How to set up Profit First for Australian businesses

How to set up Profit First for Australian businesses

Want to set up Profit First and get it right for Australian taxes, corporate structures and banks?

‘Profit First’ was published in the USA and doesn’t detail how it works for Australian taxes and corporate structures, leaving many Australian businesses unsure how to implement Profit First and frequently not taking action.

However, Profit First First can work for Australian businesses if you know a few basics. As a Chartered Accountant based in Melbourne and one of the first Certified Profit First Professionals in Australia, I’ve put together this cheat sheet with three simple steps. Follow these steps and you’ll be up and running in no time.

HOW TO SET UP PROFIT FIRST FOR AUSTRALIAN BUSINESSES KEY 1. MANAGE GST, PAYG WITHHOLDING TAX ON WAGES AND SUPERANNUATION THE FOLLOWING WAY

Using one fixed percentage to cover all taxes may not work as the percentage may be too low and not calculated properly. So that you take care of taxes easily, have separate strategies for;

PAYG withholding tax on wages and superannuation,
GST, and
Tax on profits (company tax or personal tax instalments, depending on your corporate structure).

PAYG withholding tax on wages (‘payg’) and superannuation

When you run the instant assessment, the figures for wages include the payg amount.

Therefore, when you pay the net wages to employees, you should also transfer the payg amount. I prefer to pay it directly to the ATO, as well as transferring funds to employee’s superannuation funds whenever you process payroll. This will ensure

your percentage allocations are reflected in your actual transfers.
there’s no risk of not having the funds at BAS and superannuation deadlines,
you won’t need a separate account for payg and super, simplifying your affairs, and
it will be clearer what type of tax the funds in your tax account are for.

GST

Not putting aside funds to pay GST is one of the biggest causes of business failure. So that you take care of this risk, calculate the percentage of sales to put aside for GST and pay this to a GST account or directly to the ATO when you make your Profit First transfers. Paying directly to the ATO will mean that the bulk of your GST is paid prior to having to lodge your BAS and there is no risk of spending the funds on operations or drawings.

To calculate the GST percentage to put aside, you can refer to your last three BAS’s and the net percentage of GST you have paid and apply this percentage to your Profit First tranfers.

This works well for businesses with relatively steady cashflows. An example of the way you calculate it is as follows;

	March 18	Jun 18	Sep 18	Total
Sales including GST $	80,000	75,000	85,000	240,000
GST paid to ATO after taking into account GST on purchases $	4,800	5,250	4,675	14,725
Net GST %	6%	7%	5.5%	6.1%

In this example, the business would put aside 6% of gross receipts for GST and be prepared for some variations between what was put aside and what was paid when lodging BAS’s.

Businesses with irregular cashflows can rely on up-to-date financial reports and cashflow forecasts to calculate the GST percentage to put aside.

Tax on profits

Calculating tax on profits can be complex as it’s affected by what structure you use (trust, company or sole trader), what accounting method you use to calculate tax (cash or accruals basis) and what year-end accounting adjustments you will make, such as depreciation.

To calculate the percentage to put aside, as well as factoring in your tax calculation method and year-end adjustments, refer to your profit and loss statement and work out the tax on profits for your particular structure. Then work out what this tax figure is as a percentage of gross sales (sales including GST) and use this percentage to transfers funds to your tax account or to the ATO as part of regular ATO instalments.

To calculate tax on profits, if you are using a company, use the 27.5% tax rate and factor in your wages. If you are using a trust or are a sole trader, calculate the tax on profit by referring to the individual tax rates and for a trust, bear in mind which trust beneficiaries are likely to receive trust profits. An example of this calculation is shown in the table below.

Sales	300,000
Costs	230,000
Profit before tax	70,000
Tax on profit at 27.5%	19,250

Gross receipts (sales including GST)	330,000
Tax as % gross receipts	5.8%

In this example, 5.8% of gross receipts will end up as company tax, so this is the percentage to transfer to a tax account.

HOW TO SET UP PROFIT FIRST FOR AUSTRALIAN BUSINESSES KEY 2. FACTOR GST INTO YOUR INSTANT ASSESSMENT AND ALLOCATION PERCENTAGES

If you base your allocation percentages on the profit and loss statement, your percentages will be incorrect because GST won’t be taken into account. This is because the figures on the profit and loss statement don’t include GST and thus don’t reflect the actual cash coming into and out of the bank account.

To solve this problem, calculate your allocation percentages on figures that include GST. To work out the figures, download your profit and loss statement to a spreadsheet, then add a column with figures that include GST and then work out the percentages based on this second column. It may look something like this;

	Profit and loss statement $	GST	Actual Cash received or paid (amounts including GST)	GST or No GST
Sales	10,000	1,000	11,000	GST

Profit Account			1,100
Owner’s compensation			1,650	No GST
Operating Expenses
Bank fees	20	0	20	No GST
Interest paid	400	0	400	No GST
Materials	2,200	220	2,420	GST
Motor vehicle expenses	700	70	770	GST
Printing and stationery	200	20	220	GST
Rent	800	80	880	GST
Superannuation	95	0	95	No GST
Staff wages	1,800	0	1,800	No GST
Total expenses	6,215	390	6,605
Profit First % for Operating Expenses			60%

The allocation percentage is based on the figures in the ‘Actual cash received or paid (amounts including GST) column rather than the profit and loss statement, to ensure the percentages reflect the actual cash inflows and outflows.

HOW TO SET UP PROFIT FIRST FOR AUSTRALIAN BUSINESSES KEY 3. START STRAIGHT AWAY

There is often the trap of thinking that all the different bank accounts and managing GST and Australian tax makes setting up Profit First too hard. However, you can start reaping the benefits of paying your profit first straight away and learn to deal with any complexities as you go.

Start with a profit account straight away and make payments to this account from now. Making profit is a habit and there’s no reason not to start. Even if it’s paying just one percent of sales, it gets you into the habit of paying your profit first and gives you something to build on. As you get more familiar with the system, you can add accounts as you go.

YOUR BUSINESS AND GETTING IT RIGHT

Profit First can seem complex but it will work for your Australian business if you follow these three keys. If you want help with setting up Profit First, you can

Book a free Profit First Setup Call

This is a one on one call designed to help you identify any potential issues with you Profit First system. Calls are 15 minutes and are limited each month so book through this link to ensure you don’t miss out, http://bit.ly/2Bf344a.

How to set up Profit First for Australian businesses

Other articles

<a href=”https://www.morrisonabs.com.au/calculating-your-profit-percentage-for-profit-first/”>Calculating your profit percentage for Profit First</a>

<a href=”https://www.morrisonabs.com.au/news/”>Blog articles</a>

Refererences and links

<a href=”https://www.profitfirstaustralia.com.au/product/profit-first-book-paperback/”>Profit First book</a>

<a href=”https://www.profitfirstaustralia.com.au/podcast/”>Profit First podcast</a>

<a href=”https://www.profitfirstaustralia.com.au/portfolio-item/angus-morrison/”>Profit First – my details</a>

How to set up Profit First for Australian businesses