Financial essentials for franchise buyers
If you’ve never owned or run a business, the financial side of things will be completely new to you when you buy a franchise. As a business owner, you are responsible for the financial aspects of your business and there are rules to follow.
Unfortunately, some franchise owners never get to grips with the financial aspects of business. These are often the people who end up in financial trouble. It doesn’t need to be that way! You can learn about the financial aspects of business and be in control of your finances. The key is to get the right information and advice.
It’s also important to recognise that however hard you work, you can’t know or do everything. As a business owner, it’s appropriate and necessary to work with experts in accounting, law and human resources, and other areas. Working with the right experts is part of being a savvy and smart business owner.
After thirty years working with franchisees, I’ve come to the conclusion that the best time to start learning about the financial aspects of business is before you sign the franchise agreement.
But how do you learn about the financial aspects of business? One of the best ways is to start working with an accountant as you assess the franchise. That same accountant or their staff can help you keep good records, understand your financial reports, and stay on top of your Tax Office reporting.
The financial side of business can be understood. It just takes a bit of focus in the first few months — and the right type of advice. As the months roll by, you’ll become more confident. You’lll start to understand what your figures are telling you about how your business is performing. And then you can work out what steps you can take to progress towards your business goals.
Here are some of the questions we are often asked. They might answer questions you have in your own mind, or help you when you come to talk to a potential accountant to help you in your business.
Please note that this is general advice and you should seek advice for your circumstances from an accounting and tax professional.
How can an accountant help me in my business?
You might associate accountants with year end tax returns, but in a business the accounting work is ongoing — not just a year end thing. It’s a good idea to establish a relationship from the start of your time in business. That way, your accountant can help you in five important ways.
Franchise Due Diligence: Potential franchisees should get advice from a financial and business expert before they sign their franchise agreement. This is a vital part of your franchise investigations. The right accountant can help you assess the franchise. We cover this point in more detail below.
Tax and accounting advice that’s relevant for you: The right accountant will be an important source of information and advice as you run your business. There are many tax and accounting requirements you need to comply with as a business owner. The financial issues will change as your business grows. Your accountant knows how to deal with these issues and the better they know your business, the better they can advise you.
Help you achieve your financial goals. The right accountant can prepare quarterly financial reports and discuss them with you. This will help you focus on your financial goals and make progress towards them. Your accountant can also help with cash flow and budgeting, as well as tax planning.
Annual financial statements and tax return. Each year your accountant will prepare a set of financial statements for your business. The accountant will also prepare a tax return for your business, and take care of ATO lodgement. Unexciting as these things are, they become stressful and costly if you get behind. Expensive catch up work is never the best start for a relationship with an accountant!
Be ‘Finance Ready’. We have found that more businesses need accounting records that are ‘finance ready’. This means having your records up to date not just once a year but at least every three months. This has always been good practice, but it’s now more important than ever, whether you’re looking to get a loan, a mortgage, or expand your business.
How can an accountant help me before I buy a franchise?
Many people start thinking about an accountant when their first tax return is due. This is not ideal. The best time to start working with an accountant is before you buy the business. It will cost a bit of money, but the money spent at the start will save you from bigger bills later!
Get accounting advice before you buy
The best time to find an accountant is when you have identified a franchise you’d like to purchase. This is because buying a franchise is a big financial decision. Whether the franchise costs $50,000, $300,000, or $600,000 (or more), it’s important to understand the money side — and the financial consequences if things don’t turn out as well as you hope.
We’ve advised hundreds of franchise buyers over the years. Our clients include people who buy franchises in mobile trade services, health and fitness, food, and business services of all types.
When people are thinking about a business they want to understand three important things:
- What it costs to run the business, including their own living costs and loan payments.
- What sales they need to achieve to cover all these costs and make a profit.
- Whether the sales target is achievable and how long it will take to reach it.
These questions, and others, form part of your financial due diligence.
The process of working through the due diligence with a financial expert will help you develop your financial skills. It can also help you avoid an expensive mistake, such as paying too much for a business or buying a franchise that can never provide you with the income you need.
Start out with the right business structure for you
Once you’ve decided to buy a franchise you’ll need to decide what business structure is best for you. This is not simply a matter of getting an ABN to run a business in your own name or registering a company. To protect your assets and give you the tax planning options it’s best to get expert advice.
The right accountant will ask you about your family situation and your plans for the business. They will also ask whether the franchisor has any specific requirements. The accountant will then be able to recommend a business structure that is appropriate for you.
For instance, some of our clients operate through a company in which they own the shares. Others have a more complex structure that will support their aspiration to own multiple franchises, property and so on.
Ask your accountant what accounting systems you need
Accounting systems aren’t the most exciting aspect of running a business but they are really important. The best time to get your accounting records set up is before you start trading. But what accounting records do you need to keep?
The best person to ask about accounting records is your accountant. All accountants have a preference for the information they need. The best time to find this out is before you start off in business. If the records aren’t in the right format, your year end tax work will be more expensive than if you’d followed the accountant’s advice in the first place.
