Your profit and loss statement (P&L) helps you understand your business performance and profitability over time. It’s sometimes called an Income statement and its main purpose is to list income and expenditure.
Whereas a balance sheet is a snapshot in time, the P&L shows transactions over a specific period of time. This can be a month, quarter, financial year or any other period. It can be a stand-alone report or a comparative period report.
Together with the balance sheet, these two reports provide a comprehensive understanding of the financial position and performance of a business.
The profit and loss statement has two main sections: income and expenses.
These may be further subdivided depending on the complexity of the business and reporting requirements.
- Income or Revenue
Income primarily includes main business activities such as sale of goods or services. Other income such as interest received, capital gains or income from secondary business activities is also reported. - Expenses
Expenses are usually divided into two sections: direct costs, or cost of goods sold, and expenses. Cost of goods are those that are directly linked to the provision of services or sale of goods., eg. if you buy widgets from a wholesaler and sell them at a marked-up value, the cost of the widgets is a direct cost, not an overhead expense. Other types of direct costs might be importing and freight costs, contractor costs or certain equipment. Some direct costs are fixed. This means they are the same from month to month, or they could be a fixed percentage of sales. Others vary in value but are still related to the income producing activities. Overhead expenses are all the other expenses required to run the business, regardless of the level of income: for example, rent, utilities, bank fees, bookkeeping fees, professional development costs, vehicle costs and staff costs. Many of these costs form the basis of working out your break-even point, or how much it costs just to open the doors for business.There are some expenses which may be reported as a direct cost in one business but an indirect cost in another type of business, for example, merchant fees or contractor costs.
The Bottom Line
Total income minus total expenses results in the net profit (or loss), is often called ‘the bottom line’. Often business owners are just interested in looking at the bottom line, but a true financial picture requires an understanding of several reports and an ability to see the big picture that the reports are illustrating.
The P&L is a vital tool to analyse for trends over time.
- What does your Profit and Loss Statement tell you about relationships and ratios between sales and expenses, seasonal changes and annual trends?
- Have all your direct costs been allocated correctly?
- Have you recouped all billable expenses from customers?
Financial statements help you understand the big picture for your business. With deeper understanding of your business operations and performance you can make informed decisions about your business finances.
For more information on your P+L, click here.
Does your business buy products and services from overseas suppliers? If so, you may be charged GST – but not always! Overseas businesses must register for GST in Australia if they have a turnover of more than $75,000 for sales connected with Australia.
Some things to remember:
Many large online retailers are registered and charge GST, and you can claim this on your BAS.
However, many smaller or independent online businesses are not required to be registered for GST in Australia; therefore, they do not need to include it in their invoices. A common error we see is that business owners claim GST on the BAS on all purchases, even overseas purchases that don’t charge GST.
Sometimes the invoices are not clear if GST applies or not. If you’re buying from a new supplier and unsure if GST applies, check their registration online at ABN Lookup. If the business has an ABN, the lookup will tell you if it is registered to charge GST. Check their invoice to see if GST has been included. If not, this is a GST free purchase on your BAS. If the business doesn’t have an ABN and isn’t registered for GST, you won’t find them on the ABN Lookup.
If you’re buying business purchases from overseas suppliers, getting your BAS reviewed could be a good idea to check that your GST claims are correct. We’ll also check that your accounting software is set up correctly to make automatic coding of purchases accurate.
Talk to us today to organise a review of your business accounts before you finalise your next BAS and tax return. Call 02 8089 2561 or email hello@jdscott.co. We’re looking forward to meeting you!
Want to read more about GST? Find out when you need to register your business for GST, click here.
Common Tax Deductions for Small Business
Our first tax tip- Are you claiming all the business tax deductions that you are entitled to?
There are many expenses common to most small business, and there are other expenses that are specific to the nature of the goods or services that your business provides.
- Operating expenses include accounting, administration, advertising and marketing, office premises, office running expenses, trading stock, legal fees, insurance and vehicle expenses.
- Employment expenses include salary and wages, fringe benefits, superannuation and training costs.
