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18FUNDAMENTALS OF FINANCIALSKPMG ENTERPRISE
Michael Hine, Partner in Charge, Tasmania
Fleur Telford, Director – Technology Lead
Kaajal Prasad, Director – Tax & Advisory Services
Aristidis Semertzidis, Associate Director – Digital Assets
Whether we like it or not, the numbers really do tell the story. Therefore, it is
important that you count all your beans and balance your books diligently.
This chapter will provide you with the fundamentals of the following topics:
• record keeping
• budgets
• financial statements and what the Balance Sheet and Statement of Income
actually tell you
• how to decide if you need an external advisor
• whether or not you need an audit
• what to consider when evaluating technology options
• risk management as part of your strategic plan
• considerations and obligations when taking on employees.
RECORD KEEPINGThe fundamentals of good accounting and tax compliance begin with meticulous
record keeping. In Australia, the three types of record-keeping requirements are:
• Australian Taxation Office (ATO): Records must be maintained for a minimum of
five years from the date after the completion of the transaction or acts to which
they relate.
• Australian Securities & Investments Commission (ASIC): Companies must maintain
financial records for at least seven years.
• Corporations law: All companies operating in Australia must have a registered office
in Australia and must set up and maintain a register of members in Australia.
The record-keeping requirements that apply to your business will be partly dependent
on the type of trading structure you implement. For example, a trading discretionary
trust is not subject to the record-keeping requirements of ASIC. However, all operating
businesses, regardless of their trading structure, are subject to the ATO’s requirements.
It is important to remember that the ultimate responsibility for maintaining records is
with the taxpayer, whether or not you have an external accountant or tax agent.
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For completeness, large businesses and some
medium enterprises may be required to prepare,
and have audited, a set of General Purpose
Financial Statements (GPFS), particularly if they
are subject to the requirements of corporations’
law and have several stakeholders who are
reliant on them. On the other hand, SPFS are
prepared for the private business owners only,
and there are no other statutory obligations to
present these documents to other parties.
BALANCE SHEETThe Balance Sheet provides a snapshot of the
financial health, or other circumstances, of a
business at any given moment in time. In very
basic terms, it lists the following:
• The assets that the business owns: These
include bank account balances, the value of
inventory, amounts receivable from customers
and plant, equipment and motor vehicles.
• The liabilities that the business owes: These
include amounts due to suppliers, loans due
to banks and other third parties, employee-
related payables and taxes payable.
• The equity, or net worth, in the business: This
usually consists of retained profits, capital
contributions and share capital, and it should
be equal to the business’s assets less its
liabilities.
STATEMENT OF INCOMEThe Statement of Income (formally known as
the Profit & Loss) is a summary of the business’s
income and expenditure over a specified time. It
is a key indicator of the financial performance of
the business—is the business making a profit?
Depending on the type of business you are
running (e.g., retail, manufacturing, service,
wholesale), and the structure of your business
(e.g., company, trust, unit trust, sole trader,
partnership), the Statement of Income will follow a
generally accepted format. Regardless of the type
of structure you are running your business in, the
Statement of Income will show you the income
you have earned, expenses directly incurred in
earning this income, indirect expenses incurred in
earning this income and your profit before tax.
BUDGETSMost new business owners are aware of the
importance/necessity of preparing a business
plan to capture what becomes their strategic
goals and objectives. A financial budget
helps to determine whether the activities and
transactions required on a day-to-day basis
fit in with the overall goals and objectives that
the business owner sets out to achieve, and
whether the expected levels of activity can be
achieved and sustained within certain cash and
other constraints. A good, useful budget usually
comprises the following elements:
• links to strategic goals as set out in the
business plan or strategy document
• expected timelines, particularly in relation to
achievement of specific goals and obligations
• regular comparisons of budgeted figures
against actual figures
• identification of key drivers to enable
reforecasting if actual figures do not quite
agree to budgeted tolerance levels.
FINANCIAL STATEMENTSMost small to medium enterprises (SMEs) are
not required to prepare and/or submit a formal
set of financial statements, generally called
Special Purpose Financial Statements (SPFS),
unless they are required by third parties, such as
banks and other lenders.
