Whether simple or complex, getting a good grasp on your income can be helpful – not only at the immediate cash flow level, but also for analysis and strategy going forward
For most business the primary source of income is usually sales (whereas for many other types of organisations, revenue may include more donations or grants or other income types). Like all aspects of the accounts, it’s important to have all income types recorded and allocated correctly. Accuracy is not only needed for compliance, but also to line up with the types of information that you’d like to be able to access later in your financial reports.
Within the boundaries of compliance, there is quite a bit of flexibility and variety in how different businesses may choose to label and sort revenue in ways that are meaningful to their situation. Some of the relevant factors to consider may include:
- Income source methods – what avenues will be available for customers to connect with you (EFT, credit card, website, cash etc), and what processes and people will be needed to manage these with good oversight, accountability and controls
- Income streams – will all revenue be collated under a “Sales” heading in your accounts, or is there value in distinguishing in your reports between different types of sales (whether by product or brand or some other distinction)
- Customer information – where you have customer information available (or in the case of a charity, donor information), how much information will you attempt to capture (if any) and will you be recording this against a budget or projection for particular customers
- Customer/Donor referencing – will you be making use of auto-recognition of transactions in your accounting software, and if so, are the codes or reference protocols that need to be established and communicated
- Income GST coding – is your accounting system correctly configured to assign the correct application of GST legislation to different types of income
Understanding your preferences and requirements in these areas will aid you in having good practices in data-entry to support the quality of reporting you are seeking later.
You may find that some of income that you receive (even if only on a small scale) in your business or organisation does not fit neatly into your regular sales or donations streams.
Each of these income types (and the associated activities) should be assessed to determine how the income is to be understood and treated.
Some of the types of activities to keep an eye out for in this regard could include:
- Income from commercial rent, hire or sub-letting arrangements
- Royalty income
- Income from disposal of assets
- Events income
- Income for services or staff secondments
There may be a number of factors (including the relationship to market value) to consider in determining whether an activity is commercial or not, and it may be useful to involve your accountant or board in helping make and record this determination for future reference.
Once each type of income is clarified in this way, this can then flow through into how the income is treated from a bookkeeping and GST point of view, along with any invoicing or receipting (or other documentation) that may be required to be issued.
A record of both the determination and the processing procedures for each of the items that have been identified may prove to be a handy tool and reference for those involved in the rest of the process (including, potentially, your auditor).
Then for those items of income where you are invoicing other for various charges, it will help to have a clear process for:
- preparing and sending your invoices to your clients
- maintaining your schedules of invoices for your regular client agreements
- keeping track of when your client pricing reviews are due
- transferring any paper-based invoices into your bookkeeping system
- ensuring that your different types of income are recorded correctly in your system
- allocating your incoming payments to your correct client invoices
- ensuring your payment information is flowing correctly from your external systems (for example PayPal)
- offering an online credit card payment option for your clients to use
This can benefit you by:
- keeping your cash flow moving and avoiding you having delays in receiving payments
- having your clients on the same page as you as to what they owe
- avoiding you dealing with lengthy and awkward calculations for missed invoices
- keeping good track of the use of your resources
One final area to consider on this topic is how you may go about handling the collection of money owed to your business. If you aren’t getting paid on time for invoices you have issued, it can affect your business cash flow.
Following up your late payments might be something you put off because:
- you may feel awkward in addressing late payments with your client
- you don’t have time to work out which invoices are late
- you don’t have policies or procedures in place to know when or how to follow up late payments
Your worry about this could be significantly reduced by implementing one or more of the following steps:
- setting up automatic invoice reminders to be sent to your clients
- issuing statements showing your customers what they have paid and what remains outstanding to you
- setting up a standard debt follow-up policy
- implementing regular debt follow-up tasks (emails, phone calls, referral to external collector)
This will be a case of understanding your different clients and payment terms, and the process that will work best for your business.
When getting involved with your organisational accounts, it may surprise you just how many unusual scenarios and requirements you come across with various income items.
In addition to the more regular areas of commercial activities, you also be dealing with a range of new or odd situations. Some that you may come across may include:
- Residential rental income (and associated fees and expenses) from a property that your business owns
- Government / community grants
- Donations that are specified to be used for a particular purpose
- Income into a Deductible Gift Recipient fund that your business controls
- Support tied to funding for a specific staff member’s support
- Income from a related entity in a GST grouping arrangement
- Franking credit refund from the ATO in relation to a trust distribution
- Income from the sale of assets (including property)
- Income from fundraising drives or events
This list is not exhaustive, but you get the idea of the types of things that may come up.
Again, for each item it will be important to determine:
- How the income is to be classified in your accounts
- How the income is to be treated for GST
- Whether there is further treatment needed in the accounts to siphon off the income to be held in reserve
- What type of receipting is required to clients or donors and how this will be done
- Any other regulatory reporting in relation to the income
- Other records that need to be kept
And like the other income types, a record of the various items along with all the details will be very useful for future processing and review.
Would you like to explore further topics related to bookkeeping and payroll in your business or organisation? eBook available now: