Bad debt – How to avoid it!

Posted on March 17, 2022 by Angus Jones

You gave your customer 30 days to pay, but now 60 days have passed without payment. Maybe there is a dispute. Are your cash reserves running dry because the invoices are not being paid? This guide will look at the importance of worrying about getting paid on time and how you can chase up and avoid bad debt.

Bad debt occurs when the payment of an invoice is estimated to be uncollectible. Bad debt is a contingency that must be accounted for by small businesses that extend credit terms to customers when they issue an invoice, as there is always a risk that payment will not be received.

WHY should I worry about unpaid invoices?

It does not matter if it is your best friend that has not paid you or it is a large corporation. If you cannot collect payment promptly, it will affect your cash flow and profitability, and your business will suffer. This situation is further compounded if you have already paid your costs associated with the invoice, such as materials of wages. Essentially you are lending money to your customer, and if you do not have the cash flow yourself, you may be paying interest on a bank overdraft/loan until this invoice is paid, further eating into your profits.

WHAT can I do to prevent bad debt?

When deciding to offer credit to customers, any action you can take upfront to reduce the chance of bad debt is a much simpler process than collecting money from someone who does not want to or cannot pay you.

To prevent bad debts and protect your business ideally you should:

Only send out goods or provide services after customers pay their bill
Provide simple and clear payment options
Invoice customers quickly and properly
Give discounts for paying on time or early
If you intend to provide credit you should research the customer:
- Do an ABN search https://abr.business.gov.au/
- Search ASIC Registers https://www.asic.gov.au/online-services/search-asics-registers/
- Do a credit check (try Equifax, Onedeck or creditorwatch) and ask the customer for references
- Create a business contract with clear terms and conditions using the help of legal advice
- Set up effective payment terms

Have a process to manage payments and debt recovery, a good accounting package will help with this:

Check contract terms to see when payments are due
Ensure you have the right contact details
Contact the customer in writing to request payment
Keep records of all customer correspondence
Set up regular payment reminders (some accounting packages will have an automated system for this)
Telephone the customer
Send a formal letter of demand

Most important is to create sensible limits on the credit you offer to your customers that they will be able to repay easily.

To prevent bad debts, a factoring company will buy your outstanding invoices from you for a reduced cost and then chase up the debt themselves. It is a fast way to get cash but at a high price as they take on the bad debt risk. (It is unlikely they will not just buy the bad ones)

HOW to deal with bad debt?

The first step is to understand the cause of the debt:

How long has it been outstanding?
How much is owed?
What is the invoice for?
Is the invoice disputed?
Is the debtor still trading?
How long have you been doing business together?
Does the debtor have a history of late payment, is this different to normal?
What credit agreement do you have with them and did they sign a Director’s Guarantee?

The sooner you take action to recover your overdue debt, the more likely you will recover your money.

If a customer has not paid you after various attempts, you must decide if the debt owed is worth the additional effort to collect it. For example, $100 is possibly not worth it, but $10,000 is. You must consider your time and cost to recover as well as the likelihood of the debtor paying.

The following avenues can help recover debt:

Debt collection agencies – will attempt to collect the debt on your behalf for a percentage of the debt owed.
Legal action – a lawyer can issue a lawyers’ letter of demand or start court proceedings. An online letter service is relatively cheap but going to court is not, however, the recovery costs can be added to the debt. Court proceedings will enforce an outcome and affect a debtor’s credit rating.
Small claims tribunal – provides mediation and a legally binding solution without having to involve lawyers and courts. Is good for resolving disputes. https://www.accc.gov.au/contact-us/other-helpful-agencies/small-claims-tribunals
Court – courts will decide on disputes where the amount owed is too high for a small claims tribunal. Consider using a lawyer if your case goes to courts as procedures are more formal and complicated.
Community legal centres – can assist with letter writing and filling out court forms https://clcs.org.au/
Small Business Commissioner or Ombudsman – advice on how to recover debts and subsidised or low-cost dispute resolution https://www.asbfeo.gov.au/disputesupport

As a small business, you can also take out Trade Credit Insurance which allows a business to insure themselves against bad debts.

As a business owner, you should consider some sort of provision (put money aside) for bad debts, and this is essentially self-insurance. From an accounting perspective, unpaid bad debt can be an allowable deduction as long as it was included as assessable income in the present or even a previous income year and that it is written off as “uncollectable” in the same year that a deduction is claimed.

HINTS

Unfortunately, some scammers ask your clients to pay your recent invoice into a new bank account, being the scammers’ account. Ensure your clients understand that you would not change your payment details, and in the unlikely event you did that, there would be a very clear and robust process in writing and over the phone.

