WHAT YOU NEED TO CONSIDER WHEN STARTING OUT
You've started a new business.
Things are exciting.
You've got all your ideas worked out.
But you need to address your accounting.
Things are exciting.
You've got all your ideas worked out.
But you need to address your accounting.
Get free information to help you understand the basics of setting up you business accounting.
GETTING STARTEDTHINGS TO THINK ABOUT
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QUESTIONS TO ASK YOURSELF
how will i make money?
Unless you set up your business as a philanthropic enterprise that you are wholly funding, you are going to need to think about how you will make money.
One option is that you will bill (invoice) for your goods or services. You will receive the payment at a later date.
You can bill at a variety of times: after the activity, before the activity, or at points (milestones) throughout the activity.
If you bill in advance of the activity, or at milestones throughout the activity, be aware that you may be triggering additional accounting transactions (usually by journal) to ensure that the accounting principle of matching is met. These may relate to income in advance, the need for revenue recognition and/or possibly work-in-progress calculations.
There are also potential GST issues to bear in mind around timing of the transaction and when to report it in your GST return.
If in doubt, ask your accounting professional.
Another option is to sell goods or services in a retail outlet or through an online store and receive payment at that point.
This eliminates the timing issues of accounting but has its own operational matters.
There may be grants or other funding available to support your enterprise. These may have reporting requirements attached and it's useful to set up your accounting system to enable the right reporting to be run when it is needed.
One option is that you will bill (invoice) for your goods or services. You will receive the payment at a later date.
You can bill at a variety of times: after the activity, before the activity, or at points (milestones) throughout the activity.
If you bill in advance of the activity, or at milestones throughout the activity, be aware that you may be triggering additional accounting transactions (usually by journal) to ensure that the accounting principle of matching is met. These may relate to income in advance, the need for revenue recognition and/or possibly work-in-progress calculations.
There are also potential GST issues to bear in mind around timing of the transaction and when to report it in your GST return.
If in doubt, ask your accounting professional.
Another option is to sell goods or services in a retail outlet or through an online store and receive payment at that point.
This eliminates the timing issues of accounting but has its own operational matters.
There may be grants or other funding available to support your enterprise. These may have reporting requirements attached and it's useful to set up your accounting system to enable the right reporting to be run when it is needed.
How will i receive MY money?
Most likely you will receive payment directly into your bank account - whether it is paid direct or via a third party - but it is useful to understand the timing and amounts being received.
For example:
- issuing an invoice would usually mean that the full payment is received, preferably at a time that you expect
- using a third party would often involve a delay in receiving the payment and their fees would already be deducted
- offering direct debit or instalment payments can work well, provided the client adheres to the payment dates
For example:
- issuing an invoice would usually mean that the full payment is received, preferably at a time that you expect
- using a third party would often involve a delay in receiving the payment and their fees would already be deducted
- offering direct debit or instalment payments can work well, provided the client adheres to the payment dates
what expenses will i have that relate to MY business?
This is a really good thing to think through when planning your business. Expenses have a habit of being more than you first think.
After your sales income, the next segment in your accounts will be cost of sales - what it will cost for you to deliver your products or services. It's not just raw materials that can be classified here. What else do you need to pay for to create sales?
Overheads tend to be fairly standard across companies, depending on the industry they are in.
Software systems will have a default list of overhead expenses, and they can be amended to fit your particular business.
After your sales income, the next segment in your accounts will be cost of sales - what it will cost for you to deliver your products or services. It's not just raw materials that can be classified here. What else do you need to pay for to create sales?
Overheads tend to be fairly standard across companies, depending on the industry they are in.
Software systems will have a default list of overhead expenses, and they can be amended to fit your particular business.
what overhead expenses will i have?
Overheads can be wide and varied. What qualifies as a business expense can be wide-ranging. And taxable deductions aren't necessarily the same as business expenses.
If you work from home, usual physical office expenses can be replaced (or supplemented) with home office expenses.