However, many business owners seek comfort
in obtaining a set of SPFS for their own
purposes, as a succinct report on the financial
performance and position of their business
activities for a particular period (usually at the
end of a financial year).
SPFS are subject to generally accepted
accounting principles (GAAP) and the Australian
Accounting Standards, to ensure consistent
and standardised methods for recording and
reporting transactions and balances. SPFS
usually consist of a Balance Sheet (or Statement
of Financial Position), a Statement of Income
(or Statement of Financial Performance), and
Notes to the SPFS to provide further details of
balances, where necessary.
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• identification of opportunities that may
improve your financial performance and/or
position
• access to a pool of advisors and experts,
including lawyers, bankers, insurance brokers,
and so on
• thought leadership and insights in your
industry.
In reality, many SME owners juggle the business
operations and balancing the books themselves.
Appointment of the right team of advisors helps
to minimise the distractions to the owner and the
business whilst obtaining the most appropriate
advice in an efficient, timely manner.
DO I NEED AN AUDIT?For most small to medium businesses, the
answer to this question is usually ‘no’.
Currently, three circumstances generally require
an audit of financial statements:
1. An audit pursuant to ASIC—for ‘large’
corporations: A corporation (being a company,
along with any other entities it controls) is
large if it meets two of the following criteria
in any given financial year: (1) consolidated
revenue of $25 million or more, (2)
consolidated gross assets of $12.5 million or
more, and/or (3) 50 or more employees. Many
large, privately owned Australian businesses
may be eligible for relief from a statutory audit
if they meet certain criteria in accordance with
corporations’ law.
2. An audit required by the ATO for specific
reporting requirements: Currently, there
are no audit requirements for small to
medium entities. Large multinational groups
of entities, called Significant Global Entities,
are required to submit audited GPFS.
3. An audit required by third parties: Third
parties include banks and third-party lenders,
potential investors who may require an audit
and/or due diligence as well as potential
purchasers if you are looking to sell. Such
audits are usually limited in scope and are not
subject to full testing of balances, as an ASIC
audit would entail.
STATEMENT OF CASH FLOWSWhilst not part of a standard set of financial
statements, the Statement of Cash Flows
provides valuable information in relation to your
net cash inflows and outflows from operating,
investing and financing activities. The
Statement of Cash Flows helps to reconcile the
profit (or loss) that was made over a specified
time with the funding activities that the
business undertook over that same period. In
essence, the Statement of Cash Flows bridges
the gap between profit (per the Statement of
Income) and the bank account balance (per the
Balance Sheet).
IN-HOUSE ACCOUNTANT VERSUS EXTERNAL ADVISORNo strict rules indicate when you should employ
the services of an external advisor. Most SMEs
will at least have a tax agent in place to assist
with the obligations associated with the ATO—
such as income tax returns, activity statements
for goods and services tax (GST), pay as you
go (PAYG) withholding and PAYG instalments,
and tax-related registrations. Tax agents also
provide the added benefit of being granted
concessional lodgment and payment dates for
their clients.
For most small businesses, the combination of a
bookkeeper and a tax agent is usually sufficient
when the business is in its infancy. Most modern,
cloud-based accounting systems allow you to
generate your own financial statements with a
few clicks of your mouse, and these statements
are usually sufficient to provide to your tax
agent for preparation of your tax return and
activity statements.
The addition of an accountant/advisor to your
pool of professional advisors may provide the
following added benefits:
• guidance in relation to the commercial
aspects of your business as a whole,
particularly in relation to your intentions and
objectives for that business
• review of your accounting system to ensure
optimal set-up and use
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TECHNOLOGYThe evolution of technology, particularly mobile
and cloud technology, has greatly affected the
way that businesses of all sizes are run. Business
activities are being undertaken at any time, in
real time, with a significant increase in reach and
scale, including globally.
In the world of business finances and accounting
and tax compliance, this evolution has meant
that traditional accounting and tax software
providers have had to invest significantly
in modernising their products to meet the
demands of the instantaneous transaction
capability that consumers expect. However,
using a cloud accounting package is only the
tip of the iceberg when it comes to modern
business technology practices.