If the business you are dealing with is in administration, liquidation or deregistered, they may not have the ability to pay you. Check whether a company is in liquidation or deregistered on ASIC Registers. https://asic.gov.au/online-services/search-asics-registers/

Let your customer know you plan to take legal action or use a debt collector. This may have an effect without the cost.

SUMMARY – fast action to recover debts

If you decide to offer credit to your customers, you can find yourself in a situation where a customer is refusing or cannot pay your invoice. This is known as bad debt. It is best to have a plan to avoid bad debt, but if it occurs, fast action brings the best results. Your best chance of recovery after your efforts have failed is via a small claims tribunal, using a debt collector or the services of a lawyer.

Work Health & Safety also know as OH&S

Posted on November 12, 2021 by Angus Jones

Prevention is better than a cure and although everyone thinks it will not happen to them, unfortunately, accidents happen! In Australia, small businesses have a duty of care for work health and safety. This guide will help you understand how you can make your environment safer as well as what your legal requirements are to create a safe work environment.

Work Health and Safety (WHS) – sometimes called Occupational Health and Safety (OH&S) – involves the management of risks to the health and safety of everyone in your workplace. This includes the health and safety of anyone who works for you as well as your customers, visitors and suppliers.

WHY do I need to worry about Work Health and Safety?

If an employee or any type of visitor is injured while doing your business you will most likely be held liable for medical bills and lost wages. Unfortunately, some small businesses in Australia have lost their business because they did not take the proper precautions and have legislated insurance.

Benefits of having good WHS include:

staff retention
a reduction of injury and illness in the workplace
improved productivity and minimise disruptions
reduce your liability for injured workers

WHAT do I need to understand about WHS (OH&S)?

If you employ staff you need to take out workers’ compensation insurance. This insurance covers payments to workers for medical costs and rehabilitation expenses as well as lost wages if they are unable to work due to an injury or ill health. Workers compensation schemes are different by states and links for further details can be found further into this guide.

As a small business owner, you have an important role to play when it comes to championing safety. If you take the lead your employees will understand they should follow your safety procedures and raise safety issues.

You must put health and safety practices in place as soon as you start your business. Under Australian WHS laws, your business must ensure the health and safety of your workers and not put the health and safety of other people at risk. To do this you must:

provide a safe work environment
monitor the health of workers and conditions at the workplace
provide and maintain safe machinery and structures
provide safe ways of working
ensure safe use, handling and storage of machinery, structures and substances
provide and maintain adequate facilities
provide any information, training, instruction or supervision needed for safety
monitor the health of workers and conditions at the workplace

HOW do I manage Work Health & Safety Risks?

Identify hazards in your workplace – look for physical (such as machinery noise), material or substance (for example, poison) and work task (like heavy lifting) hazards that may harm people.
Assess risks – If an employee is exposed to one of these hazards how dangerous is it, can protection be added or controlled and should that hazard be fixed before work continues?
Control Risk – look to prevent hazards when designing the process and if one is created work to remove that hazard. The remaining risk may be minimised by using appropriate personal protective equipment and providing appropriate training and supervision.
Review controls – Schedule regular inspections to identify new hazards and ensure measures are being adopted. Don’t wait for an issue to occur.
Record and report safety issues- To begin with it identifies what is an issue and provides a record for any claims. You must keep records concerning certain hazards including:
1. energised electrical work
1. diving work
1. hazardous chemicals
1. plant
1. equipment

A link to each state WHS laws and regulation can be found at the bottom of the page.

The WHS framework includes:

Act – outlines your broad responsibilities.
Regulations – set out specific requirements for hazards and risks, such as noise, machinery, and manual handling.
Codes of practice – provide practical information on how you can meet the requirements in the Act and Regulations.
Regulating Agency (regulator) – administers WHS laws, inspects workplaces, provides advice, and enforces the laws.

HINTS

It may be worth getting independent advice on the WHS requirements for your business.

Emergency plans and first aid – Part of WHS is being ready to respond if an accident or emergency happens. Do you have a first aid kit and someone trained to use it? If you evacuate do you know where you will safely assemble?

Extreme weather, including cold, extreme heat, hail or strong winds may affect your business. You must keep your workers safe and ensure you’re aware of the signs of heat-related illness and how to manage the risks.

You still have WHS responsibilities at a work function. Your staff may be letting their hair down but ensure you have internal policies around acceptable behaviour, bullying and harassment in the workplace, and sexual harassment. Any alcohol should be served legally and responsibly.

Safe Work video on how small businesses can comply with WHS requirements

SafeWork NSW provides a helpful assessment tool https://www.safework.nsw.gov.au/easywhs-beta

SUMMARY – Preventative health & safety for small business

Work Health and Safety is an important consideration for your workplace including your requirement to have workers compensation insurance for your employees.

