Basics to Managing Your Money

    • What is bookkeeping?

    • Why is bookkeeping important?

    • Bookkeeping Vs Accounting

    • Key Financial Accounts

      • Assets - Things I Own

      • Liabilities - Things I Owe

      • Equity - Book Value

      • Revenue - Money Coming In

      • Expenses - Money Going Out

    • What should be on an invoice?

    • The key financial statements

    • Tips for managing cashflow

    • Why you need a financial forecast?

    • Understanding tax

    • Types of tax

What is bookkeeping?

Bookkeeping refers to the day-to-day management of your business finances. It is the process of recording, storing and tracking the financial transactions of a business such as sales, paying wages, loan repayments etc. 

General Ledger - This is a term used when referring to a record of the business's financial transactions.

Financial Accounts - Are the different types of financial transactions such as: Assets, Debt (liabilities), Equity, Revenue (sales) and Expenses.

Why is bookkeeping important?

Keeping the financial books organised will allow a business owner to look at past performance and make better informed decisions. It can also help businesses with the following:

  • Manage Cash Flow - Keep track of business expenses, money going in and out of the business.

  • Decision Making - Analyzing financial reports and statements means you are better informed to make decisions that can grow the business.

  • Planning - Better insight on the financial health of the business can support accurate budgeting/forecasting.

  • Tax Obligations - Tidy financials means it is easier (and cheaper) for an accountant to file your end of year return.

  • Build business credit - Avoid interest and penalties.

  • Attractive to investors - The ability to prepare reports specific to investor needs in a timely manner.

Bookkeeping Vs Accounting

Bookkeeping and accounting are often confused for being the same things when in fact they are different. Bookkeeping is the first step of an accounting process.

  1. Bookkeeping is the recording of all the financial transactions of a business. key activities include:

    • Recording & categorising all transactions

    • Bank reconciliations

    • Managing accounts invoicing and debts

    • Processing payroll

  2. Accounting is the process of creating financial reports or statements. Key activities include:

    • Preparing financial statements

    • Calculating tax and file tax returns

    • Analysing the financial statements and providing advice to business owners

    • Performing audits

    • Assesses financial health and makes forecasts/budgets

Key financial accounts

Assets - Things I Own

Assets are all the resources you own and control that will generate a current or future economic value for the business. Assets are recorded on the balance sheet and can be defined as current assets, fixed assets, tangible or intangible assets.

  • Current Assets - resources that can be easily converted into cash or will be consumed within one year (E.g. Stock/inventory or materials).

  • Fixed Assets - resources that have an expected life of more than a year, will depreciate over this period & costs more than $1000 (E.g. Property, plant and equipment).

  • Financial Assets - resources from investing in the assets of financial institutions (E.g. Stocks, bonds, securities).

  • Intangible Assets - resources that have no physical presence (E.g. Trademarks, copyrights, goodwill).

Liabilities - Things I Owe

A liability is basically debt, anything that is owed to someone or a company, typically in the form of money. These are recorded on the balance sheet and are considered the ‘opposite’ of assets and will decrease the value/equity of a business.

  • Current Liabilities - debts that will be settled within the year

    (E.g. overdraft, wages payable, income tax payable, GST payable).

  • Non-Current Liabilities - debts that will be settled over the course of several years

    (E.g. Bank Loans, Mortgage repayments).

Equity - Book Value

Equity is the amount of money that would be returned to the owner upon selling the business. It is the result after all debts are paid and assets are sold.

Asset - Liabilites = Equity.

It is important to monitor your equity and keep a positive equity. A negative equity suggests that the sale of your assets would not cover your liabilities and upon selling the business, debts will remain or the business may be insolvent.

Revenue - Money Coming In

Revenue refers to the money generated from selling a good or service. Businesses may choose to sub-categorise its revenue accounts to suit the different goods or services provided.