- Other operating expenses may include things specific to your business, for example point of sale systems, freight, professional membership fees, professional education, protective equipment, tools or specialised software.
- Capital expenses include machinery and equipment, vehicles, furniture and computers. Depreciation for these assets may also be deductible if the expense was not written off immediately.
- Repairs and maintenance to assets and business premises.
Your expenses must relate to the running of the business and providing the goods or services that your business offers.
Some common expenses that are not deductible are fines and penalties, provisions for employee leave, donations to entities not registered as deductible gift recipients and entertainment.
There may be some expenses you want to check with us such as private usage of business vehicles, prepaid expenses, bad debts, loss of stock and borrowing expenses. We’ll make sure to include all the deductions you’re entitled to.
What’s on the ATO Radar for 2022?
Our second tax tip is straight from the ATO. They have advised they will be taking a closer look at record keeping, work related expenses, rental property income and deductions and cryptocurrency transactions in 2022.
- Make sure you keep records for all business transactions (income and expenses), activity statements and financial reports for at least five years.
- Keep all records relating to employees, contractors and payroll for at least seven years.
- If your business is a company, keep all records for at least seven years, including director meeting minutes.
Other Common Tax Return Issues
- Work-related travel expenses. Travel fares, accommodation, meals. Travel should be directly related to income producing activities and you need records to verify the travel claims.
- Motor vehicle expenses. Keep records for fuel, repairs and servicing, finance arrangements, insurance and registration. Keep a logbook to record private travel.
- Fringe benefits. Have you captured all benefits provided to employees? Vehicle and entertainment benefits are usually scrutinised. This means you’ll need records of any extra benefits provided to employees because of COVID-19.
- Superannuation. Have you paid the superannuation guarantee on time to employees’ super funds? Because the ATO will examine your Single Touch Payroll records including superannuation payments.
- Current temporary tax depreciation incentives. There are currently three temporary tax depreciation incentives available to eligible businesses:
- Temporary full expensing – for assets you start to hold, and first use (or have installed ready for use) for a taxable purpose, from 7.30pm (AEDT) on 6 October 2020 to 30 June 2023.
- Increased instant asset write-off – if the asset was purchased by 31 December 2020, and first used or installed ready for use before 30 June 2021. The threshold remains at $150,000.
- Backing business investment.
So, talk to us about what applies for your business.
Maximise Your Business Deductions
Our last tax tip – Maximise your deductions! We can check if your business is eligible for concessions, offsets, employer incentives and rebates and make sure your business is calculating taxable income correctly, so you don’t pay more tax than you need to!
With so many businesses still affected by COVID-19, it’s important to get the allowable tax deductions right for your business and get in early for your tax return. Because this way you get more time to plan for payment, or if you are due a refund you will see it in your bank sooner.. Call us to set up a time to chat.
One last tip! We also advise to always understand where you’re at with cash flow. To get a good understanding of what this is and how to manage it, click here.
Are you considering investing in a new way to make your business more productive or streamlined? With a tight labour market, everyone’s time is at a premium. Finding ways to maximise productivity has never been more important.
But it can take considerable funds to pay for a new website, ecommerce platform, software system or automations. Here are some questions to ask yourself when you’re weighing up the costs and potential benefits of a significant investment.
What are the upfront costs – and the ongoing expenses?
A website, for example, has a large upfront cost for the design, content creation and build. You might think that the costs are then done, but it must be updated and maintained. You can do that in-house, in which case someone needs to be assigned to that work, or you can outsource it.
Always take into account the ongoing costs, because these are a vital consideration when you decide whether to make an important investment.
Which of your current costs will disappear?
Some of the costs you currently incur may vanish with a new system. It might be as simple as no longer paying the cost of an old subscription. Or it might be time saved that is spent manually entering data, processing payments, or dealing with customer issues that arise from an outdated system.
Financial costs are relatively easy to add to the calculations. It’s trickier with time, but try to put a value and quantity on what time might be saved.
How will this change your costs in the long run?