A safe environment encourages productive, happy staff. Creating policies and plans in the event of an occurrence is a precaution that, although extra work, will help prevent and deal with any risk that may occur. Each state has its own WHS laws and regulation.

Australian Capital Territory

Act – Work Health and Safety Act 2011 (ACT)

Regulation – WHS Regulation 2011 (ACT)

Codes – ACT Codes of Practice

Regulator – WorkSafe ACT

New South Wales

Act – Work Health and Safety Act 2011 (NSW)

Regulation – WHS Regulation 2017 (NSW)

Codes – NSW Codes of Practice

Regulator – Sa f eWork NSW

Northern Territory

Act – Work Health and Safety (National Uniform Legislation) Act 2011 (NT)

Regulation – WHS (National Uniform Legislation) Regulations (NT)

Codes – NT Codes of Practice

Regulator – NT WorkSafe

Queensland

Act – Work Health and Safety Act 2011 (Qld)

Regulation – WHS Regulation 2011 (Qld)

Codes – Qld Codes of Practice

Regulator – Workplace Health and Safety Queensland

South Australia

Act – Work Health and Safety Act 2012 (SA)

Regulation – WHS Regulations 2012 (SA)

Codes – SA Codes of Practice

Regulator – SafeWork SA

Tasmania

Act – Work Health and Safety Act 2012 (Tas)

Regulation – WHS Regulations 2012 (Tas)

Codes – Tas Codes of Practice

Regulator – WorkSafe Tasmania

Victoria

Act – Occupational Health and Safety Act 2004 (Vic)

Regulation – Occupational Health and Safety Regulations 2017 (Vic)

Codes – Vic Compliance Codes and codes of practice

Regulator – WorkSafe Victoria

Western Australia

Act – Occup a tional Safety and Health Act 1984 (WA)

Regulation – Occupat i onal Safety and Health Regulations 1996 (WA)

Codes – WA Codes of Practice

Regulator – WorkSafe WA

Commonwealth

The Commonwealth jurisdiction covers workers for the Commonwealth Government (for example, the public service and the Australian Defence Force) and businesses licensed to self-insure under the Comcare scheme.

Act – Work Health and Safety Act 2011 (Cwth)

Regulation – WHS Regulations 2011 (Cwth)

Codes – Commonwealth Codes of Practice

Regulator – Comcare

Budgeting for your future

Posted on April 22, 2021 by Angus Jones

As many small businesses look for ways to bounce back from the many financial pressures experienced during the global pandemic, it can be difficult to pinpoint exactly where to start. Thus budgeting for your future is important.

Whether business leaders like it or not, a budget will be the guiding force that helps them get back on their feet and make strides towards a financially fit future.

For those looking at the best place to start, here are five ways to map out a business budget you’ll actually stick to.

1. Tally your income sources

Where are your main sources of income coming from?

Start by looking at your sales figures, and then add any other sources of income for your business throughout the month.

Do you run any additional services alongside your main product or service offering? This can all add up when it comes to funds coming into your business.

No matter how many income sources you have, it’s essential to account for any and all income flowing into your business. Then tally all those sources to get a clear picture of your total monthly income.

You may also want to differentiate between recurring and one-off income in your accounting software. If you decide to take on any external funding down the track, this will demonstrate consistent revenue to potential investors.

2. Determine fixed costs

Once you’ve sorted out your streams of income, now it’s time to get a handle on your fixed costs.

Fixed costs are any expenses that remain the same from month to month. These include your rent or mortgage, any loan repayments, as well as operating overheads like recurring equipment leasing payments, licenses, or insurances.

Are there ways you can cut down on these fixed costs? Perhaps refinancing your property mortgage or negotiating a lower interest rate for your loan might be a solution? It’s usually worth doing your research into different, more cost-effective platforms, especially in a competitive market with interest rates at record lows. Even if you don’t feel like you have time to look at your loan, it is important to always revisit your options and do your research on new products and rates in the market. Currently, with interest rates at all-time lows, it is a great time to save a significant amount of money, so it is worth allocating time to assess the options available.

3. Calculate your variable expenses

At the end of each month, work out your variable expenses. These costs don’t come with a fixed price tag and can vary in price from month to month, such as electricity, phone bills, or water bills.

These costs can often fluctuate based on usage, so it’s a good idea to go through them with a fine-tooth comb to work out which expenses you need and what ones you can opt out of. Especially if your team only works from the office flexibly instead of full-time. Still, paying for that unused Spotify subscription for office beats?

Maybe the water cooler is no longer on duty, or the fax machine is out of commission? Do you really need to order that extra box of whiteboard markers and backup printer ink? One benefit of transitioning to remote or hybrid working arrangements is that you can cut out any unnecessary expenses that you’re not using regularly anymore.

