Are you penny-pinching yourself out of business?

Episode Transcription

Den Lennie (1s):
Good day guys Den Lennie here with episode 2 24 of the Hodor scale, a video, but his podcast. And today we’re talking about the pitfalls of running your own books. I worked with a lot of filmmakers and sometimes I I’m surprised to hear that they do that on bookkeeping and that’s like giving, editing to a client to do so today I want to ask Blake from counter load, who are a specialist, video production and media accountancy firm based in Sydney, Australia to share the pitfalls of doing your own books and why, if you hire a bookkeeper, they can act as an extra pair of eyes to keep you safe and catch your blind spots. I think you’ll find this to be hugely valuable.

Den Lennie (43s):
And this is an area where if you get this right, you can actually save your money. Well, good day Blake, I’m glad to have you back on the show to talk all things, numbers, accounting, and tax planning. Today. I want to jump straight in to bookkeeping because I come across a lot of freelancers, a lot of sole traders, even some business owners who still do their own books because they use bits of software like zero. And, and I want to really ask you what are the pitfalls of running your own books and, and why is it not necessarily a great idea?

Blake Jenkins (1m 23s):
Yeah. Great. Thanks for having me back then. I really, really enjoy places like there’s a good little things to give people a lot of help. Yeah. Bookkeeping. I mean, massive, massive, massive thing for their own businesses, because this is what’s going to determine how you make your decisions and what your tax has got a go park at the end of the day. But the major things with bookkeeping is that you need to be on top of the allocations and where they’re going, income assets, reimbursements, liabilities, all those kinds of things, but also your tax, your consumption tax components. <inaudible> so, you know, if you get a, if you say, when a child with apple here, and so you’re invoicing out overseas and you’re here in Australia, that’s an export.

Blake Jenkins (2m 6s):
So there’s no GST. Could you imagine if you put the code on it with JST and you paid 20 grand to the tax office and Chiesi shouldn’t have had to, because of the coding so yeah. There’s heaps, heaps of things that can go wrong with, with the books and because they need to be a true representation of where your businesses are points on. I basically tell the story of what you’re doing. If they’re not correct enough to date, you have real trouble working out what that’s gonna look like at the end of the year.

Den Lennie (2m 37s):
It’s funny that that’s a great point about the export sales. I’m amazed at how many businesses don’t understand the difference between an export business and a domestic arrangement. That is another reason why a bookkeeper’ that catch your blind spots. Aren’t I mean, what, what, what I, my very first hire in my business was a bookkeeper. And I think it’s the most important hire you making your business, because I’ll never forget. My first bookkeeper was an elderly lady and she used to make me feel guilty, but spending my own money. And I felt that was a really important aspect. What, what, what is, what does a bookkeeper do for a start? let’s just take it right back to that.

Den Lennie (3m 18s):
That’s where I assume nothing. So what does the bookkeeper’s role in responsibility in a business?

Blake Jenkins (3m 24s):
Yeah, look, I mean, this, this is a good thing that bull caper is they make you accountable and they make sure that you’re on top of your deadlines and they give you a really, I mean, sending you transactions thing, what is this 10, $15,000 payment for might make you go, well, geez, shouldn’t spend that much on that because you saying it, I get it’s like, you’re seeing it again after you’ve already outweighed the cash. That’s basically what a bull Cape has got to do for you is they’re going to take your data, your spends your income, your debtors, and your creditors, and make sure that it’s all reconciling. So it makes sure your bank’s reconciled, which means that all the transactions have a place. So income or expense, or also track your JST that would have been talking about, or you consumption tax, depending on where you’re at, like VIT, Auburn, UK.

Blake Jenkins (4m 10s):
And they can also then prepare your quarterly launch minutes or your quarterly like liabilities, but really Sealy. It just means that you have another set of eyes over things, keeping you up to date, which means that you can look at your reports and have real-time data. They can manage your debtors as well. If you need to make sure all your credit has been people that you haven’t yet paid, but you aren’t coming due are in your file. So you can go, okay, know, I’ve got 50 grand to pay next week. Cause these are all coming to, how do I cashflow that from my debtors that are coming in on not nonplussed days on these ones, I’ve got to follow them up so I can actually pay these bills, but you don’t really have that option to do that.

