Managing business liabilities is one of the more common challenges we see here at On The Money Bookkeepers Melbourne, especially when businesses are transitioning from a small, moderately successful operation to a bigger and more profitable one.
Some business owners manage their liabilities by accident when their business is small enough that they can get away with this. But when a business’s turnover starts to increase, it’s likely that the cost of goods and operational expenses will also begin to grow, as well as staffing costs and potentially income tax and other liabilities.
So we often see businesses in this transition phase where they are making more money but have less available and then struggle to pay their liabilities on time because they still need to adjust their systems or money management to take into account the increased liabilities and expenses.
Regardless of the size of your business, managing liabilities well from day one with a team of dedicated Xero Advisors to support you will put you in the best position to sustain long-term success and profitability.
What are Business Liabilities?
Simply put, liabilities are what the business owes to other people, organisations or government.
Liabilities include:
- Superannuation
- GST
- PAYG withholding
- PAYG instalments
- Various taxes, such as payroll tax, income tax or fringe benefits tax.
- Accounts payable (or supplier bills), also known as trade creditors
- Loan repayments.
Liabilities are not on your profit and loss statement but are shown on the balance sheet. Tracking liabilities is one reason you need to be able to understand your balance sheet – so you can see at any point in time what you owe to others.
If you only look at your profit and loss statement, you might think you have more money to play with than you do.
A common error, particularly for people new to business, is that they fail to put aside the GST they have charged on their invoices. Think of it this way – you charge a fee for your services, then add the GST on top, which is payable to the Australian Taxation Office – you’re just temporarily looking after the money.
This GST amount is not your money! Yet many business owners use the entire amount of funds deposited into the accounts by customers as if it is theirs… and then wonder why they can’t pay the BAS.
Similarly, business owners often look at the net amount payable to staff without considering the PAYG that has been withheld or the superannuation payable on top of the wage. The gross wage and superannuation are shown on the profit and loss statement, but you still have to put the money aside to pay the liabilities.
If a business owner is only looking at expenses on the profit and loss statement and not considering the liabilities on the balance sheet, they are bound to run into cash flow problems.
Part of the reason business owners get caught in this trap is that they have not been given good advice early on about the liabilities and true costs of running the business, and, therefore, never plan accordingly. It can become a downward spiral that gets out of control, with the business having to borrow money or take out an overdraft account to make payments on time. The business must make a greater profit to meet both current liabilities and past debts that weren’t paid for when they were due.
A Better Way to Manage Liabilities with On The Money Bookkeeping Melbourne
Firstly, get familiar with your financial reports. Your accounting systems should be updated regularly, at least monthly, so that you can always rely on an accurate financial report to help you plan, understand your liabilities and make better financial decisions.
Secondly, a separate bank account should be opened. Transfer money into that account and use the funds only for liability payments. Some businesses do this every week, some every month.
We recommend reviewing your sales on a weekly basis and transferring the applicable GST amount to your liability bank account.
Review the balance sheet for all your other periodic liabilities, such as PAYG withholding and superannuation. Put aside enough from your working bank account into the liability account, and don’t be tempted to use it for expenses. When cash flow is tight, yes, it takes discipline to stay on top of liabilities!
Decide whether you will pay all liabilities from your dedicated bank account or use it as an interest-earning holding account, transferring money in and out as needed for all liability payments.
Then, use your everyday transaction account for general business expenses.
This is just one example of how to make managing liabilities easier – some businesses use several bank accounts to manage different types of payments. And some businesses rely on overdraft accounts to meet liability payments, particularly when the timing of receiving money and paying regular expenses doesn’t align. However, their overall cash position is positive, and they are using an overdraft facility for only a portion of each month, quarter, or season to get them through cash flow hurdles.
Rather than looking at what is in your bank account and assuming there is money to spend on unplanned expenses, when cash flow is tight, it’s essential to rein in spending and be disciplined about transferring funds out of your working account and into an account that is dedicated to liabilities.
If you’re new to the idea of strictly controlling your business finances, our team of Xero Advisors would love to help. Talk to us about systems you can implement now to help you reach your long-term financial goals and reduce the stress of meeting your liability obligations.
What to do When There’s Not Enough Money in the Bank?
It happens – sometimes, there are very tight periods to get through. The business might be breaking even or making a profit, and yet there isn’t enough money to pay for everything when it’s due.
In this case, it’s essential to do some forecasting and budgeting. Can you reasonably assume that the business will make enough profit in the foreseeable future to recover from current debts?
For example, seasonal businesses often have trouble paying all their liabilities during the off-season, so they need payment plans with the ATO and suppliers. But they know that they will generate more than enough each peak season to pay out debts and prepare for the next low period.
Overdraft arrangements can be beneficial, as can short-term loans or even credit cards.
Another important element is to look at spending. Where can you trim back, either temporarily or permanently? For example, look at marketing, subscriptions, entertainment, and travel.
If you’ve been struggling for longer than seems reasonable, then it’s time to do a deep dive into your accounts. What can you do differently to get control of your finances? We can help you to sort that out.
Working with a dedicated professional team like On The Money Bookkeepers Melbourne to help you manage your financial accounts can be a boon to business owners, especially if you’re trying to get on top of your money and manage everything for a smoother cash flow. We’d love to help get your finances under control so you can manage business liabilities well and reach the small business success you want.
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