4. Set up an emergency fund

As a business owner, you’ll know that accidents, issues or a once-in-a-lifetime pandemic can happen. Whether your computer system crashes, the toaster sparks a fire or a freak flood creates water damage, you need to be prepared for any unexpected costs.

Make sure you have some extra funds (around three months worth) tucked away for a rainy day, so you have peace of mind that you’re equipped to cover any surprise costs that come your way.

5. Evaluate your budget monthly, and stick to it

Once you’ve worked out a snapshot of your profit and loss, and you can determine what needs to be covered in your monthly budget, stick to the budget and track its success.

Health-check your budget at least once a month to ensure you have more revenue coming in than costs going out.

Are you actually maintaining your budget? Or blowing it? What expenses can you minimise? Do you have extra budget to play with? Do you really need another desk plant or novelty mug to get the job done? (spoiler: you don’t).

Again, for those businesses eventually looking to raise capital, demonstrating the ability to maintain a lean-burn rate is gold to investors.

In order to be profitable and accurately budget for the future, it’s important to make the necessary adjustments and be realistic with your financial picture.

6. Make your money work for you

As a business owner, you will always have expenses, it is part of running a company, but that doesn’t mean that it needs to be a dead cost for the business.

It is always a good idea to look at your options and think of ways to make your money work better for you.

Think about different ways to manage your cash flow. Always consider taking advantage of loyalty points and how you can use your business expenses to gain rewards through the loyalty programs on offer.

By Brodie Haupt, CEO and co-founder of digital lending and payments provider WLTH

For more tips on budgeting for the future, see Small Business Answers various guides here.

How to Invoice

Posted on March 31, 2021 by Angus Jones

As a small business owner, you need to keep track of how much money is coming in and how much money is going out. The collection and creation of invoices is a key way to achieve this. Thus you need to know how to invoice.

In this guide, we will look at why, in most cases, legally, you must provide invoices to your customers and how you go about creating one. We will also look at when and how you want to get paid.

An invoice is a time-imprinted business document that itemises and records a transaction between a seller and a buyer. If the goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available methods of payment.

WHY should I invoice my customers?

If your business turnover exceeds $75,000, you must register for and pay GST. See our guide on GST. When you make a sale of $82.50 or more, including GST, you must issue an invoice.

If your business has a turnover of less than $75,000, your customers may demand an invoice, and even if they don’t, it is simply good business practice. We have written a comprehensive guide on Record Keeping.

Legally you must keep a copy of your invoices for 5 years. This can be a paper copy or electronic. These copies will help you fill out your BAS.

If a customer requests an invoice, you must provide it in under 28 days.

WHAT terms should I offer my customers?

Before we look at the invoice itself, a very important decision needs to be made about whether you will offer your customers any credit. This is when you expect to get paid for the goods or services that you are providing. Options include:

Deposit – You require a percentage of the total upfront to start work
Cash on delivery – full payment is made at the time of delivery of the product
Payment on completion of work – full payment is made at the time of completing a service
Progress payments – a schedule of payments normally with milestones are set through the project
Credit terms – the customer is given a set number of days to pay
Discount for early payment – You offer an incentive or discount to pay an invoice early, like a 5% discount if they pay within 7 days

Ideally, you get paid early or at the time of delivery, however, many businesses will not accept that if you want to do business with them. Unfortunately, some companies have conditions whereby you have to accept terms of up to 120 days if you want their business. This is robbery, and the norm would be 30 days. The longer a business takes to pay you helps their balance sheet, the quicker you get paid helps your balance sheet.

You will also need to decide what payment methods you will accept. A bank transfer will be the most attractive as it will not attract fees, you don’t have to handle cash, and the money should move to your account within 24 hours. Cash will require you to visit the bank. If you decide to accept a credit card or Buy Now Pay Later (BNPL – for example PayPal), you will get the money straight away, but you will have to pay a merchant fee in the form of a percentage of the transaction. This payment form is convenient for the customer and will get the money to you fast.

Whatever form of payment or payment terms you decide to use, you will need to consider when building your cost model.

HOW to invoice

By far, the easiest way to produce an invoice is through an accounting package. If you create one manually, this can easily be done using a spreadsheet or word processing application. You will find many templates available in those applications, as well as downloadable templates from the internet.

