This article is for informational purposes only and does not constitute legal, accounting, or tax advice. The information contained herein is subject to change and may vary from time to time in your region. For specific advice applicable to your business, please contact a professional.
Well, 2020 was certainly an unexpected year! It is essential now more than ever, during uncertain times, to reconsider long term business plans that have been affected, and of course to tighten up your bookkeeping. Here are our accounting tips for 2021 planning.
1. Switch to accrual accounting
If you’re currently using the cash accounting method, it may be a good time to consider accrual accounting. Accrual accounting is the practice of recording revenue and expenses when the transactions occur, rather than when payment is received or made, so there’s no lag between incurring a cost and paying it, or making a sale and receiving the payment. A practical example would be inputting an invoice into your accounting system when you receive it, even if you don’t plan to pay it until it’s due.
Accrual accounting builds a more accurate picture of how your business is doing (however, you must be on top of your cash flow to ensure you’re not overestimating your ability to make payments) and is often the accounting method most small businesses should work towards.
2. Account for inventory
Did you end the financial year with expenses looking a lot higher than revenue, and a lot of stock sitting in the warehouse? This isn’t necessarily a bad thing if you reflect the inventory as an asset in your books!
If your warehouse or inventory software tracks your stock levels daily, check the report as at 30 June. You can include a line item called Finished Goods, for instance, in your balance sheet that shows the value of that stock. You can choose whether to express the number as the cost value, or it’s retail value.
When you have a better idea of your purchases, stock levels and sales, you can more effectively plan for consistent inventory flow in the coming year. The ideal inventory scenario is based on frequent turnover, so that your cost of goods sold (COGS), and therefore margins, accurately reflect any cost increases or decreases as they’re incurred.
3. Claim instant asset write-offs
In some cases, small businesses are able to claim instant asset write-offs. These are immediate deductions for the business portion of the cost of an asset, which is applicable in the year the asset is first used, or installed ready for use.
Instant asset write-off can be used for:
- multiple assets as long as the cost of each individual asset is less than the relevant threshold
- new and second-hand assets.
Cars used for business are included but have limitations. For example, the car limit is $57,581 for the 2019–20 income tax year. If you use your vehicle for 75% business use, the total you can claim under the instant asset write-off is 75% of $57,581, which equals $43,186.
Instant asset-write offs are now $150k for business assets, up from $30k last year, and eligibility has changed. Check the ATO’s website for changes, eligibility, thresholds and instructions on how to claim instant asset write offs.
4. Forecast sales for 2021
After 2020, this initially may seem like an impossible task, but there’s now 6 months’ worth of data on how the pandemic and associated lockdowns have affected small businesses. New consumer trends are emerging, from increased spending on groceries and home goods to prioritising Australia-made products, and either you will have become aware of your positioning within the changing marketplace – or you know you need to work to pivot your offering.
Either way, it’s important to look at your own revenue over the past months and years to begin to project what your sales may look like in the coming year. If you have clarity on how your business has been affected this year, and you’re on a growth trajectory, you might feel comfortable going for 20-30% sales growth in 2021. Or perhaps it feels more realistic to use 2019 numbers and aim for 10-20% growth. When sales forecasting, there aren’t answers only careful approximations using your own sales history and observing external circumstances.
5. Create a budget
After forecasting your sales, you can look at your costs to create a budget that determines how much you should be spending, and on what, to reach your goals.
You can start by running a 12-month profit and loss statement from the previous year to see your regular expenses. Then you can categorise these costs as fixed or variable costs. Fixed costs are ones that stay the same regardless of business activity or size, whereas variable costs will vary with product sales. For example, email marketing software may be $100 a month no matter how many campaigns you send out, but your packaging expense will increase with sales volume.
So in that case, you can estimate your fixed expenses based on your monthly costs, and estimate your variable expenses as a percentage of sales.
Creating a budget will bring your attention to areas in which spend could be reduced and other areas in which it could be increased. For instance, you may be cutting conference costs in 2021 but with those sales goals, you may want to increase your digital advertising spend!
6. Establish a cashflow forecast
Once you have an idea of how much you plan to sell and how much you plan to spend, you can create a cashflow forecast to determine when to keep cash in the business and when to use it.
Typically, a cashflow forecast will have an opening bank balance (i.e. actual cash on hand) and show cash inflows and outflows for each period, usually by month. As well as regular operational costs, outflows will include things like loan repayments, payments to the business owners and asset purchases. The number at the end of each month is referred to as the closing cash balance and this number becomes the opening cash balance for the next month.
Even with uncertainties in the marketplace, you can still use best practice accounting tips for your 2021 planning. It helps immensely to use robust software to track all your sales and expenses and generate reports (check out Square’s accounting apps that integrate easily with your POS and website). It’s also a good idea to have the support of an experienced bookkeeper to stay on top of changing regulations, financial planning and accounting hygiene. Here’s to a great 2020-2021 financial year!