Think about how your business will operate five years from now. Will this new investment allow you to increase your profitability without growing your team? Will you be able to spend more time finding outstanding high-value clients and less time on processes?
Any large investment should make your company run more smoothly, allow you to boost your output, and easily pay for itself.
When will this investment pay for itself?
Once you have all these numbers in hand, you can formulate some idea of when the investment will pay for itself. We can help you estimate a likely timeframe, and some best- and worst-case scenarios. You don’t have to make big choices all on your own – let us help you analyse the costs and benefits to give you more confidence in your decisions.
Click here for a 2 minute read on understanding your statement of cash flow.
Personal services income (PSI) is income received as payment for individual personal efforts and skills. It applies to many contractors who provide services as their means of earning an income. PSI rules can apply to individual sole traders and other types of business entities, but not employees. If PSI rules apply, the entity is called a personal services entity (PSE).
The PSI rules ensure the income is attributed to the individual who performed the services and not apportioned across other entities.
There are several tests to work out if your income is PSI or if you are instead conducting a personal services business (PSB), which means the PSI rules don’t apply. If a personal services entity qualifies as a PSB, the ordinary tax rules apply for that financial year.
At least one of these four tests must be satisfied for an entity to be classified as a PSB.
- Results test: the individual must be paid to produce a result, is required to supply their own equipment and tools to produce that result and is liable for the cost of rectifying defects in the work.
- Unrelated clients test: the sole trader or entity must be engaged by unrelated clients, and services must be advertised to the public.
- Employment test: in general, a sole trader or other entity must engage one or more entities to perform at least 20% of the sole trader’s principal work. Entities other than individuals must not be associated with the sole trader.
- Business premises test: the entity must maintain and use business premises to conduct personal services. The business premises must be exclusively used by the PSE and physically separate from private premises and customers.
If more than 80% of income in a financial year is derived from one customer, the PSE must satisfy the results test to be classified as a PSB.
If none of the four tests are met, the income is classified as personal services income, and the PSI taxation rules apply. PSI rules restrict the type of allowable tax deductions made in relation to personal services income-earning activities.
If you’d like to know more about PSI, talk to us to see if the services you provide meet the tests for conducting a personal services business. We’ll make sure you are claiming the maximum allowable deductions and being taxed correctly.
For more information on PSA, click here.
- You can voluntarily register even if your turnover is less than $75,000. This means you can complete an annual BAS if you prefer.
- If you’re making money through a ride-sharing platform like Uber, you must register for GST immediately. All commercial driving income, regardless of turnover, is subject to GST registration.
- If you want to claim fuel tax credits, you must register.
- If your business is a not for profit, the registration threshold is $150,000 per financial year.
- If you’re not an Australian resident business, the rules for working out GST turnover are different, so talk to us before registering.
As your accountant, we won’t just look after the financial side of your business, we can also support and advise you on the strategic side of your company, including the importance of business development as vital part of your growth plan.
Business development (BD) is what helps your company move from slow, organic growth to fast-paced, hyper-growth. And it’s only by putting the right drive and expertise behind your BD that you can turn your strategic ideas into real success stories.
So, how can we help you to achieve this?
Talk to you about your strategic goals
The starting point for any kind of business development activity is to pin down your goals and aims as a business. When you know what you want to achieve over the coming months, it’s far easier to define a strategy for success. And that’s easier to do when you talk to an objective adviser, like us.
We can sit in on your board meetings, talk to your executive team and get a real handle on what makes the business tick. And, armed with this knowledge, we’ll work with you to drive the direction of your BD and find the best opportunities for you to focus on.
Help you create a clear Business Development strategy and plan
Having a defined set of business development goals is a good starting point. To put this all into action in a productive way, you’re going to need a comprehensive plan for your BD projects.
Our years of experience advising business leaders and their teams really comes into play here. We know the best routes to take, the budgets that will be needed and the right tactics for bringing in more contracts, sales and partnerships. By putting these strategies into a clear plan and linking this to agreed timescales, you have a business development route map to follow and action.
