Accounting For You

Accounting and Bookkeeping for Small Businesses and Sole Traders

Chartered Management Accountant, Certified Practising Accountant

and Registered Tax Agent

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Accounting for a Hand Made Business

Posted on 10 February, 2014 at 20:05 Comments comments (7)
With the handmade revolution growing all the time more and more people are making products to sell. With the wealth of talent out there handmade products are growing in popularity, anything from jewellery to art, cards to clothes, and candles to candies. While many people make their products just for themselves or as gifts for their friends and families, a growing number of hand makers are now selling their products. With the growth of such online market places as Etsy and Felt and the increasing number of physical designer and hand craft markets the opportunity to sell is increasing.

However, once someone starts selling their products on a regular basis, be it online, at a market, or even via a shop or gallery, they are no longer enjoying a hobby, they are conducting a business and this needs to be properly accounted for.

As someone who makes and sells jewellery under the name of Shazzabeth Creations this is something I have had to deal with. Fortunately of course I have the advantage of also being an accountant and so this hasn’t been a problem for me.

When accounting for a handmade business it is easy to overlook some of the costs that can be claimed against sales. While some may be obvious, others may be less so. There are two categories of costs, direct and indirect.

Direct Costs

The most obvious direct costs are material costs, the raw materials that you actually use to make your products. For most people selling hand made products this may well be the only specific direct cost that there is. However, you need to ensure that you are accounting for the whole material cost, and that not only includes the actual cost of the material but could also include:

  • Shipping/Freight Costs to get the material to you
  • GST/Import Duty potentially charged by customs if the materials have come from overseas
  • Exchange Rate charges imposed by a financial institution (again for overseas purchases)

All of these add together to create the TOTAL material cost.

If your order contains several different items then the easiest way to handle this is to pro-rata the additional costs (freight etc.) against the items in your order in order to then give you a total cost for each individual item.

The other potential direct cost that hand makers could have is salaries. This would be if the business has grown enough that you are now paying one or more people to help you make your products.

Indirect Costs

Some of the indirect costs could be fairly obvious. There are some which more directly relate to the handmade business as a whole and it would generally be easy to recognise these. These would include:

  • Listing Fees (online market sites)
  • Market Stall Fees
  • Business Cards
  • Website Design and Hosting Fees
  • Packaging
  • Postage (when posting products to customers)
  • Display equipment (More about these later)
  • Paypal Commission
  • Hire of an Eftpos machine
  • Tools (More about these later)

There are however some other costs that may more easily be overlooked and which can quite legitimately be applied against the handmade business. These include (but are not necessarily limited to):

  • Mileage for driving to markets, the post office or retail outlets
  • Car Parking (relating to any of the above)
  • Internet Costs (If you are selling online you can claim a percentage of your internet costs as being business related)
  • Computer costs (again if you are selling online a percentage can be claimed)
  • Home Office / Studio costs (see earlier post on Home Office Costs)
  • Any design related fees (logo, website, business cards etc.)
  • Subscriptions to industry related magazines (i.e. Metal Clay Magazine, Quilting Magazine etc.)
  • Any tutorials purchased (either individually or in books and/or dvds)
  • Any classes attended
  • Stationery
  • Accountants Fees

Assets– Tools and Display Equipment/Materials

The one area that you have to be careful with is the cost of tools and display materials. Whether these are tables or display racks for market stalls, or sewing machines, pliers etc. used for making your products, if the useful life for these items is expected to be more than one year then the items have to be capitalised and depreciated. You can’t claim back the total cost of these items in the year of purchase.

Of course the easiest way to ensure that you are accounting for your handmade business properly is to employ an accountant, specifically if possible an accountant who understands handmade businesses.

Working From Home?

Posted on 29 January, 2014 at 23:43 Comments comments (4)
If you are working from home and have a dedicated work space, such as an office, studio etc. then you are entitled to claim tax relief against a percentage of certain of your household costs. There are just two principle conditions:

  • The area must be used principally for business use
  • You must keep a full record of all the expenses you want to claim


So what percentage are you entitled to claim?

