In the first instalment of this piece we looked at creating a budget to cover every aspect of running your business before you launch. This month we are going to discuss the other boxes you need to tick to set up your business professionally from day one. Many people do not put in the right amount of preparation before they start trading. This can lead to problems with cashflow, not having cash to pay the ATO and more importantly, not having profit to pay to yourself.
Before you start trading (even if you are going to be a sole-trader), I suggest that you do the following:
Register your business name with the relevant government body in your state. For example, in NSW this can be done via: www.service.nsw.gov.au/transaction/register-business-name
Register your business name as a sole-tradership with the ATO to get an ABN number.
Set up two separate bank accounts.
The first bank account is to conduct your trading (i.e. all revenue is paid into that account and all expense are drawn from that account. This is separate to your personal bank accounts).
The second bank account is to squirrel away cash that you need to cover tax. Both income tax and GST. If you start to generate business revenue above $75,000 will start to charge GST on your products and services. This is one trap many small businesses fall into in not providing cash to pay GST once they are liable to do so. The other balance of cash to keep in this account is any personal income tax you will be liable to pay. As a sole trader, you will be taxed on the “profit” or income your sole-tradership generates. This assessable income is simply the difference between the revenue you earn less legitimate business expenses you incur. It does not include any “income” you pay yourself. The tax applicable is per the normal marginal tax rates set by the ATO (Read: www.ato.gov.au/Rates/Individual-income-tax-rates/)
Look into an accounting program such as Xero or MYOB to help run the numbers on your business. Starting packages are very reasonable and the software is easy to use. If you start to behave like a proper business from the start it will help you succeed and your Accountant will love you for it too.
Pay yourself a “wage”. Once your revenue is covering your expenses and you have built a cash reserve to cover all business expenses for the next six to 12 months, start to transfer payments to yourself as your income. This helps to provide a clear distinction between what is income for the business and what you are paying yourself. In my first business, it took two and a half years before I had enough revenue to sit down at the end of each month and properly pay myself based on the hours I worked. This would accrue cash towards the end of the year so I had a clear understanding of what I was being paid per hour and what was my actual “profit” from my little sole-tradership that was a Disc Jockey booking agency.
The ASIC Moneysmart website has some great information that can help people looking to start their own business: www.moneysmart.gov.au/life-events-and-you/self-employed-people
In the final instalment next month we’ll address cashflow and a couple of important things that so many start-up sole traders forget to do.