Blake Jenkins (4m 53s):
Unless someone’s in there, keeping everything up to date, making sure the paid invoices done, all the pay creditors are done, or the allocations are kind of gone through,

Den Lennie (5m 4s):
Which I guess leads into that. The question around with software, like zero, which is phenomenal. It, it, it makes the process of bookkeeping. You know, I used to, we used to run on Sage and I found it just Callie uncomfortable to work with. And I’d never had to understand it. Xero has made it much more user friendly, but, but I, I, sometimes I remember working with a client a while ago and, and I’d asked him, you know, who does your books? He’s like, oh, I do them. Cause I just use zero. And I think there’s a danger that because a piece of software is accessible, that it negates the need for expertise in interpreting the numbers because am I right in thinking it’s easy to input the data incorrectly to zero or rather maybe not incorrect belly, but to assign it to the wrong place or to not be coding it correctly.

Den Lennie (6m 1s):
What are some of the pitfalls of, of, of creatives particularly choosing to do their own books in zero? What are some of the, what are some of the danger areas there that the red flags that they should be aware of?

Blake Jenkins (6m 14s):
Yeah. So with programs like zero, I mean amazing software when it came out because it changed the way that everyone thinks of accounting and no longer is it on a floppy disc and then sent around and you know, hard drive-based user-friendly data. It’s all on the cloud. And I mean, there’s plenty out there. And these online softwares, they do functionally the same thing, but with zero, you do have it. It’s really, really user-friendly. And this is why I love it. I love it because I can sit across from, you know, anyone who’s running their own business and show them how to get the most out of that program just by looking at the front cover and knowing who they owed money to and who they have to pay money to and how much money’s in the bank.

Blake Jenkins (6m 55s):
And that’s the key, your core functions of making your decisions. Now the issue then becomes if, because it’s so user-friendly and so easy to get your head around that you can quickly either one get way out of date. So you can have 300 transactions for the last three months to reconciling. Every time we look at that, you go, I want to do that as too hard basket. I don’t wanna sit down and do that. And then you start missing your deadlines. So you start missing your watch with deadlines. So when you start not following up the invoices that haven’t been paid, or your falling out invoices that have been paid, but they just haven’t been reconciled. So the zero would automatically send that you haven’t paid me yet.

Blake Jenkins (7m 36s):
And you know, you might piss off your clients, but also you might send things to the wrong spot. So you might claim tax deductions for things that aren’t deductible, you might claim GST on things that aren’t claimable, or you might not claim GST on things that are clickable. So it works both ways. Then you can set yourself up for year-end when your accountant comes in and they go towards breakfast. All right. So I’m really sorry guys, but we’re going to have to charge you extra for this, to fix up the last 12 months. But knowing that we’re also three months down the line, you’ve got three months to catch up on too, as well. So you can really blow your costs out, like blow your compliance costs just by doing it yourself.

Blake Jenkins (8m 17s):
For the sake of savings, you know, 2000 bucks a year on a bookkeeper, you might be paying 4,000 in accounting fees. So you just kind of tip the scales the other direction really quickly, and you’ve shot yourself in the foot time. So, you know, the time it takes you to the books, it can be really time-intensive. So you can be stuck there going on. Last thing we’re gonna do on a Friday night at 7:00 PM is going to reconcile my books. And every time you’ve been on a long shoot, you just got to stuff it, whatever. Okay. And then, you know, you think it’s so good, but then you go back and it’s not reconciled correctly. You’re creating dramas down the line.

Den Lennie (8m 58s):
One of the things I’m very big on in my coaching businesses is stay in your lane, you know, find out what you are, absolutely brilliant app and do that and outsource everything else. And the second part of that is you, you are, you know, with, so much automation and online tools available and ability to run businesses from home that can perform on a world stage. So you can increase your profit margin quite substantially, but, but you need to have measures in place to catch your blind spots because we’re all human and we all make mistakes. And I have found in the past, you know, when I’ve tried to do things myself, I just make mistakes and they can be costly mistakes.

Den Lennie (9m 44s):
Exactly what you were saying. You, you, you think that you can claim dinner and drinks, but actual fact they’re not allowed by any tax company. Any, any government tax organization does not allow entertainment. You have to understand if that was a business meeting, then that can be a lovable and it’s a different categorization. So I always feel that when, when you’re hiring a good bookkeeper, you’re not just paying for them to reconcile, you’re paying them for their advice. And I actually think that whatever you’re paying a bookkeeper should, should pay for itself, right? Because mistakes. Yeah.