  • Operating Revenue: money generated from the normal operations of the business (E.g. Sale of goods or services)

  • Non-operating Revenue: money that is infrequently generated from secondary sources (E.g. Government grants, iwi grants, proceeds from a sale of an asset)

Expenses - Money Going Out

Expenses are costs that are incurred from the operations of the business to generate sales. Expenses are often categorised into the following:

  • Direct costs - Costs specific to producing a good or services for sale (E.g. cost of goods sold or labour)

  • Indirect Costs - All other costs of running the business (E.g. overheads, rent, insurance, admin wages)

  • Fixed costs - Costs that will remain the same despite how busy your business is (E.g. rent, salaries, depreciation)

  • Variable costs - Costs that will change depending on how busy your business is (E.g. delivery expenses, raw materials)

  • Operating expenses - Day to day costs of running the business (E.g. rent, insurance, wages)

  • Capital expenses - Investments in properties and tools that allow you to complete work in business (E.g. computer equipment, machinery)

  • Deductible - Expenses that are required to do business, subtracted from revenue and reduces tax liability (E.g. general business expenses, 50% of entertainment expenses, work from home office expenses)

  • Non-deductible - Expenses that can be used to reduce your tax liability but will reduce your profit (E.g. personal expenses, principles on loan repayments, additions and improvements to property)

Most expenses will fall under multiple categories. You might choose to view the expenses in these different categories depending on the financial information you need.

What should be on an invoice?

If you are GST registered, there are certain requirements to show on your invoice to ensure that you can claim back GST on the goods or services you sell. As of 1 April 2023, these have changed to what is shown on this table. It is also a good idea to put your payment terms and conditions on your invoice. This will ensure you get paid on time and assist with managing cash flow.

Looking for an Invoice Template? Click here to download our Invoice Template

Key financial statements you should know as a business owner

Profit & Loss

Is a financial statement that shows all the money coming in and out of the business for a specified period.

  • Revenue, expenses, and profit or loss

  • Same as income statement

  • Can assess the businesses ability to generate profit sustainably

Balance Sheet

Is a financial statement that provides an overview of everything a business owns, owes and owners equity at a specified time and date.

  • Assets, Liabilities and Owner's equity

  • Usually produced at end of year reporting

  • Can determine how much the business is worth

  • Can help identify trends in your business finances and relationships with customers/suppliers

Cash Flow

Is a financial statement that shows how cash moves in and out of the business during a given period.

  • Cash from operations, investments and financing

  • Used by investors to see how liquid a business is to be able to pay for debts.

Tips for managing cashflow

Managing the cash flow in your business is vital. A well managed cash flow will help with growing your business and ensure you are handling your business finances properly. A poorly managed cash flow can lead to insolvency or bankruptcy. There are many things you can do to help with managing your cash flow, here are some tips below:

Bookkeeping:

  • Keeping up to date with your books will allow you to check the current financial state at a quick glance

  • Business and personal finances are kept separate

Credit control:

  • Keep track of account receivables and the timeframes for payment regularly

  • Chasing unpaid invoices monthly

  • Impose late fees on overdue payments

  • Consider providing incentives for prompt payments (small discount)

Invoicing: 

  • Having clear payment terms on your invoices will help ensure payment are received on time. 

  • Sending invoices immediately, to give your customers as much time as possible to gather funds

  • If you are providing a service, consider asking for a deposit or mid-service payment

Debt management:

  • Reduce debt and pay for invoices on time to avoid late fees or penalties. 

Why you need a financial forecast

As a way to maintain good cashflow having a budget/financial forecast in place means you have visibility of how the business is tracking.

A financial forecast is an educated and/or calculated guess (often based on past performance) of what the business is likely to generate in sales or spend on expenses.

Having a financial forecast in place means you have something in place that tells you what the business needs to make each month in sales to cover the costs being spent each month. This is what contributes to having good cashflow management in place.

Download our Financial Forecast Template here.

Types of tax

There are several types of tax you need to be aware of as a business owner.

GST

Goods & Services Tax - Tax on goods and services

  • 15% tax rate

  • If you earn more than $60,000 in 12 months you have to register for GST, otherwise is voluntary

  • You can file for GST monthly, two monthly or six monthly - its up to you

PAYE

Pay as you Earn - Tax on employees income

  • Tax rate is dependent on the amount of income earned

  • Businesses pay this tax on behalf of their employees to IRD

  • It is deducted from employees pay, and paid to IRD monthly

FBT

Fringe Benefit Tax - Tax on staff benefits provided

  • Generally a flat rate of 63.93%

  • Benefits can include subsided goods/services such as dental care, gym, insurance, motor vehicle use for personal, low interest/interest free loans or employer contributions to funds