In order to work out the percentage you are entitled to claim you need to calculate the floor space (in square metres) of the dedicated work space you have as a percentage of the floor space for the house as a whole.

So for example, if your dedicated work space is 8.6 square metres and the whole of your house is 151.6 square metres, then your dedicated work space accounts for 6% of your total house.

(If you need help converting room measurements to square metres then here is a great tool -

The percentage of your work space against the whole house is then the percentage of the household costs that you are entitled to claim.  


So exactly which household costs can you claim a percentage of?

The sort of costs that the tax office states you can claim a percentage of, based on floor area, are as follows:

  • Mortgage Interest (if you own the property)
  • Rent (if you are renting the property)
  • Rates
  • Electricity
  • Insurance

So using the above example, you would be entitled to claim 6% of these costs.
 

Telephone Costs

Unlike the above mentioned costs telephone costs are not based on a percentage of floor area. If your home is the management centre for your business then you are entitled to claim 50% of the fixed line rental costs of your phone. You are then also entitled to claim all the toll calls that are business related.

Of course, if you have two phone lines, one for business and one for personal then you can claim 100% of the costs for the business line but none of the costs for the personal line.  


GST

For both of the above types of costs, if you are NOT registered for GST then you can claim your percentages based on the GROSS costs. However, if you are registered for GST then your percentage claim needs to be against the net costs. You can then claim back the relevant percentage of the GST cost through your GST Return.  

Employees Working From Home

While the tax office specifically mentions small business owners working from home in relation to claiming home based costs, if you are an employee working from home you may also be entitled to claim home based costs as long as you are not receiving any sort of reimbursement or allowance from your employer in relation to these costs.  

Budgeting for Personal Finance

Posted on 20 January, 2014 at 17:26 Comments comments (22)
We all know how important it is for businesses to have a budget but it can be just as important to have a budget to manage your personal finances.

So many people get into debt because they don’t manage their personal finances properly or become stuck when they get an unexpected large bill and have difficulty paying it. By having a personal budget it is easier to ensure that you are prepared for the unexpected and that you have money put aside ready for those large bills.

The primary goal for a personal budget is to minimise expenses and maximise savings. By cutting down on unnecessary spending and increasing your monthly savings you can put that extra saving toward long term financial goals. A budget also allows you to properly plan for and put money aside for periodic bills such as quarterly rates bills, or annual insurance bills.

Income

For most people who are in paid employment it is easy to know what your monthly income is. However for those who are self-employed or who run their own business determining income may not be quite so straight forward. In this instance a best estimate should be used, if possible aligning it with the business budget.

Fixed Expenses

There are certain expenditures which will be the same or very similar each month. These would include:      

  • Mortgage
  • Rates
  • Insurance
  • Utilities
  • Loans

These are therefore relatively easy to budget for.

Discretionary Spending

The second category of expenses are those which can vary much more, but by the same token are also those over which you have more control in terms of the amount you spend. Some are still necessary costs but others are not and can therefore be dropped if the budget does not allow for them. These types of costs include:

  • Groceries
  • Clothes
  • Eating Out
  • Car / Travel
  • Entertaining
  • Gifts
  • Holidays

By first getting a realistic picture of how much is currently spent on each of these costs and by then taking control of this expenditure your budget will start to look much healthier.

Tip! Put money into a different bank account each month for those bills that are quarterly or annual so that you have the money put aside ready for when the bills come in.

Help with Budgeting

There are many different websites that provide free templates and guidance on creating personal budgets thus making it a relatively easy exercise to perform as long as you have the discipline required. A few samples of these websites are as follows:

Budgeting for Business

Posted on 12 January, 2014 at 16:23 Comments comments (0)
Once you have plans and goals for your business the next most logical thing to put in place is budgets. Budgets can be important tools which unfortunately too many businesses don’t make proper use of.