In Australia, an invoice must include:

the heading “tax invoice”
Your business or trading name
your Australian business number (ABN)
date of the invoice
a description of the items sold, including the units (hours or goods) and price
the GST amount– this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, a statement which states ‘Total price includes GST’ (only applies if you are liable for GST)
If the invoice is over $1,000, including GST, you must also include the buyers’ identity or ABN

Example

Tax Invoice

Freds Shop 17 Fake St
ABN: 32 123 456 789 Your Town State Postcode

Date: 25 March 2021

To:         Valuable customer
              56 Down Rd
              Town State Postcode

Description                                                   Quantity             Total
Widgets                                                          1                           $40.00
Labour                                                            2hrs                     $80.00

Total Price including GST $132
GST $12.00

HINTS

Now you have created your invoice, you need to send it to your customer, with the most common form these days being via email. Ensure you have the right contact, and it is also worth copying it to a company’s accounts payable team. You can, of course, hand-deliver or post.

If your customers do not pay your invoices, read more about your options in our guide on bad debts.

The tax office provides guides on requirements for tax invoices here.

SUMMARY – How to Invoice

Accurate invoicing will help you keep your business in check and the ATO happy. An invoice can be easily created. You can use an accounting package to help with the greater task of managing to invoice and your accounts. If your turnover exceeds $75,000, you must provide invoices that specify GST. Invoices are not required for amounts less than $82.50, including GST.

Can’t pay my debts – Insolvency Reforms

Posted on February 15, 2021 by Angus Jones

With Australian small business gripped by the effects of COVID-19, many find themselves in a position where they can’t pay their debts. The Australian government has stepped in to help by introducing insolvency reforms.

Insolvency is when you find yourself in a position that you do not have the funds to pay the money you owe to others. As the owner of a small business your business and most likely you personally are responsible for paying your debts.

WHY should I pay my debts

If you don’t pay money that you owe to others, they have the right to recover those funds. If you don’t have the funds, you become insolvent or essentially bankrupt.

Before January 2021 it was illegal for a business to trade if insolvent. The Australian government has introduced reforms that will allow a small business more time to restructure and survive the financial effects of COVID-19.

WHAT do insolvency reforms mean to me?

If you find your self insolvent and your debts are less than $1million, you will be eligible. Note that you must also have paid your employees their entitlements including superannuation and have your taxation lodgements up to date.

The small business reforms package consists of:

• A debt restructuring process providing a quicker and less complicated procedure for financially distressed but viable firms to restructure their debt.

• A liquidation process to allow faster and lower-cost liquidation, maximising returns for employees and creditors.

These reforms have been announced as temporary so at some point they will be removed!

Most importantly, this means that you can keep trading under your control while developing a debt restructuring plan.

HOW do I get help?

Traditionally you would need an administrator who would take control of your business which would be placed in voluntary administration.

Now a small business restructuring practitioner is recruited, which will reduce the complexity involved.

If you are facing financial stress, you should approach a practitioner immediately to discuss your options. There is a flat fee to do this but remember it is the difference between closing your business immediately and trading out of your insolvency.

The practitioner will work with you over up to 20 days to create a plan that your creditors must vote on. If the plan is approved, the practitioner will administer the plan, including making payments on your behalf to creditors as set out in the plan.

HINTS – Small Business Reforms Package

A government fact sheet can be found here

You can find a registered restructuring practitioner h e re. Only a person registered with the Australian Securities & Investment Commission (ASIC) as a “registered liquidator” can act as a business restructuring practitioner.

SUMMARY – Can’t pay my debts

Key to your business success is good record keeping. Knowing your financial position and understanding if your business has become insolvent means you may be able to trade out of your issues. Alternatively, shut your business down without also destroying any personal assets. The recent government reforms show sympathy and understanding of small business. They are making it easier to get back on your feet.

Contractor – using or being one

Posted on July 14, 2020 by Angus Jones

Your small business may not be ready to take on an additional employee so a contractor may be a better solution or perhaps you would like to start your own business as a contractor. This guide will look at both sides and help you understand the implications of using or being a contractor.

A contractor or sub-contractor, freelancer or consultant is a person that provides goods or services under a written contract or a verbal agreement. Unlike employees, contractors do not work regularly for an employer but work as required. Contractors are usually paid on a freelance basis and often work for themselves using their own tools and processes.

WHY should you use or consider becoming a contractor?

By Using a contractor, you can:

Increase or decrease workers based on business needs
Get fast access to skilled workers for different tasks
End contacts quickly with no reason
Normally no payments for Superannuation, holiday or sick pay and payroll taxes
Save on liability insurance, as contractors must have their own

By Becoming a contractor, you can:

Be your own boss
Earn more money if your skills are in demand
Work the hours that suit you including part-time
Test out a company before committing to a full-time job

WHAT do you need to understand about contractors?

Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation, and superannuation. In Australia, the Independent Contractors Act 2006 in conjunction with the Fair Work Act 2009 protect the rights and entitlements of independent contractors.