Entertainment expenses, especially coffee meetings that cost a handful of dollars can soon add up and become a major expense.
With online services now being focussed on subscription models, and with automatic deduction from bank accounts or onto credit cards, it can be very easy to forget or overlook what costs you will be incurring, and when they will be increasing.
TIP: take a good look at your potential expenses and make a note - preferably create a budget - and refer back to them in a few months' time, to see how it has changed. Then rework your business calculations to make sure you can comfortably pay for them all.
If you work from home, usual physical office expenses can be replaced (or supplemented) with home office expenses.
Entertainment expenses, especially coffee meetings that cost a handful of dollars can soon add up and become a major expense.
With online services now being focussed on subscription models, and with automatic deduction from bank accounts or onto credit cards, it can be very easy to forget or overlook what costs you will be incurring, and when they will be increasing.
TIP: take a good look at your potential expenses and make a note - preferably create a budget - and refer back to them in a few months' time, to see how it has changed. Then rework your business calculations to make sure you can comfortably pay for them all.
how WILL i pay MYself?
This is an area where there are several options, and they have different legislative requirements and different tax effects.
Whilst I'm not going to delve into the world of personal taxation, the options for paying yourself are:
- become an employee
- contract to your company
- take out drawings, which will become a salary item in your accounts at the year end
I strongly recommend talking to a finance professional about which option is best for you.
Whilst I'm not going to delve into the world of personal taxation, the options for paying yourself are:
- become an employee
- contract to your company
- take out drawings, which will become a salary item in your accounts at the year end
I strongly recommend talking to a finance professional about which option is best for you.
How comfortable aM i with bookkeeping/accounting?
Here's the bad news: you cannot escape doing your accounting.
If you don't want to be committed to doing business accounting, please consider being an employee of someone else's business.
Here's the good news: there are plenty of resources to help you learn the basics and plenty of people who will do your accounting for you.
All you need to decide is how much you want to learn and do by yourself, and how much you want to hand over to someone else.
If you are reading this website, then you must be interested to learn some of it for yourself.
TIP: accounting is a HUGE area of knowledge but only a small area of it may be applicable to your business. Even if you sign up to one of the very capable software systems, you still need to understand the basics and know that you're making the right decisions.
If you don't want to be committed to doing business accounting, please consider being an employee of someone else's business.
Here's the good news: there are plenty of resources to help you learn the basics and plenty of people who will do your accounting for you.
All you need to decide is how much you want to learn and do by yourself, and how much you want to hand over to someone else.
If you are reading this website, then you must be interested to learn some of it for yourself.
TIP: accounting is a HUGE area of knowledge but only a small area of it may be applicable to your business. Even if you sign up to one of the very capable software systems, you still need to understand the basics and know that you're making the right decisions.
how comfortable aM I with using software?
Choosing the right accounting software for you depends on your current circumstances and how you see your future.
If you are a freelancer or sole-trader, a simple spreadsheet may be enough to give you the information that you need to understand your financial position.
If you run a limited liability company, you may need something more sophisticated, but choose wisely.
The most popular option may not be best for you. It may contain too much functionality (in which case you are paying for more than you need), or it may not contain enough functionality (and you will end up paying for costly add-ons or use up valuable time using work-arounds).
Do you own research, or ask an independent finance person. Be aware that some bookkeepers and accountants are software resellers (i.e. they make money from signing you up) and that particular software may be best for them, rather than for you.
If you are a freelancer or sole-trader, a simple spreadsheet may be enough to give you the information that you need to understand your financial position.
If you run a limited liability company, you may need something more sophisticated, but choose wisely.
The most popular option may not be best for you. It may contain too much functionality (in which case you are paying for more than you need), or it may not contain enough functionality (and you will end up paying for costly add-ons or use up valuable time using work-arounds).
Do you own research, or ask an independent finance person. Be aware that some bookkeepers and accountants are software resellers (i.e. they make money from signing you up) and that particular software may be best for them, rather than for you.
