Why is accounting important for tradies?
Any business owner must keep track of their finances in order to maintain ongoing financial health and the success of their business. Accounting is no less important for tradies, particularly in an economic climate of rising supply costs and tighter cash flow pressures.
Effective accounting and bookkeeping practices will help you stay organised, track your performance and limit your tax liabilities throughout the year.
This blog will provide a guide to accounting for tradies, including our best tips for accounting and bookkeeping in the construction industry.
1. Utilise online accounting software
The first and most important step of accounting for a tradie is to have an effective system to record and track your financial records. Keeping accurate financial records has many crucial benefits, including maximising your deductions at tax time, managing your cash flow and tracking the performance of your business.
The easiest way to do this is through online accounting software. Platforms like the one we use, Xero, have made it far easier for business owners to stay on top of their accounting and simplify tasks such as invoicing, tracking expenses, and calculating profit and loss. These programs can be especially helpful for those not comfortable with spreadsheets or those looking for an automated solution.
2. Have a separate bank account for the business
Separating your business and personal bank accounts is crucial for maintaining accountability and organisation of your finances.
Not only will this simplify the process for your accountant during tax season, but it will also aid in sticking to your budget and keeping detailed records of any tax-deductible expenses.
One of the most common mistakes that we see tradies make is blending their business and personal finances, making it difficult to evaluate the performance of your business and properly manage cash flow. To ensure that your business and personal receipts remain distinct, we recommend using a business card for work-related expenses and maintaining accurate logs when using personal items for work.
3. Pay close attention to your cash flow
The biggest threat facing small businesses is poor cash flow management. This is particularly relevant for businesses in the construction industry which can be subject to fluctuating supply costs and payment delays.
In recent times, even some of Australia’s largest building companies have fallen victim to cash flow difficulties, serving as an important reminder of the necessity to plan, organise and monitor your cash flow constantly.
Some of the best ways to maintain a healthy cash flow include creating and sticking to an effective budget, planning your accounts payable and receivable, as well as seeking the help of a qualified business accountant.
Visit this blog for our best tips on effective cash flow management.
4. Start tax planning
Tax planning is one of the most important roles of an accountant and one of the best ways you can limit your overall costs and liabilities. Implementing a few tax planning strategies before the end of the financial year can go a long way towards minimising your tax bill and boosting your cash flow.
For tradies, an effective tax planning strategy can be to bring forward the purchases of supplies and equipment before June 30 whilst delaying issuing invoices until the next financial year. We’ve also included many other great tax planning strategies for you to take advantage of in this article.
We also strongly recommend setting aside appropriate funds every paycheck to cover upcoming tax payments and avoid being caught by a large tax bill. An efficient and stress-free method of budgeting for taxes is to consult with an accountant; they can assist you in determining and planning your future tax instalments months in advance.
5. Keep track of vehicle expenses
As a tradie, you’ll likely use a vehicle while carrying out your day-to-day business operations. This will often involve driving substantial distances as you travel between sites, clients and suppliers.
When looking to make the most out of the tax deductions available for your vehicle, it pays to stay organised.
If you use your car extensively for work, keeping a logbook is likely the most effective method for maximising your vehicle tax deductions. The logbook must be recorded over 12 consecutive weeks and can be done either manually or electronically. To maximise your vehicle deductions, you’ll need to include information such as the distance your car travels, what percentage of this travel is for business use and any other vehicle-related expenses you incur during this period.
The cents-per-kilometre method is also available as an alternative to keeping a logbook. This involves calculating the kilometres you travelled as part of your job and claiming a deduction for each kilometre using a set rate. This method, however, allows only a maximum claim of 5000km per car, meaning tradies who drive extensively may miss out on potential tax savings.
Other vehicle expenses you should record include:
- Petrol
- Repairs & maintenance
- Insurance
- Vehicle registration
- Vehicle depreciation
6. Keep a record of all equipment purchases
Make sure you record any purchase directly related to earning your income.
As a tradie, this may include purchases of items such as protective clothing, tools, permits, self-education and vehicle expenses.
Whilst online accounting software like Xero will make it easy to record and store receipts for these transactions, a basic spreadsheet will also be able to do the job for you.
7. Hire an accountant
As your workload grows and your finances get more complex, managing your bookkeeping will become an increasingly bigger burden on your work life. Additionally, effective bookkeeping practices can help cut tax costs drastically, as well as maximise profit and minimise expenses.
Hiring a trusted accountant or bookkeeper will help you manage the financial side of your business and give you expert advice when you need it most.
For help with tax compliance, bookkeeping, tax planning and more, reach out to one of our tradie accountants for a free consultation.
