For far too many of us, receiving our company’s annual accounts is just a repeat of the confusion, intimidation and disconnection we felt during maths class.
Numbersnumbersnumbersnumbersnumbersnumbers, percentage, ratio, depreciation … ah, “Sign Here” THAT, I understand.
Even if we try, it can be hard to connect what the numbers say to what we know about our business. There’s a profit? Awesome! But wait, where is it? The company bank account balance is tragically low. So this ‘profit’ the numbers show… how can that be right?
It can be too embarrassing to admit you don’t understand the numbers, or the explanations given. Easier to just outsource everything to your bookkeeper or accountant and simply nod a lot when they insist on having a meeting.
But when you’re trying to figure out how to take your business forward, wouldn’t you like to begin by knowing where you actually are? To be able to predict some of the things that will happen in the future? Be absolutely confident that you will know whether that marketing plan has worked or not?
All those numbersnumbersnumbersnumbers … they can give you all of that, and more.
Don’t feel you have to understand everything perfectly, immediately. Start out with small steps, and keep taking them.
Here are the two small steps I recommend you take if you are one of the many people who completely avoid or are confused by the numbers side of your business.
Plus a couple of traps to avoid.
First Step: Separate Bank Accounts / Bank Cards for Business and Personal Expenses
If you already have this, you can skip ahead. If you don’t, schedule some time in now to open a business bank account . Mixing your business and personal money just makes a mess that you have to pay someone to untangle at some point. Even you’re at the stage of only having 1-2 business expenses a month, it’s so much clearer what’s going on if you pay for them out of the business bank account.
At a very basic level, you’ll know if the business is covering its own costs
And at the very least, you won’t have a mess to sort out at tax time.
Trap: Basing Spending Decisions on Today’s Bank Balance
While having a business bank account is crucial, it’s not enough by itself. The balance will give you a rough idea of how well you’re doing, but far too rough to base big spending decisions on.
For example, say you really want a MacBook Air, and your business bank account balance today could cover the cost in full. Excellent!
Or is it?
Have you paid all your bills recently, or are your payments late? Have you recently received a large, up-front payment that will need to last you for the next few months? Do you have some big expenses coming in shortly that the money in the bank will have to cover?
The bank account balance by itself tells you very little about the actual financial position of the business.
This situation is where the spending plan that I’ve talked about in the last few blog posts is invaluable, because it allows you to look into the future a little.
Before you make the purchase, you can put the numbers into the plan and see if buying that MacBook Air is actually possible, or if it will choke your business of cash just when the tax bill is due.
Trap: Tax-Deductible Expenses
Now that you’re paying for business expenses from the business bank account, you need to be sure you understand how tax-deductible expenses work. There is a trap here that I would have fallen into without guidance.
When I was a university student, a friend started their own business. We met up with other friends for dinner, and when the bill came, he offered to pay for all of us through his business, as ‘business expenses are tax-deductible.’
I knew nothing about business finance, but I’d been speaking English fluently for about 20 years at that point, and I instantly understood his meaning. He could deduct any business expenses from his tax. Nice!
Our mutual accountant friend turned pale. Possibly at the thought of paying for personal expenses through the business (see above), but mostly at the misunderstanding of ‘tax-deductible.’
There followed a mortifying exchange as clarification was given: tax-deductible expenses can be deducted from business income before tax is calculated. That’s it. You do not get to wipe the whole amount from your tax bill. If the expense is non-essential (or not even a business expense!) you are spending 72 cents to save 28 cents.
That was my first lesson in business tax.
In the years that have followed, I have found that my friend and I were not the only two people in the world to misunderstand the term “tax-deductible expense,” partly because those who do understand it often think it needs no explanation. Which is why I’ve explained it here.
Second Step: Get an Accountant or Bookkeeper who Gets You
There are around 30,000 accountants and at least 350 bookkeepers in New Zealand.
Among that number must be several who get you. Ask for recommendations, and interview several. Move practices if you’re not happy.
Get one you like, who you feel is a valuable business advisor. One who respects what you do, and who can explain your business numbers and the story they are telling in a way that you can understand.
One will not only prepare and explain your Profit and Loss and Balance Sheet, but who can tell you the answer to questions like:
- What numbers should I be looking at on a regular basis?
- What are those numbers telling me?
- At what point should I worry or change what I’m doing when I check those numbers? At what point can I feel chuffed?
- When you look at my accounts, is there anything that stands out to you?
- I know you’ve told me this before, would you mind explaining again?
If you’d like a recommendation, get in touch. I know several excellent accountants and bookkeepers through Venus Business Network. And if you’d like help with the spending plan side, I can do that too.