Under the Fair Work Act 2009, independent contractors are protected from:

adverse action – for example, a business cannot terminate a contract with an independent contractor because they make a complaint to a regulator about their workplace rights
coercion – for example, a business cannot threaten to take action against an independent contractor to coerce them not to exercise their workplace rights
abuses of freedom of association – independent contractors are free to join, or not join, a trade union or employer group

The Independent Contractors Act 2006 allows independent contractors to ask a court to review a contract because it is ‘unfair’ or ‘harsh’. The court may consider:

the terms of the contract when it was made
the relative bargaining strengths of the contract parties and, if applicable, anyone acting on their behalf
whether there was any undue influence or pressure, or any unfair tactics used against, a party to the contract
whether the contract provides remuneration that is less than that of an employee doing similar work
any other matters the court thinks is relevant

The court may order:

the terms of the contract to be changed (for example, they may be added or removed)
the whole contract or part of the contract be ‘set aside’ (that is, have no effect)

All workers in Australia are entitled to a safe and healthy workplace. This means that employers — including self-employed contractors — must comply with the relevant state or territory’s workplace health and safety laws.

Sham contracting is illegal and is when an employer attempts to disguise an employment relationship as a contractor relationship. This is usually done to avoid responsibility for employee entitlements.

HOW do you hire a contractor or become a contractor?

In Hiring a contractor, you should be careful in checking their credentials to ensure they have the right experience, attitude and skills. You will need to carefully plan how they will integrate into your workflow and ensure you pay them promptly or they may not continue to turn up. A contractor may not be an employee but you need to treat them as part of the team to get the best result. Make sure you engage a contractor in a legally binding way in writing and consider what other documents may be required like a Non-Disclosure Agreement. Ensure you keep accurate records of their hours and or completion of set tasks.

In Becoming a contractor, you essentially start your own business. See our guide on starting a business. This process will include writing a business plan which will help you be realistic about things like future income. You will need to keep track of your business so read our guide on Record Keeping as well as considering setting up a separate bank account.
Insurance is important as you most likely will not be covered by your employer so consider taking out liability, income protection and asset (protect your tools) insurance.

If as a contractor you are paid wholly or principally for your labour your employer must pay for your superannuation, if not you should consider making voluntary personal contributions. Be sure to review our guides on Business structure and GST as you may need a separate tax file number and your services will be subject to GST if your business turnover is above $75,000. If you do not have an Australian Business Number (ABN) your hirer may legally withhold tax at the top rates.

HINTS

Unsure if someone is an employee or contractor? See the Fair Work Table here https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/rights-and-obligations/independent-contractors-and-employees

If your business engages contractors, it’s a good idea to have a Contractor Agreement in place with each contractor you engage. This sets clear expectations about the scope and standard of services to be provided, fees and payment, confidentiality, IP ownership and termination processes. A lawyer can draft a contractor agreement for your business.

Keep track of your contractors’ hours and how much they’re costing you. Use your accounting software to produce reports so you can see whether you are getting value for money. Over time you will discover the right mix of employees and contractors that works for your small business.

SUMMARY – skilled supply of labour and materials

Contractors work for themselves and offer other businesses and individuals a skilled supplier of labour and possibly materials. Both the contractor and the hirer have flexibility around hours and hirers do not have to provide for holiday and sick pay or payroll taxes. Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation, and superannuation.

Shareholder & Partnership agreement

Posted on July 14, 2020 by Angus Jones

You are probably reading this guide because you are at the beginning of your business venture however it could be because a partnership or shareholding has gone wrong. This guide is all about helping you get that first shareholder & partnership agreement right so down the track there is a clear predetermined plan of how things should happen.

A Shareholder & Partnership Agreement is a legally binding contract between the shareholders or partners of a business. A Shareholder & Partnership Agreement covers the funding, structure, management and direction of the business. It outlines the responsibilities and obligations of the business owners.

WHY should all partners be in agreement?

In the excitement of starting a new venture, it is very easy to put this important task aside. A shareholder agreement is to protect the multiple owners’ investment in the business, to establish a fair relationship between the owners and govern how the company is run.

It is best to put a shareholder and partnership agreement in place when the business is first established. At this early stage owners should be like-minded and if this is not the case questions should be asked why you are going into business together.

WHAT is in a shareholder & partnership agreement?

The agreement should contain important, specific, and practical rules relating to the business and the relationship between the owners.

