The end of the financial year is almost upon us. Is your small business all set?
EOFY isn’t just about getting your ducks in a row and wrapping everything up. It’s also about setting yourself up for success in the coming financial year.
While it’s late in the day, here are some key things we recommend you tick off your to-do list before 30 June passes by. Running through this EOFY checklist can reduce your tax bill and boost next year’s cash flow.
Review profitability to determine tax
Profitability is used to measure the overall success of your business. So, looking at how much your small business made, or didn’t make at EOFY is crucial.
Once you’ve determined your business profitability, you can estimate how much tax you will be liable to pay based on the figure and the current tax for companies, and threshold for individuals. This can help you plan and put money aside for when you do lodge and pay.
Depending on your business structure, estimating how much tax you will need to pay can be much more complex than the above, so it’s a good idea to work with your accountant to get an accurate figure.
Many small businesses are seeing their tax bills jumping because they deferred paying BAS and income tax instalments.
If your tax bill is looking overwhelming, talk to the ATO in advance. If things are really bad, consider going through the new small business restructuring process to get back on track.
Look at bringing business spending forward
If your small business made a good profit this financial year, you might want to look at bringing forward some spending to reduce your taxable income and tax bill.
But don’t just spend for spending’s sake. Only buy assets and equipment for your business that you legitimately need. Plus, don’t fall for all the EOFY sales marketing at this time of year. Make sure you do the math's to make sure it does benefit your bottom line.
In addition, don’t be tempted to sneak in some items that aren’t technically business-related, in an attempt to claw back tax. The ATO takes mis-claims seriously, adding penalties and interest when recovering them.
Typically, as a small business, you can claim the following operating and capital expenses:
- Motor vehicle expenses
- Work from home expenses
- Business travel expenses
- Worker’s salaries, wages and super contributions
- Repairs, maintenance and replacement expenses
- Depreciating assets and other capital expenses
- Advertising, marketing and professional services fees
It’s important to understand that a tax deduction isn’t a 100 per cent refund. Your personal work expenses are deducted from your total assessable income to reduce the rate you pay on that amount. Typically, if you earn $45,000 - $120,000 per annum, this will be 32.5 per cent.
Importantly, just be aware that whatever you bring forward and buy this year won’t be deductible from next year’s tax bill.
Pre-pay employee super to date
This is technically covered above but is worth bringing attention to on its own.
While it may now be too late for this year, pre-paying employee superannuation in the same financial year – before the end of June – can bring forward your tax deduction. Contributions are considered paid when the super fund receives them.
You can also consider paying additional super for yourself as the business owner, which also gets you a tax deduction. Look at your super contribution caps, and add some extra cash if you haven’t used the prior year’s limits.
Consider pre-payments carefully
At EOFY, larger businesses you supply or work with may ask you to bill them for work that is yet to be done as they’re looking to use up this current financial year’s budget.
However, while the cashflow injection may be tempting, bringing payments forward can boost your earnings. This can leave you with a higher profit, a larger taxable income, and a bigger tax bill.
Because of this, make sure you talk with your bookkeeper or accountant before agreeing to anything.
Make realistic cashflow projections
As well as wrapping up the loose ends of this financial year and doing what you can to minimise your tax bill, EOFY is also a time to be planning for next year and future growth. Cash flow management is critical to this.
To make accurate and realistic cash flow projections for next year, you must assess your previous year’s cash flow requirements. You should also look at your estimated sales for the coming year.
See what you can negotiate with your vendors and suppliers to keep your working capital needs lower. Also, don’t forget to factor in shortages and unexpected situations. Your cash flow projection should always leave room for surprises.
Things to consider for 2022-23 projections
- The Fair Work Commission announcement of a 5.2% national minimum wage increase from 1 July, in addition to labour shortages, is seeing wage pressure that may impact your cashflow and profitability in 2022-23.
- Superannuation increases from 10% to 10.5% on 1 July. If your employee contracts offer a base plus superannuation, you will need to factor in this increase in costs.
- With the current state of the market, customers may start spending less, as concern over rising inflation and interest rates grow. Industries this may impact include construction, retail and hospitality.
- It’s forecast that supply chain delays will take 12 months to return to normal, but freight cost increases have risen substantially, and it’s unclear when they’ll come back down.
- If people do start spending, they may put their cash into overseas travel, now that restrictions have eased, creating further pressure if your small business is in retail or hospitality in Australia.
Look at tightening your debt collection policies
As the 2022-23 financial year potentially presents many risks for small businesses, it’s going to be important that you get paid on time, so the struggle doesn’t become too difficult to manage.
To ensure this, EOFY is a good time to look at your current collection policy and processes and tighten them up to avoid slow or bad debt. This includes things like:
- Asking for an upfront initial payment
- Shortening your payment terms
- Increasing payment methods, you offer
- Automating invoice collection
These are effective ways to get your invoices paid and improve your cashflow.
Plan to get on top of your paperwork
If EOFY this time around has been painful, the start of a new financial year is the perfect time to plan and prepare to get your financial paperwork in order. It will make the next EOFY run a whole lot smoother.
Some of the yearly paperwork you may need to do as a small business and pass on to your accountant includes:
- A summary of your income and expenses in a profit and loss statement
- Conducting a stocktake of your assets
- Summaries of your record of debtors and creditors
- Collating records of asset purchases or expenditure on improvements
- Completing and lodging your income tax returns
- Lodging yearly reports or returns for different tax types such as PAYG, fringe benefits tax, GST and super.
If you’re not already, going digital with bookkeeping and accounting software, such as XERO, Quickbooks or MYOB, can be a great investment, saving you time and stress every EOFY and throughout the year.
By ticking off all the recommendations above on our EOFY checklist, you can start the financial new year afresh and with a clear plan for meeting your tax bill and riding the wave of unexpected economic conditions.
Worried your tax debt will be impossible to meet? Get in touch with our team of ATO debt solution specialists today on 1800 861 247 for professional, non-judgemental support, advice, and intervention.
