Are you penny-pinching yourself out of business? EP #224 - Blake Jenkins

G', day, guys. Den Lenny here with episode 224 of the how to Scale a Video Business Podcast. And today we're talking about the pitfalls of running your own books. I work with a lot of filmmakers and sometimes I am surprised to hear that they do their own bookkeeping. And that's like giving editing to a client to do. So today I want to ask Blake from Count Out Loud, who are a specialist video production and movie 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. And this is an area where, if you get this right, it can actually save you money.

Well, g', 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 Xero. And. And I want to really ask you, what are the pitfalls of running your own books and why is it not necessarily a great idea?

Yeah, great. Thanks for having me back, Dan. I really, really enjoy these. These are good, good, good little things to give people a lot of help. Yeah, bookkeeping. I mean, massive, massive, massive thing for all businesses because this is what's going to determine how you make your decisions and what your tax is going to look like at the end of the day. But look, the major things with bookkeeping is that you need to be on top of the allocations, where they're going, income assets, reimbursements, you know, liabilities, all those kind of things, but also your tax, your consumption tax components, so your GSTs. So, you know, if you get a. If, say you win a job with Apple here and so you're invoicing out overseas and you're here in Australia, that's an export, 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 JST shouldn't have had to because of the coding. So, yeah, there's heaps of things that can go wrong with the books and because they need to be, you know, a true representation of where your business is at, at a point in time and basically tell the story of what you're doing. If they're not correct and up to date. You have real trouble working out what that's going to look like at the end of the year.

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 ARR.

That is another reason why a bookkeeper is there. They're there to catch your blind spots, aren't. I mean my very first hire in my business was a bookkeeper and I think it's the most important hire you make in your business because I'll never forget my first bookkeeper was an elderly lady and she used to make me feel guilty about spending my own money and I felt that was a really important aspect. And.

What does a bookkeeper do? For a start, let's just take it right back to assume nothing. So what is a bookkeeper's role and responsibility in a business?

Yeah, look, I mean this is a good thing about a bookkeeper 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 saying what is this 10, $15,000 payment form might make you go, well just jeez, shouldn't have spent that much on that because you're seeing it again. It's like you're seeing it again after you've already parted away with the cash. But basically what a bookkeeper is going 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 make sure your bank's reconciled which means that all the transactions have a place. So income or expense, they're also track your GST that we've been talking about or your consumption tax depending where you're at, like VAT over in uk. And they can also then prepare your quarterly lodgements or your quarterly super like liabilities. But realistically 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, real time data. They can manage your debtors as well. If you need to make sure all your creditors being people that you haven't yet paid but are coming due are in your files. So you can go, okay, I know I've got 50 grand to pay next week because these are all coming due. How do I cash flow that from my debtors that aren't coming in? I'm at 90 plus 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 unless someone's in there keeping everything up to date, making sure the paid invoices done, all the paid creditors are done, all the allocations are kind of gone through.

Which I guess leads into the question around with software like Xero, which is phenomenal.

It makes the process of bookkeeping we used to run on Sage and I found it just wholly uncomfortable to work with and I never did understand it. Xero has made it much more user friendly.

But sometimes I remember working with the client a while ago and I asked him, you know, who does your books? He's like, oh, I do them because I just use zero. And I think there's a, there's a, 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 incorrectly, but to assign it to the wrong place or to not be coding it correctly. What are some of the pitfalls of, of, of creatives particularly choosing to do their own books in zero? What, what are some of, what are some of the danger areas there that the red flags that they should be aware of?

Yeah, so I mean with programs like Xero, 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 disk and then sent around and you know, hard drive based data, it's all on the cloud and I mean there's plenty out there in these online softwares. They do functionally the same thing. But with Xero you do have, it's really, really user friendly. And this is why I love it. I love it because I can sit across from 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 owe money to and who they have to pay money to and how much money is in the bank. 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 could have 300 transactions for the last three months to reconcile. And every time you look at that, you go, don't want to do that, that's too hard basket. I don't Want to sit down and do that? And then you start missing your deadlines. So you start missing your lodgement deadlines, or you start not following up invoices that haven't been paid, or you're following up invoices that have been paid, but they just haven't been reconciled. So Xero would automatically send that, you haven't paid me yet. 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 claimable. So it works both ways. Then you set yourself up for year end when your accountant comes in and they go, dog's 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, blow your compliance costs out. Just by doing it yourself for the sake of saving, say 2,000 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, you know, really, really time intensive. So you can be stuck there going on, last thing I want to do on a Friday night at 7pm is go and reconcile my books. And you know, if you're tired, you've been on a long shoot, you just go stuff it, whatever, okay, okay, okay. And then, you know, you think it's all good, but then you go back and it's not reconciled correctly. You're creating dramas down the line.

One of the things I'm very big on in my coaching business is, is stay in your lane, you know, find out what you are absolutely brilliant at and do that and outsource everything else. And the second part of that is you, you are, you know, with, with so much automation and online tools available and ability to run businesses from home that, that can perform on a world stage so you can increase your profit margin quite substantially.

