THE BUSINESS WE MEANT TO BUILD

How good businesses lose their way

Chapter 18 – Compliance Is Not the Enemy

There was a line we used at Banks Consultancy for years that usually produced either a laugh or a slightly nervous look from a new client. Our third pillar was that we would “drag you kicking and screaming to compliance.” It sat between reducing your tax liability legally and acting like a “silent” partner in the business, and I suspect some clients initially wondered whether they had appointed an accountant or enlisted in some form of financial boot camp. The wording was deliberately provocative, but the thinking behind it was much less dramatic. We had learned over many years that some of the things business owners most resisted doing were precisely the things that could stop relatively small problems becoming very expensive ones.

Nothing demonstrated that better for me than the Business Activity Statement. Depending upon the business and its reporting obligations, the BAS may arrive monthly or quarterly, with the ATO generally requiring quarterly GST reporting for businesses below the relevant turnover threshold unless monthly reporting applies or is chosen, while monthly reporters ordinarily lodge and pay by the 21st of the following month. To many business owners it is simply another government form, another deadline and another amount of money disappearing from the bank account. To me, it has always represented something considerably more valuable: a regularly scheduled opportunity to stop, look at the business and ask what has actually happened during the period just finished.

That is probably why BAS compliance has been one of my particular bugbears throughout my career. I could never quite understand why somebody would run a business for three months, collect GST, deduct tax from employees’ wages, generate sales, incur expenses and move perhaps hundreds of thousands of dollars through a bank account, yet wait until the BAS was almost due before deciding they might like to know what the result of all that activity had been. The deadline would approach, the books would finally be brought up to date and the accountant would calculate the liability. Then would come the moment I saw far too many times: the face turning red as though the tax liability had somehow crept into the room during the night and ambushed everybody.

The liability had not suddenly appeared. In most cases it had been accumulating transaction by transaction throughout the month or quarter, often including amounts the business had effectively collected on behalf of government rather than earned for itself. The only real surprise was that nobody had bothered to calculate it soon enough to remove the surprise. Yet somehow the accountant delivering the number could become the bearer of extraordinarily bad news, when the number had been sitting inside the business waiting to be discovered for weeks or months.

I have often thought that this is where our relationship with compliance becomes unnecessarily adversarial. The business owner sees the BAS as an ATO demand and therefore delays dealing with it until the ATO demands it, while the accountant sees a reporting deadline approaching and starts chasing records. Everybody concentrates on the date the form must be lodged when perhaps the more useful date was several weeks earlier, when the period closed and the information became available. A quarterly BAS due sometime later does not require the business to remain ignorant until the week before lodgment.

Quite the opposite, because the BAS can provide one of the most natural rhythms available to a small business. If you report quarterly, then four times each year something is effectively forcing you to bring the books up to date, understand sales, review purchases, reconcile accounts and calculate an amount that will shortly have to leave the bank. If you report monthly, the rhythm is even tighter, with the ATO ordinarily expecting lodgment and payment on the 21st day after the reporting month. That may have been designed as a taxation reporting system, but there is nothing preventing the business owner from turning exactly the same process into a performance review.

How much did we sell? What did it cost us to generate those sales? Are our margins holding up, or have supplier increases quietly eaten into them while our prices remained unchanged? How much is sitting in debtors, how quickly are customers paying us and what cash will actually remain after the BAS liability is satisfied? Those are not really taxation questions at all, although preparing the BAS can force the information required to answer them onto the table.

That is why I have never been particularly impressed by the argument that keeping the records up to date is merely work being done for the Tax Office. The ATO certainly wants the information for its own purposes, but the business owner should want it for an entirely different reason. Good records allow you to know what is happening while something can still be done about it. Poor records leave you relying on bank balances, instinct and optimism, three things that can coexist quite happily with a business heading towards trouble.

There is also a peculiar psychology surrounding money collected through a business. A bank account with $80,000 in it can make an owner feel considerably more comfortable than a bank account with $20,000 in it, even when $60,000 of the first amount is effectively spoken for through GST, PAYG withholding, superannuation, suppliers or other imminent obligations. The banking app displays the total without attaching little labels telling you which dollars are really yours. Unless the records are current, it is remarkably easy for temporary custody of money to be mistaken for available cash.

That is where the red face at BAS time usually begins. The accountant says the BAS liability is $25,000 and the owner reacts as though somebody has just removed $25,000 from their profit, when much of the liability has been developing throughout the reporting period. Perhaps that money funded stock, a vehicle payment, wages, a new piece of equipment or simply the everyday pressures of operating the business. Whatever happened to it, the underlying issue is rarely that the BAS unexpectedly created a liability; it is that the business spent cash without maintaining a clear distinction between what was available and what was already committed elsewhere.

I found that particularly frustrating because it was so avoidable. I was never interested in lecturing somebody for having a cash-flow problem, because businesses have them and sometimes circumstances genuinely turn against the owner. What concerned me was the unnecessary cash-flow problem created by not wanting to know. If a business discovers shortly after the end of a quarter that $25,000 will be required by a known future date, there is at least time to plan around $25,000; discovering virtually the same fact immediately before payment is due converts information into an emergency.