What financial records do I need to keep?
Ask a qualified expert first
There are specific record keeping requirements for business. You will need to know the basics and set up your record keeping to comply with the rules. But how do you learn?
A good place to start learning about financial record keeping is the government web site www.business.gov.au.
Certified accountants and tax agents are trained to know about record keeping requirements, so it’s worth asking them. Your accountant can tell you what good record keeping looks like and give you tips that help you keep your books in order, save you time, and save you money.
Set up your accounting software before you start trading
When you set up your business, you’ll need to implement a system to keep track of income and expenses. You do this using accounting software. A few franchises specify the software you must use, but if they don’t, you should follow the advice of your accountant.
It’s best to set up your accounting records before you begin trading. This helps you get into good habits and keep up to date with your accounting.
But, you don’t just turn on your accounting software. It has to be correctly set up and that takes a bit of time. You also need to learn how to use it properly. The danger with leaving this to ‘later’ is that you’ll always be playing catch up — and this can be stressful and costly!
You also need to establish a system to keep track of bills and receipts. When you run a business, you need a copy of every bill or receipt and they need to tie in to the transactions in your bank account. Thankfully, we have apps that take care of this. Your accountant can advise on the best approach.
Keep the right payroll records
When you employ people you must comply with some very specific record keeping obligations. These include employment agreements, working hours, and records of leave accrued and taken. You also need to collect tax file number declarations and Super Choice forms.
And once you start to pay people you must comply with the laws around pay and conditions. Penalties apply if you don’t pay your staff the correct wages, allowances and benefits.
Yes, there’s a lot to this!
That’s why we recommend every business owner completes the free online training courses offered by the Fair Work Ombudsman. Once you have done this, talk to both a HR and payroll expert about the record keeping for your business.
What does an accountant do?
Your accountant will do the year end work to prepare the financial statements for your business and also the business tax return. But this isn’t all they can do for you. The right accountant can help you in three key areas:
Tax planning: This is usually an annual activity that takes place a couple of months before the year end.
Financial forecast: A financial forecast is something that every business owner should have. It is a financial model that looks at what you expect sales, costs, profit, and cash flow to be in the next 12 to 36 months. Even at the start of your business life, you should be looking ahead and using the forecast as a way to help you set goals and move towards them. Your financial forecast can also take into account your personal financial needs and the way you expect to use the profit from the business to build your wealth.
Business development: An accountant who knows your business can help you develop and grow it. This might involve helping you improve your financial processes, review costs, or create plans for the future. As your business grows, your accountant can help you manage the growth and save yourself time and headaches. Typically, business development discussions take place quarterly or every six months.
These three services are all about adding value to your business. They are about helping you to get the most from your business, and saving you time on record keeping tasks so you can get on with growing the business.
What costs can I put through the business?
Beware the advice of friends and family
You might have heard people say something like “Having a company means you get better tax deductions”. But beware! The advice of your friends can get you into hot water with the Australian Tax Office (ATO)
The ATO has clear guidelines for what costs you can put through your business. Their website states, “You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.”
The ATO also says that the expense must have been for your business, not personal expenses, and you must have the records to prove it. Some expenses are not deductible even if they were related to your business, for instance entertainment expenses and traffic fines. For instance, travel to your franchise conference is a legitimate business expense, while your kids’ school books, your grocery shopping, or haircut are not.
Your accountant or bookkeeper will help learn what is a business expense and what is not. So, don’t ask a friend, as your accountant!
How does GST work?
GST is one of the more tricky things for a new business owner to understand. It’s something we don’t have to think about in everyday life. When we but something, we just hand over the money! But it’s not that simple when you own a business. Here are some GST essentials that a new business owner needs to know.
Business collects GST on behalf of the government. It’s not your money!
GST is a tax. Businesses collect GST from customers and pay GST to suppliers. The difference between the GST collected and GST paid belongs to the ATO.
You report GST to the ATO every three months the amount of GST collected and paid. At the same time you pay the ATO the GST you owe them. For instance, if you collect $1,000 of GST from customers and pay $500 to suppliers, you pay the ATO $500.
A business needs to register for GST if its turnover exceeds $75,000 or is likely to exceed it. When you commence trading you will then:
Include GST in the price you charge for your goods and services
Claim credits for the GST included in the price of goods and services you buy for your business.
GST is not charged on everything
Some products and services don’t have GST on them. To see for yourself, have a look at the receipt when you buy groceries. You’ll see items with GST are identified and some have no GST.
Your franchisor will be able to tell you how GST applies in their franchise. If some of your sales will be GST free, the franchisor should help you set up your point of sale system so it calculates GST the correct way. You can also ask your accountant for information about GST.
How do you know whether there is GST on an item you have purchased for your business? The answer is to look at the Tax Invoice. It will show the GST amount.
Keep track of GST in your accounting records
By now you can see that it’s important to keep track of the GST you charge and pay. Your accounting software and point-of-sale system will be able to do this. When it’s correctly set up, the software will also calculate the GST owed to the ATO each quarter.