Introduce you to a broader network of business partners
We work with a wide range of businesses across many different sectors, industries and niches. By introducing you to our network of clients, we welcome you into a supportive community of like-minded business owners. And that’s excellent news when looking for new partnerships.
Whether it’s attending a local conference, an online webinar or one of our in-house client events, you’ll meet new people, share new ideas and make the right connections. This is a great way to build alliances and work together with other local businesses. When you’re well-connected, you set the very best foundations for your future business development activity.
Provide better routes to funding and investment
Whatever goals you’ve set for your BD projects, it’s likely that you’re going to need additional funding to finance this activity. Investing in your expansion, or new partnerships is vital to getting a good return on your business development, so great access to finance is a definite bonus.
We’ll advise you on the most appropriate funding channels and how you can use these facilities to finance your business development plans. And we can also link you up with banks, lenders and business finance specialists – so you get the advice and finance you need to bring your BD to life.
Help you track and measure your Business Development performance
Meeting your BD targets takes time – and a whole lot of dedication. Measuring your BD performance over time, helps you stay on track and gives you a good indication of how well you’re tracking against your planned progress.
We’ll help you create the reporting and metrics you need, so you have clear data to track your progress over time. You can log your activity in your project management system, or your client relationship management (CRM) software, and keep clear notes on contacts made, relationships built and targets converted etc.
If you want business development support, please do get in touch. We’ll partner with you to put some real drive, experience and impetus behind your BD strategies.
Benefits provided to employees or their associates in addition to salary or wages are known as fringe benefits. These benefits are paid for by the employer from pre-tax earnings, making the provision of benefits attractive to employees as it may reduce their taxable income while receiving payment in other forms.
Fringe benefits tax (FBT) may apply based on the type of benefit provided.
Tax is payable because the benefits are a different form of payment by an employer instead of salary and wages. The tax is calculated on the taxable value of the benefit, which reflects the grossed-up salary the employee would have had to earn to pay for the benefits from post-tax earnings.
Employers can generally claim a tax deduction for the benefits and related FBT payable.
Types of Benefits
There are many different types of fringe benefits employers may provide to employees. These include:
- Vehicle owned by the business provided for private use.
- Vehicle lease arrangements.
- Car parking.
- Entertainment, such as golf club membership or tickets to major events.
- Expense payments, such as credit cards or health insurance.
- Other types include debt waiver, living away from home allowance, or property benefits.
Some benefits provided to employees don’t attract FBT. If you pay expenses that an employee would otherwise have been able to claim as a work-related tax deduction, FBT won’t apply. For example, if you pay for employees to attend a professional development course, there won’t be any FBT liability on this benefit. COVID-19 tests required for employment are also exempt from FBT.
Fringe Benefits Tax Administration
The fringe benefits tax year runs from 1 April to 31 March. You must include the reportable amount for each employee on their Single Touch Payroll by 14 July, so it flows through to their annual income statement.
As with all business transactions, keeping accurate records is essential to determining whether FBT applies and how much needs to be included on the employee’s income statement, if any.
If you’re interested in how fringe benefits might apply to your business, talk to us about FBT registration and administration. We can advise on the types of benefits available, how much tax is payable or how to reduce FBT liability. We’ll also get your bookkeeping software set up to make record keeping easy.
For more FBT info, click here.
