One of the biggest financial challenges faced by small businesses is operating expenses. According to Semrush, 66% of small businesses face financial challenges, with 43% claiming the most prominent challenge is paying operating expenses. Operating expenses cover labour costs, employee benefits, insurances, necessary tools etc. With 2020 proving to be too much for some small businesses to sustain operations, now is the time to look at your operating costs and determine where you can add value for your audience, and reduce costs for you. Below are some tips to keep your costs down, and your profit margin up.

First, embrace some contemporary business practices which have been steadily reducing operating costs for years.

Utilise emerging technologies – innovations in bookkeeping softwares, business management and CRM systems have made processes quick, painless and effective. They’ve also dramatically reduced the amount of hours and manpower required to get a job done. Another benefit of contemporary digital technologies is the tendency for them to be paperless, eco-friendly innovations, saving you cost on deliveries, waste disposal and physical storage.

Another way to reduce operating costs is outsourcing certain practices to third party experts, who can get tasks done much more efficiently and effectively than in-house employees. This can be particularly helpful for marketing and creative services which is often a common pain point for small businesses.

When it comes to utilising vendors, make sure to shop for the best deal that will bring the most value to your business. Be aware that some deals seem cost effective but include features not relevant to your business, meaning you may end up losing money in the long run. Additionally, ensure vendor invoices are paid on time or early if possible. Some vendors offer discounts for early invoice payments, and most (if not all) will charge extra for late payments.

Finally, analyse your business and determine all operating cost inefficiencies. Check for practices which are out-dated, use old technologies or are no longer useful.

This is an ongoing practice, one where employee participation should be encouraged. First hand experiences of policies and procedures are the best way to determine their efficacy.

Considering small businesses are still in recovery from the year that was 2020, reducing operating costs and increasing profit margins is on every business owner’s mind. Following these practices will help your business rebuild in a self-sustainable way.

Cash vs. Accruals  – knowing your options.

Business owners with an annual turnover of under $2 million per year, have a choice whether to report their GST using a ‘cash’ or ‘accrual’ method. This can result in substantial differences in respect to Quarterly GST  and annual Income Tax refunds / payments.

What Is the Difference between Cash & Accruals Accounting?

Cash accounting is recognising the income and expenses in your business when they are physically paid rather than on receipt or issue of an invoice. Many business owners when starting out often use a simple, basic cash system, because it helps to keep track of cash flow.

An accrual accounting system recognises both income and expenses on receipt of an invoice or bill although not yet due for payment. This system will create debtors and creditors in your accounting software, showing what you owe and when, as well as funds owed to the business from your customers.

The benefits of accrual accounting

For small businesses in many industries (like the construction industry for example) there are strong benefits of reporting using an accrual basis. One example is that the cash may not be received in the month that the work is performed which can lead to fluctuating profitability (something that does not look good to either the bank or the ATO). Accrual accounting also assists small business to flatten out the profit, reflecting a more stable and secure business. Accrual accounting also highlights the cash-flow effects of collecting debtors and paying creditors.

The benefits of cash accounting

On the contrary, the benefits to cash accounting are simple to explain – If cash comes in for services performed – we record this as revenue, if cash goes out for goods or services we purchased – we record this as an expense. The cash method of accounting is very simple to administer.

Implications of accruals for GST

How you choose to register for GST may greatly affect the cash flow of your business, as GST is payable on sales for which payment has not yet been received, this could leave you out of pocket for a time. However, GST can also be claimed on unpaid expenses if you hold a tax invoice.

Whether you’ve registered for GST on a cash or accrual basis will also affect your financing of large purchases for your business. With accruals, GST is claimable upfront, so it might be of benefit to your business to use this method.

The method used to report your GST, is of course something that we will review & advice you on.

Income Tax

This has been a touchy subject for the Australian Taxation Office & the courts over the years and there is now a large amount of laws that apply to this subject. When preparing your Income Tax Return, we complementarily review your business situation & ensure you are using the correct method.

Would you like to know more?

I encourage you to contact me on 0404 935 495 or chris@qcaccountants.com.au for a further discussion about your personal situation.

Thanks,

Chris