RUNNING YOUR BUSINESS ‘IN THE CLOUD’Cloud accounting systems, mobile phone apps
and integration are fast becoming the norm
for SMEs. Cloud accounting systems provide
real-time results of financial performance and
position by relying on constant refreshing of
live data feeds that almost instantaneously
update your accounting ledger. Reports can be
generated with a few clicks of the mouse, and all
of this can be done by the technology while you
focus on running your business.
Mobile phone apps only make things easier—your
accounting system and all the reports it can
generate are always by your side. It is not
uncommon these days to approve invoices
and payments whilst sitting at the beach sipping
a cocktail.
However, a cloud accounting package on its own
does not maximise efficiency, optimise business
performance or minimise the time you spend
‘on the books’. Several other systems or apps,
when properly integrated with your accounting
system, can drive efficiencies and provide you
with valuable insights:
• Point of sale systems: Instantly update the
sales, cost of sales and margins associated
with each transaction.
• Inventory management systems: Instantly
track and update stock that is associated
with a sale or purchase and even
automatically reorder a stock item for
you if it is running low.
• Timesheet/rostering systems: Ensure that
your payroll is correct, provide an audit trail
for employees’ working hours and get help
in allocating sufficient staff based on
expected demand.
• Key performance indicators reporting tools:
Provide benchmark and traffic-light reporting
to show how you are tracking against budget.
• Customer Relationship Management
systems: Manage reward and discount
systems, customer and supplier contacts and
coordinate marketing and communications
activities.
• Marketing and branding systems: Create
branded flyers, brochures, invitations and
the like by using professional graphic
design systems.
Many companies provide cloud technology
systems, and choosing the most appropriate
systems for your business requires investing
time up-front and seeking the right advice.
The key to getting the most out of the tools
is to ensure that you speak with your advisor
about the most appropriate options for your
business and then ensure that these options are
integrated properly as part of your business’s
technology ecosystem.
RISK MANAGEMENTRisk management is a strategic area of business
that is often overlooked or not formalised by
SME owners. Risk management should form a
critical part of your strategic plan because, in
its most basic form, it sets the foundation for
the extent to which you will push to make your
business successful.
The core areas of risk management are:
• Commercial risk
° For example, market position, competitor
analysis, adaptability to changes in market
conditions.
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• Financial risk
° For example, borrowing capacity, ‘give up’
threshold, performance against budget.
• Information technology (IT) risk
° For example, adaptability to technological
advancements, data security, efficiency
measures, choosing the right systems to aid
delivery.
• Operational risk
° For example, understanding customer
base and reliance levels, market and client
awareness, staff skill level, engaged and
appropriately rewarded staff.
• Reputation risk
° For example, brand association, marketing
activities, client service assessments.
These areas of risk management should be
aligned with the strategic intent for your
business and should reflect the risks that come
towards the strategy, the risks that come from
the strategy and the risks of the strategy itself.
Many business owners fail to consider that the
strategy itself may not actually lead the business
to its desired position.
Risk management is a fluid and ongoing process
and requires all owners and employees of the
business to be aligned in their approach to
achieving the strategy.
CONSIDERATIONS AND OBLIGATIONS WHEN TAKING ON EMPLOYEESHiring or contracting people to work on
your idea and business is one of the most
responsibility-laden steps a business can
take, and it is important to be aware of all the
statutory obligations. The following section is a
brief summary of what you need to be aware of
and where to find more detailed information.
Most of the following steps are not optional.
All statutory obligations must be fulfilled.
Under Australian law, directors of the company
employing people are held personally
responsible for PAYG withholding amounts and
the superannuation guarantee charge (SGC).
PAY AS YOU GO WITHHOLDINGDuring set-up of a business, it is necessary to
register for PAYG withholding with the ATO
if you are planning to either pay yourself or
others in the operation of the business. PAYG
withholding enables employees to meet their
tax obligations at the end of the financial year,
and the ATO is notified of their employment in
your business through the lodgment of tax file
number declaration forms.