Question 7
Answer to question 7
Question 8
Answer to question 8
Question 9
Answer to question 9
START OUT GUIDANCE
get to grips with your finances before you start
We specialise in
ask if you don't know
Financial informa
everybody's situation is different
There are m
Question 3
Answer to question 3
Question 4
Answer to question 4
Question 5
Answer to question 5
BASICSBEFORE YOU START
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OBLIGATIONS QUESTIONS
what are my obligations?
NZ law puts a number of obligations on a business owner, and what applies to you depends on what you intend to do.
In terms of your financial obligations, tax is likely to be the first one that springs to mind, then using software to do your basic bookkeeping is likely next, but there are more and if you understand them you can make better decisions.
NZ company law requires accounts to be kept and maintained for trading entities.
How you do bookkeeping and accounting is governed by laws, rules and regulations, and also by accounting principles, accounting standards and best practice policies (that's why it takes so long to qualify as an accountant).
Tax laws differ from country to country and change over time. This website does not go into depth about tax laws and regulations.
In terms of your financial obligations, tax is likely to be the first one that springs to mind, then using software to do your basic bookkeeping is likely next, but there are more and if you understand them you can make better decisions.
NZ company law requires accounts to be kept and maintained for trading entities.
How you do bookkeeping and accounting is governed by laws, rules and regulations, and also by accounting principles, accounting standards and best practice policies (that's why it takes so long to qualify as an accountant).
Tax laws differ from country to country and change over time. This website does not go into depth about tax laws and regulations.
WHAT ARE THE law and legalities?
Financial information comes in many forms. For compliance (legal) reasons, you need to produce a set of financial statements (usually the Profit & Loss Account, the Balance Sheet, the Cashflow statement and various notes to the accounts) at the year end, but there are many reports that you can create that will give you additional information for running your business.
WHAT JARGON DO I NEED TO KNOW?
Registered company
Sole trader
Contractor
Accounting
Bookkeeping
Financial statements
IRD
MyIR
GST
Sole trader
Contractor
Accounting
Bookkeeping
Financial statements
IRD
MyIR
GST
PRACTICALITIES
KEEP BUSINESS AND PERSONAL SEPARATE
DO YOU NEED A SEPARATE BANK ACCOUNT?
THE IMPORTANCE OF PAPERWORK
THE IMPORTANCE OF TIMING
SETTING UP GOOD SYSTEMS AND PROCESSES
Question 5
Answer to question 5
Question 6
START UP QUESTIONS
DO I NEED TO KEEP RECEIPTS?
Under the IRD law NZ businesses are required to keep source documents (i.e. receipts, invoices etc.) on NZ soil.
Some cloud software companies keep their records on servers in overseas locations and many have sought approval from the IRD for that. To check whether your software supplier is compliant with this rule, go to this webpage.
Some cloud software companies keep their records on servers in overseas locations and many have sought approval from the IRD for that. To check whether your software supplier is compliant with this rule, go to this webpage.
WHAT TAX DO I NEED TO PAY?
Answer to question 1
Question 2
Answer to question 2
Question 3
Answer to question 3
Question 4
Answer to question 4
PRICING QUESTIONS
HOW WILL I WORK OUT MY PRICING?
WILL GST AFFECT MY SALES PRICE?
HOW DO I CALCULATE A CHARGE-OUT RATE?
Start with how much you would like to earn over a year (before deductions for tax). Then work out how many working hours you have available. You may decide to only work part-time, say 20 hours per week, or you may decide to work full-time.
If you decide on-full time, work out how many hours that equates to for a year, remembering to deduct public holiday hours, annual holiday hours and sick day hours.
Then deduct other hours that you won't be working on chargeable work (i.e. admin time, meetings, client meetings, development time, and time used for free jobs).
When you have your total number of working hours, divide your required annual pay by the number of hours and that will give you the hourly rate that you need to charge.