Too many businesses will take their “actual” sales and costs from the previous year and then use them as their “budgeted” sales and costs for the next year. While this may be a quick and easy way to put a budget together it means that the budget isn’t being used to its full extent – as a control tool.

Budgets can be used when helping to forecast sales, but more importantly they should be used to help control costs.

  • Are all your costs necessary?
  • Are you spending money on things that you don’t really need?
  • Are there ways to reduce some of your costs?
  • Could you achieve better savings by timing your purchases or by buying in bulk?

These are all questions that you should be asking when putting together a budget.

One example that I saw at a previous company was the buying of stationery. All stationery was purchased online and then delivered. The delivery cost was free if the order was over a certain amount. Originally the stationery was purchased as and when required and delivery costs were frequently paid. However, this was changed to a once a month order, with requirements being added to a list throughout the month. This immediately eradicated the delivery costs while at the same time making staff more careful with their stationery usage thus reducing the cost of stationery consumables too.

Zero Based Budgeting is a great way to set up a budget that is to be used as a proper control tool, particularly for new businesses or businesses that need to introduce better control of their costs. What zero based budgeting does, as the name implies, is that it starts with no costs in the budget at all. You then justify every cost that gets added to the budget:

  • Do I need to spend this?
  • What is the best price I can get this for?
  • Is there a way to reduce this?

By asking these questions and justifying every item of expenditure the budget is being used as a control tool making you aware of all your costs and the need for them.

Of course putting a budget together is just half of the exercise when it comes to properly using a budget as a control tool. The other half of the exercise is to compare and analyse the actual costs against the budgeted costs. This will be covered in more depth at a later time.

New Beginnings and Goals

Posted on 5 January, 2014 at 21:54 Comments comments (1)
When better to do an appraisal of your business and to set new goals than at the beginning of a new year. Now is the time to sit back and take an honest look at your business.

Is your business progressing and growing the way you would like it to go and if not why not?

By focusing on your business you can get a good idea of how the business is performing and this will enable you to set the focus of your strategy for moving forward.
 
1.    A good starting point for your review is to evaluate what you actually do, your core activities, the products and/or services that you provide. Ask yourself what makes them successful, how could they be improved, and could you introduce new or complimentary products and services.
 
2.    Are you reviewing costs frequently? Are you keeping a close enough eye on your direct costs, your overheads and your assets? Are there different ways of doing things or new materials you could use that would lower your costs?
 
3.    How efficient is your business – are there any internal factors holding the business back and if so what can you do about them?
 
4.    Review your financial position – when it comes to your business’s success, developing and implementing sound financial and management systems is vital.
 
5.    Review your marketing plan. Assess your customer base and market positioning as a key part of this process. Look at factors such as:
 
·         Changes in your market
·         New and emerging services
·         Changes in your customers’ needs
·         Changes in competitive activity

Once you have reviewed your business use your review to redefine your business goals. Ask yourself the following
key questions:

1.    Where is the business now?
 
2.    Where is it going?
 
3.    How is it going to get there?
 
Prepare work plans to put the new ideas into place and set some timetables. Regularly review the plan and allow for adjustments as you progress. In addition, a simple planning cycle can greatly enhance your ability to make changes in your business routine if necessary. Good planning helps you anticipate problems and adapt to change more easily.

Accounting in the Cloud

Posted on 15 December, 2013 at 19:19 Comments comments (1)
"The Cloud" is the user-friendly term for the location of software that is accessed online. Unlike traditional programs that you buy and save on your individual hard drive, with the cloud you get a flexible subscription to software that is located on a remote, secure database. You can then access your data from anywhere, at any time, on a desktop or mobile device.

The Cloud is a more effective to work with a variety of benefits:

  • Software updates are free and happen automatically
  • You can access your files at any time for anywhere
  • Data is safe from internal computer errors or security breaches
  • There is no upfront cost of investing in software, instead you generally can pay fees on a monthly basis.