Run regular cashflow forecasts
Positive cashflow is vital to the short, medium and long-term success of your business. Without cash, you simply can’t operate the business efficiently. Running regular cashflow forecasts helps you overcome this challenge. With detailed projections of your future cashflow, you can spot the cash gaps that lie further down the road and take action to fill these cashflow holes. Income can often be unpredictable, especially in challenging economic times. If customers fail to pay an invoice, or suppliers increase their prices, this can all start to eat into your available cash. Using forecasting, you can extrapolate your numbers forward to which weeks, months or quarters are looking financially tight. And with enough prior warning, there’s plenty of time to look for short-term funding facilities, or get proactive with reducing your spending.Run sales and revenue forecasts
Keeping the business profitable is one of the key foundations of making a success of your enterprise. You want your sales to be stable and your revenues predictable if you’re going to generate enough capital to fund your growth plans. You need to know how those revenues will pan out over the course of the coming financial period. Revenue forecasts work much like a cashflow forecast. Instead of looking at your future cash position, a revenue forecast gives a projection of your sales and how much revenue is likely to be brought into the business in future weeks and months. With better revenue information, you’ll be more on top of your profit targets. You can manage your working capital in a more practical way. And you can improve your ability to invest in new projects, additional staff or funding of the long-term expansion of your business.Run different scenario plans
What’s going to happen to your business in the future? None of us have a crystal ball to predict this future path exactly. By looking at different possible scenarios, you can run projections to see what the potential outcomes and impacts may be. These ‘What-if scenarios’ can be exceptionally useful tools when thinking about big business decisions. What if there’s an economic recession? What if our sales increased by 25%? What if we raised our prices by 10% next quarter? What if we lost a quarter of our customers? By plugging the relevant data into your forecasting engine, you can run these scenarios and see how each option pans out. That’s massively useful when the worst (or the best) does happen.Update your strategy, based on your forecasts
By making the most of your forecasting tools, you give your board, your finance team and advisers the most insightful data and projections to work with. A good business plan is designed to flex and evolve to meet the needs of the changing market and the changing needs of your own business strategy. By making use of your cashflow forecasts, revenue projections and what-if scenario planning, you give yourself the insights needed to update your strategy and your business plan. You can make solid, well-informed decisions and keep yourself one step ahead of your competitors. In the dog-eat-dog world of business, that’s a competitive edge that can make a huge difference. If you want to delve deeper into the positive benefits of forecasting, please do get in touch. We can showcase the latest forecasting software and apps, and show you the value that’s delivered through well-executed forecasting and longer-term projections.So what’s involved? – The balance sheet has three sections: assets, liabilities and equity.
What are Assets?
Assets are things and resources that a company owns. They have current and/or future value and can be measured in currency. Assets may be subdivided on the balance sheet into bank accounts, current assets, (receivable within one year), fixed assets, inventory, non-current (or long term) assets, intangible assets and prepayments. These include banks and other financial accounts held, accounts receivable (trade debtors), supplier deposits or bonds, stock on hand, property, equipment, vehicles, investments and intellectual property. All of these can be translated into monetary value.What are Liabilities?
Liabilities are amounts owed to suppliers and other creditors for goods or services already received. They may also include amounts received in advance for future services yet to be provided by the business. Liabilities are generally subdivided into current, (payable within one year), and non-current liabilities. These include accounts payable (trade creditors), payroll obligations (salaries, taxes, superannuation), interest, customer deposits received, warranties and loans.What is Equity?
Equity includes owner funds contributed, drawings, retained earnings and stocks. The value of the equity equals assets minus liabilities. Transactions that affect profit and loss accounts also affect balance sheet accounts. For example, providing a service increases the accounts receivable balance, which therefore increases the equity.The Balance Sheet Equation
The balance sheet must always balance! Asset value = liabilities + equity. For example, if you buy a new vehicle for the business at say $50,000, having paid a $10,000 deposit and taking out a $40,000 loan, the value of fixed assets increases by $50k, but the bank asset value decreases by the $10k deposit paid. The value of liabilities increases by $40k loan, thus leaving the balance sheet balanced on both sides of the equation. The balance sheet equation shows you how much money you would have left over if you paid all your bills and debts and sold all your assets at a given date. This amount is the Owner’s Equity. Note that the balance sheet equity total is not necessarily how much the business is worth at market value. Assets are listed on the balance sheet at their transaction value, which may be very different from the market value. Some assets may be worth more, and others may depreciate in value. Business value is calculated not just on the balance sheet figures but many other factors.Need more information?
Talk to us. Get the complete picture of your business performance and financial position, regardless of what stage of business you are at.JD Scott + Co is one of Sydney’s leading Chartered Accounting firms, we aim to help build your business and wealth, empowering you to reach your goals.