Blake Jenkins (10m 23s):
Yeah. And it’s, it’s a keeping you accountable as well, which goes a long way because what you should, as you say, focus on what you good on that if you want to spend all your time in building business and, and bringing in new clients, or just really going hard on your shoots, then you don’t want to be dealing with on the side. But when you’ve got someone on the side, raising their hand saying, look, Dan, you’ve got 20 transactions here that need to be reconciled. Can you, can we talk about when, because they look, you know, entertain them while you’re doing, going out for drinks every day. Like these are claimable RK, well then maybe I’ll stop doing, paying for drinks for everyone all the time. And I’ll start doing less of that. So at least she know what’s going on and you know that now, now I can’t do that anymore.

Blake Jenkins (11m 6s):
Or if I do want it to always got to be a sometimes thing, because I can’t keep paying for everything is not claimable. The end. There was a hundred percent agree with you, stay and stay in your own lane. Like I wouldn’t go out and think that I could do the farming in our bathroom. Cause I mean, I’ll probably make a dog’s breakfast all day and then have to pay someone extra to come and fix it. You know?

Den Lennie (11m 26s):
And this is something we come across all the time in, in, in TV with TV, land and film and video land is that people who try and do things themselves always mess up. And yet there’s this kind of disconnect in the brain from creatives that go, oh, I’ll just do my own books. And, and I think the other thing about this is it, your numbers can tell a story about the health of your business. You know, your, your, your dashboard on zero. If you, if you do have a bookkeeper that, that touches base with you every month and tells you a story about how your business is performing, you can catch problems before they become problems. And also problems can be if you’re doing very well and making a lot of money, understanding how to plan for tax minimization ahead of time is very important.

Den Lennie (12m 14s):
And I think that if you reframe accountancy and bookkeeping as a consulting service, not just as simply a government compliance service, I think that shift can really have a habit, have a habit, an important factor, because, you know, I think you mentioned this before, but understanding how timing is important in a business. You know, when we’re talking about profit and loss, we’re talking about the last month for the last three months, we’re talking about tax planning. We’re talking about what might be due in eight months, but, but you want to be making businesses and just don’t you based on data, not on, oh, I just won this big project so we can buy a new camera and, and understand that you know how to manage those cashflow crunches.

Den Lennie (12m 59s):
And at certain periods, you’re going to have bigger amounts of cash flow going out the business to cover off taxation or liabilities there. Can you talk a bit about some of the more in-depth reasons, why having a good relationship with your bookkeeper and using them as a consultant is, is a really important aspect rather than perhaps just like getting someone to do it cheap. That’s I think there’s an inherent value and having a consulting approach with it, with the bookkeeper.

Blake Jenkins (13m 27s):
Yeah. And a hundred, a hundred percent. It’s you get what you pay for? Like, you look at those there’s that classic one that goes around. And so I want a drawing of a horse and I want to pay 50 bucks versus 500 bucks. And then down the middle one sucks squiggled. And one’s really amazing. So, you know, don’t be afraid of if it’s if you think it’s gonna, it’s looking like an expensive <inaudible>, but you’re gonna get the value. So it’s expensive because it’s good. And you’ll see that value straight away when you realize that, okay, everything’s up to date and I’m feeling a lot more confident and comfortable with those numbers. And when you say, you know, there’s someone who’s good at what they do, and they can tell you what you’re doing wrong. They can, they can give you assistance with your debtors are out of date.

Blake Jenkins (14m 10s):
You need to follow them up. Otherwise, you can’t pay your bills because I’ve seen the bank balance drops straight away. Like you can watch it go down, down and down, which then helps you plan for that big job that you got 25% in 25%, halfway in 50 at the end of it. It also does allow you knowing that the bookkeeper’s doing things really well is helping them stay up to date. And then you can go and talk to your accountant and have those strategic conversations. So when you think about, I mean, from us as an accounts point of view, not a good chunk of what we do is compliance because that has, that has to happen. But the really value-adding work that we do is making, helping you make those strategic decisions at that point in time.