If the business is utilising the services of
contractors, it is important to determine if they
are in fact contractors under tax legislation. The
ATO has a decision tool to assist with this task.
A business is also obligated to withhold PAYG
payments from businesses that do not quote
their Australian Business Number, and payments
made to directors of the company. (Seek
professional advice if you are a director making
payments to yourself or other directors, to
ascertain your obligations in this regard.)
SUPERANNUATION GUARANTEE CHARGEThe SGC is currently a payment of 9.5 percent of
the gross amount of the salary or wages paid to
each eligible employee that is paid in addition to
it and is paid into a superannuation fund of the
employee’s choosing. It is important to set up a
default fund for employees who do not have a
fund; there is a range of low-fee industry funds
that are suitable.
It is necessary to use a payroll system that has
‘SuperStream’ functionality because it is the
way businesses must pay employee SGC to
super funds. SuperStream transmits money
and information consistently across the super
system between employers, super funds, service
providers and the ATO.
PAYROLL TAXPayroll tax is a state-based tax and is only
required once a payroll has reached a certain
level of gross payments (salaries, wages and
superannuation payments combined). The
threshold varies across Australia: the lowest
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them shares in the company to share in the
growth their work is contributing to. An ESS
can also offer shares for sale to eligible staff for
either cash or through a loan from the company.
This is an alternative way to raise small amounts
of capital that has the double benefit of creating
greater loyalty. Speak to your advisor regarding
both ESSs and salary packaging to ensure they
are set up correctly.
HUMAN RESOURCES POLICIESTo be sure you are complying with
employment-related legislation as outlined
in the Fair Work Act 2009 and subsequent
regulations and amendments, it is advisable
to acquire a human resources policy manual
from a reputable source and adapt it to
your business. It will cover both legislative
requirements as well as general policies
(such as a code of conduct and an IT usage
policy) that are important for the harmonious
operation of your business. The manual
should be made available to employees when
they commence and be referred to in times
of dispute. Having a manual is especially
important in regards to the Small Business
Fair Dismissal Code to ensure limiting the
risk of unlawful dismissal when terminating
employees.
Overall, it is important to remember that hiring
staff comes with a high level of administration
and legislative responsibility that cannot be
neglected. The obligations to the ATO are
bound by the company director’s personal
responsibility, and it is important to notify the
ATO early if the company is suffering difficulties
in meeting its PAYG or SGC obligations. The ATO
is usually willing to arrange payment plans if you
are proactive about your situation. Directors of
the company could be subject to large fines if
you are not.
threshold is $600,000 in South Australia,
and the highest is $2 million in the Australian
Capital Territory (ACT). If your business is not
geographically dependent and expects to have
a large number of employees, it is worth doing
the calculation regarding payroll tax because a
$3 million payroll (37 employees on an average
of $73,000) will cost the business $150,000 in
payroll tax in South Australia per year but only
$68,500 in the ACT.
INSURANCESWorkers’ compensation insurance is compulsory
and based on an estimation of the wages
your business expects to pay for the coming
12 months. The calculation for the premium is
based upon the risk category of the type of job
being performed and can become expensive
in some industry sectors. Two other insurances
required are public liability (protection against
financial risk due to negligence) and professional
indemnity (to cover the cost of litigation due to
breaches of contract or making an error in the
delivery of a service). If you sell, supply or deliver
goods, it is advisable to take out product liability
insurance as well to cover liability in the event
your products cause injury or death, property
damage or a recognised mental health injury.
SALARY PACKAGINGTo retain staff, you may wish to consider
offering salary packaging arrangements where
employees are able to sacrifice part of their
salary so that some items or services are able
to be paid from their pretax salary. Depending
upon your business, you may be able to offer the
salary packaging of computers, cars and, most
commonly, superannuation. Be sure to seek advice
on the fringe-benefit tax implications on the salary
packaging items you deem appropriate to offer.
