Why cooking the books isn’t such a great idea

Ignore this tale at your peril – Cooking the books could kill your business

Recently in Geelong another new restaurant closed. This new restaurant had been going for two years and in its first two months was very well received and very successful.

The owners knew that although one was good as a chef and the other was good with the front of house and customers, neither of them were good at the bookkeeping.

From day one the front of house manager started paying staff “off the books”, because he didn’t know how to do payroll. What this meant was that every time he had to declare income he was declaring a very high income because he could not deduct his largest expense, his staff.

When bills arrived, he would only partially pay every bill, with the idea that he would save a little bit of money on each bill in case he needed some for the next bill. What this meant was that he never fully paid any bill.

And herein lies the problem…

When it came time to do his BAS statement he was unable to claim his GST on partially paid bills and as such was not getting a very good BAS return at all. He had good income (too good in fact) but he was unable to claim the GST on his expenses.

Within a few months it became very clear that he had to start listening to what his bookkeeper was saying, particularly to do his payroll properly and fully pay each invoice so that he could claim his staff expenses and claim his GST return properly.

Within the first 12 months we calculated that this front of house manager cost his business over $10 000 in deductions and because the books weren’t able to be correctly completed, the bookkeeper ended up spending a great deal of time just to reconcile the partially paid invoices. Effectively every invoice had to be worked on at least twice, some even more.

To make things even worse, he continued to pay suppliers in cash. The outcome of paying cash for his produce was that he couldn’t claim a deduction for these supplies, again making his income seem higher, and increasing his GST bill.

He sometimes paid personal expenses from his business account and business expenses from his personal account. The issue of using his personal account for business expenses was that to accurately capture his deductions his bookkeeper needed to go through two bank accounts, not just one.

By doing personal expenses in the business account, it meant that the bookkeeper had to continue to charge these expenses to his personal income which also meant that there was a double handling of his affairs.

The saddest part of this story is that all along this business had an extremely well-qualified bookkeeper helping them. The problem was that the front of house manager did not fully hand over the responsibility for the bookkeeping to a person with adequate skill and experience.

It is quite common when people start a small business that they either ignore the bookkeeping or they hand the bookkeeping to somebody without appropriate expertise.

In the case of this restaurant, it is very clear that if they just had listened to their bookkeeper they would’ve had better cash flow and would have been able to pay invoices properly, record them accurately, disclose them to the tax office, and receive the full returns they were entitled to.

In many cases it is the spouse of the business person that gets thrown into the deep end of bookkeeping. Often they do not call for help until they are almost drowning.

Many times new systems can be created, backward reconciliations can be done and negotiations with the tax department can be conducted by qualified BAS agents, but not always.

If you are starting a new business or managing the bookkeeping for someone and you know that you could use some support, the sooner you call out for that support, the better.

Recently the expert bookkeeper that was sent to help that restaurant called us to say the restaurant was for sale. Sadly even when the business was for sale the poor bookkeeping and incomplete paper trail was going to cost this business a lot of money because the person buying the business was not going to see the full strength of what begun as something wonderful.

It is important to mention that after six months of trying to assist this business, we were told that the bookkeeping should not be taking so long and that we should be getting him better returns. When we explained why the systems were not working he was not prepared to change so we parted ways.

It seems the saying that “you can’t help someone who is not prepared to help himself” is true.

Are you concerned that you too may be playing with “ATO Fire”?

Even if you’re just a little concerned, we encourage you to contact us immediately to see whether you’re on the road to cashflow success or business death by a 1000 cuts.

Give us a call today – we are here to help!