Blake Jenkins (14m 54s):
So going in and saying, all right, so every, every year what we do for everyone is before the end of June, we take a look at their data and yet today, and work out tax strategies for that year. So that then, you know, before the end of the year, what your tax is going to be, so you can sit there and go, okay, well, I was planning for 50 grand tasks. We’re going to do all, they put all these strategies in place. We’re probably only going to apply 45 grand tax, but you can’t do that. If the data isn’t valid, if the validity of the daughter is so important because that tells a story of the whole business start to finish for the year. And that’s where those reports come in, come in handy. So when, you know, we can’t make those strategic decisions around taxing and business opportunities without the data to back it up <inaudible> and that’s when your keep, it can really come in and just, you know, if they take it by the horns and kind of hold you accountable and tell you what you’re doing wrong, tell you what you’re doing.

Blake Jenkins (15m 50s):
Right. I know I can be kind of hard to hear someone to tell you what you say, what you’re doing, and you’re in your own business, but is incredibly important to leverage the other people that you know, or that you employed for services, because they’re going to help you make a better and more strong business by the end of the day,

Den Lennie (16m 8s):
I think as well, you know, having, having a great relationship, I think a lot of, a lot of businesses just see their bookkeeper bookkeepers, someone who just to just balances the books each month, and then the accountant, someone they speak to once a year, I actually have a meeting with my cabinet every single month for a half an hour. And we review the previous month and we look at what’s been happening and we look at percentages of profit percentages of turnover, what our tax rate is. And he says to me, okay, this is what you’ve got to play with. If you want to buy an investment property this year, we can do it. If we keep going like this. And, and that advice is massive because, you know, we’re looking to, to buy a, like a camper van at the minute.

Den Lennie (16m 52s):
And, and we use, we had one before and we used it for business a lot at the time. And so we bought it through the business, but I know that before I made that purchase, I’ll simply go to the accountant and say, okay, here’s what we’re planning to do. What do you recommend is the best way to do this? And because we speak every month, he will give me advice based on that. And presumably that’s, that’s what you guys do as well. Like for your clients. If someone needs to have a conversation about an asset purchase, you’d much rather they got in touch because you’re going to factor in all of the different elements on you.

Blake Jenkins (17m 24s):
<inaudible>, I mean, there’s nothing worse than getting to the end of the year and having those conversations 12 months after it’s happened and you go, whoa, this just looks way off, you know, like you want to be on the front foot. So, you know, knowing that you can actually, what, what your benefits are, and then it helps you make your benefits, any pitfalls on any decision you’re looking to make. Cause you know, it’s, it’s easy to have these ideas and go, this is what I wanted to, but then I guess when you go to a third party, they’re then going to help you, not out the other bits and pieces that you might not have thought about it, like, well, is there proper use of that campus then? What’s how are we going to keep it for what’s the interest rate on that loan?

Blake Jenkins (18m 5s):
And what’s your cash flow, right. Looking at that point. And what’s your tax outcome of the whole thing. These are the questions that you might not think about the point in time, but you can work through it with someone as, almost as a sounding board, and then come through with that. Okay. Maybe I wait six months and see where I land up for that six months, or maybe we’re good to go now. So let’s, let’s do it. But yeah, having that, that pool, I mean, I love it when people actually call me throughout the year, rather than once a year, because that way we know where we’re at that point in time and we’re planning for the next 12 months. So yeah, it’s, your accountant should be able to do that for you. If they’re not, it’s probably time to stuff. Cause keep for someone who is going to give you that support.

Den Lennie (18m 46s):
Cause numbers tell a story don’t they? And we will always got to consider as well that, you know, the tax office, the ATO here in Australia or the inland revenue in, in, in, in the UK or the IRS in the US like they are individual human beings who are assessing. If, if they’re going to do an investigation, which can happen completely randomly, they’re going to sit down. And I remember we, we, and our business in the UK, when we first started, we had a VAT inspection, which is quite common because you’re claiming two years of expenses prior to, to being GM equivalent, GST registered. And I remember having this GST audit and being completely cool with it.

Den Lennie (19m 30s):
Cause the guy came to our house and he was just a human being like us. And he’s like, I can’t take a cup of tea of you, but I can have a glass of water, but he helped us understand where a bookkeeper had actually made a couple of mistakes, but he also showed us where we could claim additional income. And I think the thing that’s really important to remember is that the ATO or the IRS or the inland revenue, yes, these are government organizations, but when it comes to an investigation or an audit, it’s you against another human being, who’s going to sit across the table and go, okay, this can provide them. I know you’ve got that as a production vehicle, but you and I both know that that’s not a hundred percent business use. So if you see, while 90% business use, you still got to kind of back that up.

Den Lennie (20m 14s):
If you say, look, 50% of his business use 50% of his personal use, that is a more plausible and believable aspect. Especially if you have another vehicle for business. In my case, I can always back it up by showing content I’ve created as a result of being in that van. And we did that with the previous van and we drove around Australia minute podcast. So it’s easy to justify, but I think it’s, it is that important. Like, you know, certain industries have certain benchmarks and if you are making a hundred grand a year, but you’re financing two vehicles and a camera kit, and you’re running at a loss, it does, that’s going to flag up for the eighth year.

Den Lennie (20m 55s):
Wasn’t it? I mean, you have to be human, but you have to be realistic about it

Blake Jenkins (20m 60s):
A hundred percent. And as you say, when you get in those situations where you need to talk to the ATO, for example, and they may be reviewing your claims and reviewing your chair’s tape, there’s a level of discretion around it. And the way that every business runs differently from the other one. So even though you might get a flag on something, it doesn’t mean you can’t claim it there’s the classic one is the tax returns, like give you a big flag because they automatically match thing and say, you’re, you’re overclaiming for your industry. But as long as they would shoot them in and it’s been it’s fun. But then also when you get in that situation where you have the audit, then you have those conversations and they, they tend to be understanding. I like to think as the ACO is not sitting there to catch everyone out there, sitting there to administer the law.

Blake Jenkins (21m 44s):
Then if you potentially doing things to avoid paying tax outside the realms of the war, or claiming too much JST or doing dodgy stuff, then yeah, they’re going to throw the book at you and what organization, isn’t it for the most of them, they’re there to administer the situation. And they’re pretty understanding. There’s not an audit said, I think through the pretty understanding. But, but yeah. So in terms of, in terms of when you call your book, keep doing it, then at least, you know, that when that Donna does come to the review, you’ve got that level of confidence competence there that, you know, if there are mistakes, are they material mistakes? Probably not going to make a massive difference to the outcome another day, probably not.

Blake Jenkins (22m 28s):
But at least you’ve got a level of confidence that you’ve got data backed up by source documents instantaneously. When the question gets asked and it’s done and dusted within a month, now you can forget about it and move on.

Den Lennie (22m 41s):
I agree. And we had that. We had an audit during the cashflow boost here. And because the, and the auditor just rang me up and said, I’m just, I’ve got a couple of questions about this. And I said, here’s my candidates. You can talk to them. And, and they just, you know, you’ve got taxation rules are ambiguous at best, and you’ve got the way an accountant and therapist, the rules, the way the client tap is the rules and the way the ATU and tap of the rules. And when it comes to an audit situation, because I’ve been through a couple now, but in different countries and they never freaked me out because I know I’m a hundred percent squeaky clean and everything I claim, I legitimately believe I can evidence.

Den Lennie (23m 22s):
And in both situations that I’ve had audits to go through, I’ve been able to justify an evidence. My, my reasoning for coming to the decision and what I find to be very interesting is that there isn’t necessarily a right or wrong. There’s two parties interpreted, interpreting a rule. And when an audit situation occurs, there may be some dispute. And at that point, it’s a question of two individuals are with a third party being the accountancy firm, negotiating on what they believe is fair and reasonable in your experience of doing I’m sure audits for clients. What has had bought has been your experience in, in that overall sense of like, you know, how that runs

Blake Jenkins (24m 5s):
Realistically, it’s pretty, pretty smooth. A lot of the time it’s conversations, it’s conversations back and forth between the client and the ATO and just substantiating documentation. And if it’s, if there’s, if it is reasonable, like it is more often than not acceptable. There may be, you know, unreasonable claims out there. And in which case we would, from our point of view, we would let the client know that this is not something that’s going to go through. You brought issues here, you should pay the tax. So we’d never go down road, down the line to go on there, see how far we can push the ATI, right? So you go down the line that we’ve got these set of roles that we need to work within.