The agreement should (but not have to) include:

define who are the shareholders, in what percentage ownership over what term
define how important decisions are to be made
describe how the business is going to be run
indicate if any intellectual property is not owned by the business
set out the owners’ rights and obligations including time spent on business
agreement on accounting processes and reporting
decide how profits will be divided and income paid
regulate the sale of shares in the business including full sale and withdrawal or addition of an owner
define dispute resolution procedures – if 2 owners have equal decision making decide how will you break the stalemate
outline any additional powers of minority shareholder/s so not always overruled on key decisions
define what constitutes a breach of the agreement and what action should then take place – possibilities include termination or mediation
include restrictions to stop shareholders from starting a new business in competition
identify how an owner may exit the business
have terms around specific circumstances like:
- Hiring and firing of employees
- Who can authorise payments
- Taking on debt
- Approving expenses

If a disagreement does occur in the life of the business and there is a clear shareholder agreement it gives a clear roadmap to move forward.

A partnership or shareholders agreement can be drawn up by a lawyer and you will find several providers offer a template-based solution that can be adapted to your specific needs via the internet for minimal cost.

HOW do you deal with conflict?

Conflict will inevitably arise with shareholders at some point in the running of a business. It does not matter how well you know your fellow owners, irrespective if they are a family, friend, or business partner it is best to have a shareholders agreement in place that you can refer to when conflict arises in your business relationship.

A lot of successful small businesses have been known to have shareholders with stormy relationships. A business relationship, whether good or bad, can have a huge impact on whether a company is going to be successful or not.

Decisions should be made through discussion, compromise and ultimately deciding what is best for the business. More progress can be made on working out how to resolve conflict rather than how to win a conflict.

Being a minority shareholder and having a shareholders’ agreement that includes the requirement for all shareholders to be unanimous ensures that you have a say in the important decisions that impact the company. This could be decisions on:

Adding or removing owners
appointment or removal of staff
taking on new debt
changing business operations

However, if all decisions must be unanimous this could cause problems and ultimately prevent your company from carrying out its business.

In a scenario when two owners each own 50% each of the business it is important to have a dispute resolution provision included. Without an agreed procedure to resolve disputes no decisions can be made leaving the company unable to operate.

You can terminate a shareholder agreement in one of 3 ways:

By mutual agreement – the original shareholder agreement should have had a provision on this
Termination by a breach – unless there are clauses for mediation of a breach in the agreement can lead to termination
One owner withdraws – the shareholder agreement should have a provision that maps out this scenario

To force an unhappy shareholder to stay in a business may cause more problems than having a new shareholder who is interested in the business being successful. Shareholders’ agreements will often include rules around share sales and transfers – who shares can be transferred to, on what terms and at what price.

HINTS

Decisions can be specified to be based on equity holdings or unanimous by all owners.

Discussing the worst possible scenarios at the beginning of your business journey and having a roadmap to resolve them will save a lot of headache down the track. The more comprehensive the better.

Owners need to enter into an agreement voluntarily.

Any new shareholder must be bound by the terms of the original shareholder/partner agreement.

SUMMARY – shareholder & partnership agreement for profit

A shareholder or partner agreement is a legal document that creates a set of rules for the owners to follow when a business is first established. It helps deal with certain scenarios that may occur in the future to reduce the chance of conflict. Those rules deal with equity, decisions, obligations and the ultimate end of the agreement. A well legally written agreement can be produced inexpensively from templates or through a lawyer.

Register a Company

Posted on July 14, 2020 by Angus Jones

In our guide Choosing a business structure, we listed the various choices including starting a company. In this guide, we will look at the process to register a company which is more complicated than the other business structures.

A company is a legal entity with higher set-up and administration costs. Companies also have additional reporting requirements.
A company is run by its directors and owned by its shareholders.
While a company provides some asset protection, its directors can be legally liable for their actions and, in some cases, the debts of the company.
Companies are regulated by the Australian Securities & Investments Commission (ASIC).
Australian Tax Office

WHY set your business structure as a Company?

There is less personal liability to its owners.

A company is its own legal entity and as such can borrow money, take legal action, and be legally sued by someone else. As a shareholder of a company whether it be 10% or 100% you are only liable for any unpaid money on your shares. So in theory they cannot come after your house, however as a director of that company if it is found you are in breach of your legal obligations to that company you could be sued. A company is owned by its shareholders but controlled by its directors.

WHAT you need to understand to register a company

A business name is not the same as registering a company name, they indeed can be identical bar the abbreviation but don’t need to be the same. See our separate guide on Registering a Business name. However in the case of a company you must register its name as well. For example you may have a company name “Your Town Fruit Pty Ltd” trading with your registered business name called “Your Town Fruit Shop”. We recommend you go through the process to determine your company name listed on the ASIC website. https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/company-name-availability/. A company’s name must show its legal status and include an abbreviation at the end, for example, “Your Town Fruit Pty Ltd”. The abbreviation relates to the liability of its members.