One of the most widely forms of cloudcomputing that has been taken up by businesses and individuals alike is that of computer back-ups. Many online companies offer this service with the benefit of no longer needing to buy external disc drives or having to worry about storing back-ups off site in case of fire etc. Instead all back-ups can now safely be stored on online servers.

However The Cloud can now be used for much more than just back-ups and one of the growing areas of cloud computing is business services. Inventory management, payroll, job costing, and most specifically accounting (as well as a host of other services not mentioned) can now be done in the Cloud.

One of the biggest advantages of using cloud computing for accounting,particularly for small businesses who use external accountants and/or bookkeepers (as opposed to larger businesses who employ their own) is that the external accountants and bookkeepers can now gain access to the accounts of their clients in real time from their own offices. This means that help and advice can be more immediate and problems can be solved much more quickly and easily. It also means that the small businesses (and sole traders) no longer need to gather up all their books and paperwork to 'take to their accountants', instead the accountants can access them directly.

One of the fastest growing applications for accounting in the cloud in New Zealand is Xero. Having started as an "in the cloud" company all of Xero's investment has gone into cloud accounting resulting in an easy to use real time system. Xero uniquely provides a single platform where small businesses and accountants can collaborate easily.

Some of the benefits of using Xero include:

  • bank statements that can feed automatically into your Xero account
  • a dashboard where you can instantly see all your bank balances, recent sales and upcoming bills
  • instant up to date reporting with quick links to all the transactions
  • a mobile application allowing invoices, expenses and cashflow tracking to be done on the go
  • unlimited round the clock email support and a detailed on line help centre

There are also a wealth of add on applications such as payroll, inventory and time tracking that integrate seamlessly with Xero to save your business time and money.

With monthly packages starting from as little as $25/month Xero Accounting can prove to be a big benefit both to sole traders and to small businesses.

The Gift of Time

Posted on 9 December, 2013 at 18:45 Comments comments (2)
In today's busy world the one commodity that always seems to be in short supply is time. How often have tasks been delayed or put off because there just hasn't been enough time to do them? It doesn't matter if you are the managing director of a multi-national, a small business owner, an employee or a stay at home mum, time is something that is precious to everyone.
 
There are of course ways to better manage your time and "time management" is a key phrase that is commonly heard. Some of the major principles involved in time management are as follows:
 
  • Only check and deal with your emails once a day, often best done at the beginning of each day.
  • Set a "To Do" task list with the most important / time sensitive tasks first and then systematically work through the list.
  • Get rid of distractions, turn off your phone for a period if necessary.
  • Delegate.
 
Delegation is one of the most useful tools when it comes to saving time and is a tool that is frequently used both in the workplace and at home.
 
In the corporate world managers will often delegate tasks to their subordinates, something that is understood and readily accepted.
 
So how is delegation employed at home? Many householders will employ a cleaner to come in and do their housework once a week, or a lawn man to come and mow their lawns once a fortnight. It is not because the householders are unable to do the tasks themselves but rather because they want to save the time of doing those tasks themselves. Online grocery shopping is gradually now growing as a resource to save the time of going to the supermarket.
 
So how about small business owners and sole traders? This is frequently a category of person who struggles to find any spare time at all. They are busy running or developing their business during the working day and then find themselves spending every evening or weekend keeping on top of the paperwork. So how then can small business owners and sole traders delegate when there are 'no other staff'? Quite simply small businesses and sole traders can delegate by means of subcontracting certain parts of their work, specifically all the back office services needed to keep their business up and running.
 
When it comes to sub-contracting services some are more obvious than others. For example, no one would think twice about using a lawyer for help in dealing with legal matters to do with their business. However, when it comes to other types of back office services business owners will frequently struggle trying to find the time to deal with them on their own. There are however a wealth of professionals who can be delegated to for all sorts of other services, professionals who can save business owners time. These include:
 
  • Bookkeepers
  • Accountants
  • Virtual Assistants
  • IT Consultants
 
Any one of these professionals can help to give back the gift of time allowing more time to be spent on those things, that at the end of the day, are most important to everyone, such as family and friends.

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