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 when I've tried to do things myself, I just make mistakes, and they can be costly mistakes. Exactly what you were saying.

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 allowable. 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, it should pay for itself. Right. Because you're catching mistakes.

Yeah. And it's. It's like keeping you accountable as well, which goes a long way. Because what you should, as you say, focus on what you good on. If you want to spend all your time in building business and, and bringing in new clients or just really going hard on your shoes, then you don't want to be dealing with that on the side. But when you've got someone on the side raising their hand and saying, look, dan, you've got 20 transactions here that need to be reconciled. Can we talk about them? Because they look entertainment. What are you doing going out for drinks every day? These aren't claimable. Okay, well, then maybe I'll stop paying for drinks for everyone all the time. Maybe I'll start doing less of that. So at least you know what's going on, and you know that now. No, I can't do that anymore. Or if I do want to do, it's got to be a sometimes thing, because I can't keep paying for everything. It's not claimable. But yeah, and also 100% agree with you staying in your own lane. Like, I wouldn't go out and think that I could do the plumbing in our bathroom because, I mean, I'll probably make a dog's breakfast of it and then have to pay someone extra to come and fix it.

You know, and this is something we come across all the time in 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, I'll just do my own books. And I think the other thing about this is that your numbers can tell a story about the health of your business. You know, your dashboard on zero. If you do have a bookkeeper 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. 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 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 or the last three months, we're talking about tax planning, we're talking about what might be due in eight months.

But you want to be making business decisions, don't you, based on data, not on, oh, I just won this big project so we can buy a new camera and understand that you know how to manage those cash flow crunches. 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 a really important aspect rather than perhaps just like getting someone to do it cheap.

I think there's an inherent value and having a consulting approach with a bookkeeper.

Well, yeah, and 100% it's, you get what you pay for. Like you look at those, there's that classic one that goes around and it's like, I want a drawing of a horse and I want to pay 50 bucks versus 500 bucks. And down the middle one's like squiggled and one's really amazing. So, you know, don't be afraid of if it's, if you think it's going to, it's looking like an expensive ordeal, but you're going to 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, I'm feeling a lot more confident and comfortable with those numbers. And when you say you know someone who's good at what they do, they can tell you what you're doing wrong. They can give you assistance with your debtors are out of date, you need to follow them up. Otherwise you can't pay your bills. Because I've seen the bank balance drop straight away like you can squatch it go down, down and down, which then helps you plan for that big job that you've got 25% in 25% halfway another 50 at the end of.

Also does allow you knowing that the bookkeeper's doing things really well is helping that 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 accountant point of view, not a good chunk of what we do is compliance, because that has to happen. But the really value adding work that we do is helping you make those strategic decisions at that point in time. 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 year to date and work out tax strategies for that year so that you 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 tax. We're going to do all the, put all these strategies in place. We're probably only going to pay 45 grand tax. But you can't do that if the data is invalid, if the validity of the data 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, 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 being, being right. And that's when your bookkeeper 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 right. I know it can be kind of hard to hear someone to tell you what you tell you what you're doing when you're in your own business. But it's incredibly important to leverage off the other people that you know or that you employ for services, because they're going to help you make a better and more, you know, strong business by the end of the day.

I think as well, you know, having, having a great relationship. I think a lot of, a lot of businesses just see their bookkeeper as someone who just, who just balances books each month. And then the accountant, someone they speak to once a year. I actually have a meeting with my accountant every single month for 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 that advice is massive because we're looking to buy a camper van at the minute, and we had one before. We used it for business a lot of the time, and so we bought it through the business. But I know that before I make 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, 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, aren't you?

Well, 100%. And that's. 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, well, this just looks way off, you know, like you want to be on the front foot. So, yeah, knowing that you can actually like what your benefits are, and then it helps you make your benefits and your pitfalls on any decision you're looking to make, because, you know, it's easy to have these ideas and go, okay, this is what I want to do. But then I guess when you go to a third party, they're then going to help you nut out the other bits and pieces that you might not have thought about. Like always there, a private use of that camper van, or what's. How long are you going to keep it for? What's the interest rate on that loan? And what's your cash flow like, looking at that point, and what's your tax outcome of the whole thing? Like, these are the questions that you might not, you know, think about at the point in time, but you can work through 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 after that six months. Or maybe we're good to go now. So let's, let's do it. But yeah, yeah, having that call, 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 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 start looking for someone who is going to give you that support.

Because numbers tell a story, don't they? And we always got to consider as well that the Tax Office, the ATO here in Australia or the Inland Revenue in the uk, or the IRS in the us.