Blake Jenkins (24m 47s):
A lot of it is open to interpretation. I mean, section eight dash one is literally the most interpreted section of the income tax act because it says anything and connected to businesses claim, unless it’s excluded, but anyone can say anything is claimable, but, but that’s the thing. Then there’s other subfolders and sub-cases and some things that come into it. So it becomes incredibly complex process. But when you start talking with that other person on the, on the line, as long as you can reasonably substantiate things, you know, you’ll come to an outcome and that more often than not, unless you’ve done something completely dodgy, there’s no penalties in pilot pose. It’s just an adjustment to your tax.

Den Lennie (25m 27s):
Yeah. And I think we talked about this in the last episode that, you know, pink tax is not a bad thing. In fact, if your business is healthy, you, you, you, it pays you to show it taxable profit because then the eight years getting some money and you’re paying your contribution to society, but it actually allows for, but the more profit you make weirdly, the more I don’t want to elaborate is the wrong word. But the more you can claim because you’re proportionately revenue and profit is proportionate for your industry. And I think especially if you are more profitable or grow revenue and profit is higher than the norm for the industry that your business catchphrases and you don’t really attract attention because the ATO is getting the tax money.

Den Lennie (26m 15s):
And all they’re looking to make sure is, is this compliance?

Blake Jenkins (26m 19s):
Yeah, exactly, exactly. A hundred percent agree. And then it’s, I, you know, making, making profit and paying taxes is, as you say, isn’t the end of the world. It’s a good thing. But the more that you can do, the more money you make, the more opportunities I guess, arise for you. The more you try to squeeze that profit down, just for the sake of not paying tax, the more issues you can run into and planning problems down the track and growth opportunity, which is lost because you basically squeezed everything so tight that you’ve put your head up above the sand and said, Hey, look at me, ATO. And you’ve also spent way too much money on goods that you probably may not need, and then hindering your cash flights to other projects.

Blake Jenkins (27m 4s):
And then you’ve just squeezed your tax planning opportunity as well, because we can’t move around from this point because we’re stuck at a low-profit area and you might not be getting the value out of that structure you’re currently in.

Den Lennie (27m 16s):
Yeah. You know, it’s funny. I remember the a might be unpopular for saying this, but I actually think the taxation system is very fair for business owners. I think there is an enormous amount of scope to claim legitimate expenses that, that, that, that, that helps you run a great business and have a great lifestyle as a result of it. And that, I don’t think you need to do anything dodgy. Like it, it does, it doesn’t make any sense because you can legitimately claim, as you said, section eight dash one, you can claim anything that can be justified as related to your business. And so, as long as you’re making the money, I found personally that there’s never been an issue and the businesses I worked with at the same, it’s, it’s good to pay tax.

Den Lennie (27m 59s):
I think that’s the essence of this, this, this, this session isn’t, it is actually. Yeah.

Blake Jenkins (28m 2s):
Would you have, which, which is a weird thing to say as an accountant, that’s at the end of the day if you structured everything correctly and you’re doing good stuff in terms of tax minimization, but you’re not just going crazy. If you’re paying taxes and you’re doing everything as best, the right way you can, and as structured the best you can, then if you’re paying taxes even great with that much money when I can run.

Den Lennie (28m 28s):
And I think just, you know, make sure you’ve got a good accountant and bookkeeper in your corner because it is worth its weight in gold. So Blake, if someone’s listening to this and the lake, what you’re saying, is that a way they can get in touch with you to kind of have a chat if they want to find out more about you guys?

Blake Jenkins (28m 44s):
Yeah, yeah. For sure. Like if anyone wants to reach out and have a chat and, you know, might be from anything from bookkeeping ideas or, you know, any specific advice, can we, can you take a look at my last year’s return and see what it looks like? You can just go onto our website, which is just kenoutloud.com.au or you can flick me an email, which is [email protected]. And we can have chat

Den Lennie (29m 6s):
Epic Blake. I look forward to seeing you again on the shore next month.

Blake Jenkins (29m 11s):
Awesome. Thanks for having me, Den. Appreciate it.

Den Lennie (29m 13s):
Hey guys. Thanks for watching. I hope you got a huge amount of value from that episode. If you’re looking for additional support or resources to support your business journey, then head over to denlennie.com, where you can get a whole heap of other resources, free downloads and access all the other episodes in the series. Be sure to subscribe and I’ll see you next time.