In reality, the industry may dictate a usual hourly rate - either more or less than your calculation. If it's more, great! But if it is less, you may need to adjust your working hours or your expected annual wage to fit.
If you decide on-full time, work out how many hours that equates to for a year, remembering to deduct public holiday hours, annual holiday hours and sick day hours.
Then deduct other hours that you won't be working on chargeable work (i.e. admin time, meetings, client meetings, development time, and time used for free jobs).
When you have your total number of working hours, divide your required annual pay by the number of hours and that will give you the hourly rate that you need to charge.
In reality, the industry may dictate a usual hourly rate - either more or less than your calculation. If it's more, great! But if it is less, you may need to adjust your working hours or your expected annual wage to fit.
HOW DO I WORK OUT AN ON-COST RATE?
You may want to add an on-cost to external expenses if you have overheads to pay for in addition to your own wages when budgeting or quoting for a project or production.
The simplest way to calculate an on-cost is to add up all your overhead expenses, work out your total expected external expenses, and then divide the overheads by the external expenses value. That will give you a percentage value (multiply by 100 to get the %) that you add to each external cost as you budget for a project or production.
The simplest way to calculate an on-cost is to add up all your overhead expenses, work out your total expected external expenses, and then divide the overheads by the external expenses value. That will give you a percentage value (multiply by 100 to get the %) that you add to each external cost as you budget for a project or production.
SOFTWARE THINGS TO CONSIDER
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ONLINE SOFTWARE SUBSCRIPTIONS
know your requirements before subscribing to software
It's tempting to sign up to a software package straightaway and then think about what you need afterwards.
If you later discover that you need a particular accounting process or set of reports, it can be an expensive business to fix that - either in additional software requirements or in time to undo and redo the work you've already done.
If you later discover that you need a particular accounting process or set of reports, it can be an expensive business to fix that - either in additional software requirements or in time to undo and redo the work you've already done.
everybody's situation is different
While other people may recommend a software package in all good faith, their situation may be very different to yours and you may end up with something that is inappropriate.
It's a good idea to know what you want and make sure that the software you get covers what you need.
It's a good idea to know what you want and make sure that the software you get covers what you need.
review the pros and cons of each software
There are m
the popular option may not be the best option for you
Start with
TAKE A COURSE TO LEARN HOW TO USE IT
You may want to add an on-cost to external expenses if you have overheads to pay for in addition to your own wages when budgeting or quoting for a project or production.
The simplest way to calculate an on-cost is to add up all your overhead expenses, work out your total expected external expenses, and then divide the overheads by the external expenses value. That will give you a percentage value (multiply by 100 to get the %) that you add to each external cost as you budget for a project or production.
The simplest way to calculate an on-cost is to add up all your overhead expenses, work out your total expected external expenses, and then divide the overheads by the external expenses value. That will give you a percentage value (multiply by 100 to get the %) that you add to each external cost as you budget for a project or production.
SETTING IT UP WELL
is your business one for which a specific structure of accounts is needed?
Different type of businesses have their accounts structured in different ways. For example, a shop is required to have an accounts structure with stock and inventory, whereas a contractor would need a simple accounts structure.
will you need additional reporting e.g. departments or regions?
Financial information come
will you need add-ons e.g. project reporting?
There are many b
will you use an inbuilt payroll system or integrate an external system?
Start with how
LINKING YOUR BANK ACCOUNT TO THE SOFTWARE
Answer to question 4
SETTING UP TAXATION
ADDITIONAL RESOURCESGET EXTRA HELP
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checklist
We spec
resources
Financial i
free resources
There are many b
paid guidance
If anything in this section applies to your business and you'd like my specific help, please go the Paid Guidance section of this website, or contact me via the details below.
LEGAL STUFF
By the very nature of our profession, any advice or guidance given on this website or in open training resources are general and generic in nature. The majority of my focus is on better business practices and knowledge.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
Ready to ROCK Your accounting?
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