EMPLOYEE SHARE SCHEMESEmployee Share Schemes (ESSs) are a good
mechanism for locking in key staff by offering
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KPMG
Tower Two, Collins Square
727 Collins Street
Melbourne VIC 3008
Australia
Tel: +61 3 9288 5555
Web: www.kpmg.com
Tower Three, International Towers Sydney,
300 Barangaroo Avenue,
Sydney NSW 2000
Tel: +61 2 9335 7000
Web: www.kpmg.com.au
MICHAEL HINEPartner in Charge, Tasmania, KPMG Enterprise
Email: [email protected]
Mr. Hine has more than 27 years of experience
in providing advice on income tax, capital
gains tax, goods and services tax and fringe
benefits tax to a large range of clients in
both the private and public sectors. He was
a member of the Commissioner of Taxation’s
Division 7A task group. With the advent of
cloud accounting, Mr. Hine has led KPMG’s
cloud accounting and business process
outsourcing approach, which allows him
to combine his technology, small-business
accounting, taxation and practical commercial
advice for a diverse client base. He has
developed tax-effective structures and has
provided taxation advice to a wide range of
sectors, both to the firm’s clients and on a
referral basis, covering income tax, goods and
services tax, fringe benefits tax and payroll
tax. Mr. Hine has managed Australian Taxation
Office and State Revenue Office audits and
investigations on behalf of clients. He also has
transitioned clients to both cloud accounting
platforms and to Business Process Outsourced
platforms and provided strong commercial
advice through a variety of business
acquisitions, disposals and restructures.
FLEUR TELFORDDirector – Technology Lead, KPMG Enterprise
Email: [email protected]
Ms. Telford is a specialist in the Professional
Services industry with 20 years of experience
in financial controlling, IT management and
operations management. She is currently the
Director for Technology for KPMG Enterprise
and is responsible for their 2020 Technology
Strategy plan, guiding the accounting
professionals through the automation,
robotics and artificial intelligence revolution
that is occurring within the financial services
industry. Ms. Telford has been a vocal advocate
for the shift of focus that needs to occur in
accounting services—away from the traditional
style processing of accounts and tax returns
to a more business advisory approach that
assists small to medium enterprises (SMEs)
to make the most of their day-to-day business
opportunities. She was an architect of Deloitte
Private Connect, the back-office transaction
outsourcing service offered by Deloitte, and
is responsible for the technology component
of KPMG Finance Hub, the KPMG competing
product to Connect. Ms. Telford is now working
on bringing a range of subscription service
products to the mid-market for KPMG.
KAAJAL PRASAD, CADirector – Tax & Advisory Services, KPMG
Enterprise
Email: [email protected]
Ms. Prasad is a Director in the KPMG Enterprise
Tax and Advisory team in Melbourne and an
accredited Chartered Accountant and Family
Business Adviser. She has over 10 years of
experience across Australia and New Zealand in
providing accounting, taxation and commercial
advisory services to privately owned
businesses and family groups. Ms. Prasad is well
experienced in advising on strategic planning,
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growth and exit strategies, commercialisation
of new businesses, franchising, mergers
and acquisitions, capital raising, structuring,
governance, financial modelling and forecasting,
management and statutory reporting, and tax
compliance and advisory. Amongst her client
portfolio are some well-known names, and her
client experience spans a multitude of industry
sectors covering startups, retail, wholesale and
distribution, agribusiness, investment portfolios
and family office.
ARISTIDIS SEMERTZIDISAssociate Director – Digital Assets, KPMG
Enterprise
Email: [email protected]
Mr. Semertzidis is Associate Director of Digital
Assets at KPMG Enterprise, working on KPMG
Finance Hub. Having grown up in a number of
family businesses, combined with over 10 years
of professional experience, he has witnessed
firsthand, the challenges that startups, SMEs
and family businesses face and experience
on a daily basis. As part of the KPMG Finance
Hub team, he and his team work to identify
and deliver convenient solutions for clients
who want, and need, to focus on growing
their businesses, whilst KPMG takes care of
the client’s financials—ensuring that business
owners get access to the best possible advice
to guide them through the business life cycle.
Utilising KPMG’s Digital Assets and market-
leading cloud technology, he ensures that
business owners have the right information at
their fingertips when making decisions that
affect their businesses.
