax professional
Seek an accountant that specialises in industry-specific bookkeeping, tax, and accounting services, such as Tradies Accountant. They know how to support you in your business, whether that involves assisting with your accounting software, taxation advice or preparing cash flow projections.
Why should you use financial management software?
Trade and field service businesses gain a lot from using cloud-based financial management software, such as:
- Automated price quoting, billing, and payments.
- Improved accuracy and reduced human error, due to automated workflows.
- Real-time visibility into your company’s financial performance.
- Seamless collaboration between team members and departments.
- Instant financial reporting and cash flow forecasting.
- Reduced paper waste and storage costs.
- Access to financial data anytime, anywhere.
- Highly encrypted and secured cloud servers to keep financial information safe.
- Tight integrations with other software like job management systems.
For more information on integration features, read the 4 essential integration features to look for in your accounting software.
What are the top accounting software picks?
Below are our top suggestions for accounting software with integration features, here are our top suggestions:
- QuickBooks – This all-in-one cloud accounting software features a user-friendly interface and robust inventory management tools. You can save time by automatically importing invoices, bills and receipts from sources like email services, QuickBooks Invoice Manager, or online work portals.
- MYOB – Whether you’re looking to automate your data entry, manage inventory, or expedite invoicing, this software will help you track and organise everything. MYOB even facilitates multi-currency transactions for when you’re dealing with international suppliers and business partners.
- Xero – With a mobile app that allows you to input expenses even when on the go, Xero is a great option for SMBs with a distributed workforce. If your technicians need access to their accounting data from anywhere, this cloud-based software will deliver what they need.
Key takeaway: Financial organisation is not an easy task. Automating the financial process is one step to making this process easier. When considering financial management software, evaluate the platform based on how it addresses your financial needs. Ask yourself the following questions:
WorkBuddy is a flexible job management system that can seamlessly integrate with any accounting system. For more information on how WorkBuddy and accounting software integrations can help your business grow, book a demo today.