Full Word	Abbreviation
No Liability	NL
Proprietary	Pty
Limited	Ltd

HOW to Register a Company?

At this point it is our strong recommendation that you get assistance from a professional. You can easily find them by Googling “registering a company”. For a minimal fee they will do all the hard work for you based on you answering some questions and providing information. These are usually accountants or solicitors and are known as Private Service Providers. More details can be found https://asic.gov.au/for-business/registering-a-business-name/before-you-register-a-business-name/private-service-providers/

One thing you cannot escape as a company director (assuming you make yourself a director) is your obligations to keep details up to date, maintaining records and details on a register and paying the annual fees. Australian companies also require 1 or more directors to reside in Australia depending on the structure.

HINT

The fees to register a company can be found here. https://asic.gov.au/for-business/payments-fees-and-invoices/asic-fees/fees-for-commonly-lodged-documents/starting-a-company/

If you do not go down the Private Service Provider route be prepared to understand and decide on a constitution or replaceable rules, share structures, etc.

SUMMARY – Company means less personal liability

A company structure will reduce your risk of personal liability but is more complicated to establish and maintain. Using a private service provider is an economical and pain-free way to do the setup.

Internet Security protects from cyber threat

Posted on July 8, 2020 by Angus Jones

What is the most valuable item in your small business? Is it a piece of machinery or perhaps the data on your computers. How do you protect that valuable item? With thick steel bars or a thin sheet of glass? This guide will discuss Internet Security protecting you from a Cyber Threat.

A Cyber Threat is the possibility of a malicious attempt to steal information, damage or disrupt a computer network or system. This threat will come via the internet , but you can protect yourself via security software and good practise.

WHY should you care about internet security?

All the benefits of being able to connect with the world via the internet also mean that all the criminals of the world can target you.

Not only do you want to protect your reputation and secure your private information you also must protect any customer data you have and can be fined for a breach.

WHAT are the types of cyber threats?

Malware

Refers to viruses, spyware, trojans, and worms. Malware can allow someone to take control or spy on an individual’s computer. Key information stolen includes bank details, credit card numbers, and passwords.

Phishing (pronounced fishing)

This refers to receiving an email from someone pretending to be familiar with you. They quite often pretend to be a well know Australian brand and encourage you to click on a link. You will then be asked to provide information like passwords, birth dates or to pay a fake bill. For example, you receive an email from your bank but it is actually a phisher. They ask you to confirm your banking details including password. The phisher then uses these details to log into your real account and steal money.

Phishing may occur via email, SMS, instant messaging or social media

Ransomware

This is where your computer is essentially hijacked and you are asked to pay a ransom. Do Not Pay a ransom as they may never give you access even if you pay! It works by you clicking on a link or opening an attachment that installs software which denies you access to your computer or files. A message is displayed indicating if you pay money they will give you access back.

How do you protect yourself against internet security threats?

To protect your small business from cyber threats you should consider implementing the following:

Antivirus software – Also known as anti-malware software, this is computer software used to detect, prevent, and remove malware. Bought as a per year subscription you should ensure all PCs are running it and subscriptions are up to date. See Gadget Guy for reviews of the latest antivirus software solutions.

Automatically update your operating system – The likes of Microsoft and Apple are continually providing software updates to counter new threats. Most modern operating systems are set to automatically update by default but ensure this has not been deactivated.

Automatically update your software applications – Just like your operating system, applications like Microsoft Office need regular security updates. Since the release of Microsoft Office 10, this is automatic by default (from office click file then account to check).

Regularly back up your business’ data – This is a digital copy of your data from your PCs and shared storage devices preferably kept externally to your place of business. Back up is a critical strategy to restore your business and we cover this in a separate essential guide on Backup.

Multi-Factor Authentication – This is a security measure where two or more proof of identity must be provided to gain access. It would include some combination of password, pin, secret question, physical key (card or token), SMS, and a fingerprint.

Be cautious – If you are asked for money, your password, account details, or login details don’t provide them.

HINT

Implement a password strategy within your business which requires passwords to be strong. The key aspects of a strong password are length (the longer the better); a mix of letters (upper and lower case), numbers, and symbols, no ties to your personal information, and no dictionary words.

Make sure you have a strong password set up on your wi-fi

Decide who you will give access to what data

Teach your staff about the importance and predetermine a plan if you are affected.

Consider taking out technology and cyber crime insurance (see our essential guide on insurance)

SUMMARY – Secure your business against a cyber threat

Do not believe it will not happen to you. TAKE PRECAUTIONS AGAINST A CYBER THREAT TO YOUR COMPUTERS. Implement simple internet security steps to protect yourself like having virus software, keeping software up to date, ensuring you have secure passwords, and backing up your data will ensure your reputation and continuity of business.