They are individual human beings who are assessing. If they're going to do an investigation, which can happen completely randomly, they're going to sit down and remember, in 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 being equivalent of GST registered. I remember having this GST audit and being completely cool with it because 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 our 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 camper van, I know you've got it down as a production vehicle, but you and I both know that that's not 100% business use. So if you say, well, 90% business use, you've still got to kind of back that up. 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 that I've created as a result of being in that van. And we did that with the previous van and we drove around Australia, we did podcasts. 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 100 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 ato, isn't it? I mean, you have to be human about, you have to be realistic about it.

100. And as you say, when you get in those situations where you need to talk to the ATO for a example, and they're maybe reviewing your claims and reviewing your gst.

There'S a level of discretion around it in the way that every business runs differently from the other one. So even though you might get flagged on something, it doesn't mean you can't claim it. The classic one is the tax returns that give you a big flag because they automatically match things so you're over claiming for your industry. But as long as they're legitimate, then it's, then it's fine. But then also when you get into that situation where you have the audit, then you have those conversations and they tend to be understanding. I like this thing is the ATO is not sitting there to catch everyone out. They're sitting there to administer the law. Then like if you're potentially doing things to avoid paying tax outside the realms of the law or claiming too much GST or doing dodgy stuff, then yeah, they're going to throw the book at you. What organization is it for the most of them they're there to administer the situation and they're pretty, pretty understanding the amount of audits that I've been through, they're pretty understanding on them.

But yeah, so.

In terms of when you've got your bookkeeper doing it, then at least you know that when that data does come to be reviewed, you've got that level of confidence there that you know, if there are mistakes, what's are they material mistakes? Probably not. Are they going to make a massive difference to the outcome? At the end of the day, probably not. 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, you know, a month now, you can forget about it and move on.

I agree. We, we had that, we had an audit during the, the cash flow boost here because the, and the auditor just rang me up and said oh, I'm just, I've got a couple of questions about this. And I said oh, here's my accountants detail 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 interprets the rules, the way the client interprets the rules and the way the ATU interpret the rules. And when it comes to an audit situation, because I've been through a couple now but in different countries they never freaked me out because I know I'm 100% squeaky clean and everything I claim I legitimately believe I can evidence and in both situations that I've had audits to go through I've been able to justify and evidence my reasoning for coming to the decision. And what I found to be very interesting is that there isn't necessarily a right or wrong. There's two parties 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 or 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 been your experience in that overall sense of how that runs?

Realistically, it's 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 is reasonable like it is, more often than not acceptable, there may be, you know, unreasonable claims out there. 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've got issues here. You should pay the tax. So we never go down, down the line to go, oh, they'll see how far we can push the ato. Right. So you go down the line that we've got these set of rules that we need to work within. A lot of it is open to interpretation. I mean, Section 81 is literally the most interpreted section of the Income Tax act because it says anything connected to business is claimable unless it's excluded. But anyone can say anything is claimable. Right, but that's the thing. Then there's other sub laws and sub cases and sub things that come into it. So it becomes an incredibly complex process. But when you start talking with that other person on the other on the line, as long as you can reasonably substantiate things, you know, you'll come to an outcome and more often than not, unless you've done something completely dodgy, there's no penalties imposed, it's just an adjustment to your tax.

Yeah, and I think we talked about this in the last episode that you know, paying tax is not a bad thing. In fact, if your business is healthy, it pays you to show a taxable profit because then the ATU is getting some money and you're paying your contribution to society. But it actually allows for like the more profit you make, weirdly, the more, I don't elaborate is the wrong word, but the more you can claim because your proportionately revenue and profit is proportionate for your industry. And I think especially if you are more profitable or revenue and profit is higher than the norm for the industry that you're claiming. Business category sits in. You don't really attract attention because the ATO is getting the tax money and all they're looking to make sure is this compliance.

Yeah, exactly, exactly. 100% agree and say.

Making profit and paying taxes, as you say, isn't the end of the world. It's a good thing. But the more 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 squeeze everything so tight that you 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 flow to do other projects. 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, the value out of that structure you're currently in.

You know, it's funny, I, and maybe I 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 help you run a great business and have a great lifestyle as a result of it. That I don't think you need to do anything dodgy like it does. It doesn't make any sense because you can legitimately claim, as you said, Section 8 1, you can claim anything that can be justified as related to your business. And so as long as you're making the money, I've found personally that there's never been an issue and the businesses I work with are the same. It's good to pay tax. I think that's the essence of this session, isn't it?

Which is a weird thing to say as an accountant. But at the end of the day, if you, if you structured everything correctly and you're doing, you know, good stuff in terms of tax minimization, but you're not just going crazy if you're paying tax 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 look at how much money we're making, right?

And I think just, you know, make sure you've got, 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 they like what you're saying, is there 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?

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 take a look at my last year's return, see what it looks like. You can just go onto our website, which is just canoutloud.com or you can flick me an email, which is blakeountloud.com and we can have a chat.

Blake, I look forward to seeing you again on the show next month.

Awesome. Thanks for having me, Dan. Appreciate it.

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 Denleny.com where you can get a whole heap of other resources, free downloads, and access all the other episodes in this series. Be sure to subscribe and I'll see you next time.