This is where compliance becomes something other than compliance. The regulator has provided the deadline, but the business gets to decide whether that deadline is going to be the first time it considers the liability or simply the final date on a process that began weeks earlier. One approach says, “How much do we owe and where are we going to find it?” The other says, “This is what we owe, this is when it is due and this is how we have provided for it.”

They are very different ways of running the same business. Neither one reduces the tax or GST simply through positive thinking, and neither changes the legal obligation that ultimately has to be met. What changes is the degree of control the owner retains over the journey. Knowing early creates choices, while knowing late tends to replace choices with reactions.

It also provides a perfect opportunity to look beyond the BAS itself. Suppose sales for the quarter are higher but the bank balance is lower; that should provoke a question. Suppose GST payable has risen substantially but profitability has not followed; that may tell us something about margins, expenditure or the composition of the sales. Suppose turnover appears healthy but outstanding debtors have ballooned; then perhaps the business has been successful at making sales while becoming less successful at collecting money.

This is the part of compliance I wish more business owners could see. The BAS is not a set of management accounts and should never be mistaken for one, but the work required to produce an accurate BAS creates a regular checkpoint at which the underlying records ought to be sufficiently current to tell us considerably more than the amount payable to the ATO. It is an ancillary benefit hiding in plain sight. We have already done much of the boring work, so why would we not take another few minutes and ask what the numbers are trying to tell us?

That is the Discipline of Boring in almost perfect form. Bank reconciliations, invoices, debtor ledgers, payroll records, GST coding, PAYG withholding and provisions for liabilities will probably never compete successfully with the excitement of a new customer, a large contract or a shiny piece of technology. Yet those ordinary disciplines tell us whether the excitement is producing the result we imagine it is producing. Business has always had a slightly unfortunate habit of celebrating the sale long before it checks whether the sale made any money.

The BAS can interrupt that habit every month or every quarter if we allow it to. Instead of beginning the process when the accountant sends the third email asking where the records are, perhaps the reporting period itself could become the trigger for bringing everything up to date. The quarter ends, the accounts are reconciled, the liability is estimated and the amount required is identified or preferably already being provided for. The eventual lodgment then becomes what it should have been all along: completion of the process rather than commencement of the panic.

There is a CANEI element here as well, although it is hardly the version likely to fill a conference auditorium. Constant and Never-Ending Improvement does not always require a revolutionary new system; sometimes it means the March quarter BAS is prepared ten days earlier than the December quarter, and the June quarter is cleaner again. Perhaps the owner begins reviewing debtors at the same time, then margins, then cash flow, until something once regarded entirely as taxation compliance has quietly become part of the management rhythm of the business. Nothing particularly spectacular has occurred, but the owner knows more, earlier, and that is usually a useful direction in which to travel.

That thinking sits naturally beside 20 Days Too Late. The title came from the recurring reality that opportunities often disappear not because an answer never existed, but because the question was asked after the point at which anything useful could still be done. BAS liabilities provide a miniature version of exactly the same problem every reporting period. The amount required next month is far easier to deal with this month than it is the afternoon before payment is due.

It also connects with What the Accountant Saw, because the most interesting part of accounting has rarely been the final number for me. It is what happened underneath it. Why did gross margin move, why did debtors increase, why is cash disappearing despite increasing turnover, why is the BAS liability consistently causing distress and why does a supposedly profitable business repeatedly struggle to fund obligations generated by that profit? Compliance provides numbers, but curiosity turns those numbers into management information.

That is where I believe the accountant acting as a genuine “silent” partner earns their place. The conversation should not end with, “Your BAS is $25,000 and it is due on this date.” I would rather ask whether the owner expected approximately $25,000, whether provision has already been made for it and, if not, why the result came as a surprise. From there the discussion can move into systems, margins, cash flow, pricing, collections and whatever else the figures have begun to expose.

There is no virtue in making a client feel foolish because they have been caught short. There is considerably more value in ensuring that the same conversation does not happen again three months later. The objective behind “drag you kicking and screaming to compliance” was never to produce perfectly obedient clients who trembled at the mention of the ATO. It was to reach the point where they understood their obligations well enough, and understood their own business well enough, that nobody needed to drag them anywhere.

Compliance, viewed that way, becomes an act of stewardship. You are looking after the business, the employees depending upon it, the family relying upon it, the customers trusting it and the dream that caused you to begin the thing in the first place. The BAS is simply one of the recurring moments when the business is asked to put its cards on the table. Whether we look at those cards early enough to learn something from them remains our choice.

Perhaps that is why this particular subject has irritated me for so many years. I have watched too many intelligent and otherwise capable business owners turn red when handed a BAS liability that their own records could have told them about weeks earlier, then scramble to solve a problem that did not need to become a crisis. The liability was never the real enemy, and neither was the compliance that exposed it. More often, the enemy was the gap between when the business could have known and when somebody finally chose to look.

The third pillar of Banks Consultancy may therefore still deserve its deliberately uncomfortable wording: we will drag you kicking and screaming to compliance. The irony is that successful compliance was achieved when the dragging stopped, because the owner had begun using the discipline for themselves rather than performing it reluctantly for somebody else. If a monthly or quarterly BAS can tell you not only what you owe but also encourage you to ask how the business performed, where the cash went and what needs attention before the next reporting period closes, then perhaps compliance was never standing in the way of the business at all; perhaps it was one of the tools trying to help the owner see it clearly.