You also need evidence of the GST you have paid to your suppliers. The Tax Invoice provides this evidence. And with the right accounting system there’s no need to keep paper receipts! You scan a receipt with your phone, or send it to your accounting software directly from your email.
Put aside the GST you owe the ATO
Some business owners forget that the GST they collect does not belong to them. They might spend the GST they collect on behalf of the government. This means the money isn’t there when the ATO needs to be paid.
To avoid a problem paying the GST that you owe, it’s best to put aside the GST. Put it into a separate GST bank account and don’t touch it until it’s time to pay the ATO. Ask your accountant to help you work out how much to put aside.
Understand about the Business Activity Statement
Your business will need to submit a Business Activity Statement (BAS) to the Australian Tax Office (ATO), usually quarterly. Your accountant will do this for you as part of their service.
The BAS shows the sales your business has made, the GST charged to customers and the GST paid to suppliers. It also shows wages paid to employees and the PAYG tax withheld from their wages.
You will then pay the ATO the difference between the GST you collected from customers and the GST you paid suppliers, as well as the PAYG withheld from wages. If you paid more GST than you collected, you’ll receive a refund from the ATO.
It’s important to lodge and pay your BAS on time, as penalties apply for late lodgement and interest is charged on overdue amounts. The BAS is lodged electronically, and your accountant can do this for you.
Do I need a bookkeeper?
Every business needs some bookkeeping help
After years of working with franchise owners we have come to the conclusion that every business needs some help with bookkeeping. Even if you do a lot of the record keeping yourself, it’s best to have an expert assist with certain aspects and especially with ATO lodgements. Here’s an example of why.
The other day a business owner called me. He had been in business for six months but no accounting records had been set up. He is behind with his ATO paperwork and doesn’t know how the business is going. Of course, we can help him get up to date, but it’s more expensive than if the records had been properly kept from the start.
A good bookkeeper can help you get your accounting systems running smoothly. This will save time and money later.
Once the systems are set up, and depending on your business and your skills, you might be able to do a lot of the bookkeeping yourself. Often it’s simpler to ask a bookkeeper to do all or part of the day to day work. This frees your time to work on the business.
Whatever you do, don’t assume that you can just switch on some accounting software and get going yourself. Every time we have seen people do this it has led to expensive mistakes.
What does a bookkeeper do?
A bookkeeper typically takes care of matching bank transactions to bills, receipts and invoices. They can also help with payroll processing. The best bookkeepers will help ensure your accounting records are in good order for your year end accounting work.
Your accountant may be able to recommend a bookkeeper, or they might provide that service from within their firm. If you use your accountant’s bookkeeping services, you’ll avoid the need to recruit, manage and instruct your own bookkeeper.
Your accountant should be able to provide advice as to whether a bookkeeper would be helpful in your circumstances.
How can I get money out of the business?
“How do I pay myself?” This is one of the earliest questions a business owner asks. We have a simple answer, and also a more complicated one.
Pay yourself wages
The simple answer is to pay yourself wages. When you work in the business, you should pay yourself for the work you do. This creates a discipline around the business operation, and it also means you have regular income to support yourself and your family.
Depending on the franchise, it might take time to build up enough income for you to take a wage. But we generally recommend that the owner should ‘go on the payroll’ once he operating costs are being covered each month.
Whatever franchise you buy, your initial investigations should help you identify whether the business can pay you a decent wage for the work you do. This is a bare minimum requirement. For instance, if you are managing a hospitality business, you’ll want to see that the business can generate enough to pay you a manager’s wage. If you’re a handyman or pool technician, you’ll want to receive an amount appropriate for your skills and experience.
Towards the end of the financial year, you and your accountant can assess whether it makes sense for you to receive additional payments on top of the wages you’ve already received.
You’ll need to pay PAYG tax and Super on your wages. Just because you’re the owner of the business doesn’t mean you can just take money from the business and not deal with the tax system.
Ask your accountant about dividends and loan repayments
As your business progresses, your accountant will help you decide on tax effective ways to repay any money you have invested in the business.
This might include loan repayments or dividend payments, depending on the structure of your business and your personal circumstances. These payments have tax consequences beyond regular PAYG tax, so it’s important to get advice before you take money out of the business.
This seems like a lot of stuff to know!
As you can see, there is quite a bit to the accounting aspects of running a business. Remember, an experienced business accountant and their advisory team have spent years developing their understanding and skills. Your goal is not to become an accountant but to learn how to work well with your accountant, bookkeeper and advisers.
Today’s accounting technology reduces much of the record keeping burden and allows you and your adviser to focus on profit improvement and business growth. And by getting things done right from the start you’ll be well placed to progress towards your goals.
Kate Groom is co-founder and director of Franchise Accounting and Tax. She has previously worked for franchisors and as a business adviser. Kate’s focus is on helping clients understand the financial aspects of running a business and on business planning and coaching.