Specialised accounting and finance for engineers
Engineers and design professionals are big thinkers. They spend their days investigating ways to develop and utilise new technologies, solve problems or improve existing systems. Their projects can vary greatly in size and scope, but they are often under time constraints and feel the pressure of regulatory requirements.
While they are highly technical, business accounting isn’t necessarily their forte and this is where we can help. Our abilities within complex accounting and finance for engineers are second to none, and we know exactly what a firm requires to achieve successful financial management.
Valuing your time
The fundamentals of business accounting are always the same, regardless of industry sector. Tax requirements and basic business finance matters rarely change, whether you are an engineer, a wholesale supplier or a mechanic.
But the nuance appears when we consider what your actual ‘product’ is… a wholesale supplier sells a specific item, a mechanic repairs a car… but in engineering and design your product is your time. Marius explains:
“Yes, an engineer produces a design but that is the end product that will be built or created from your design. Essentially, what the firm would be selling is their time.
In those cases, when it comes to an accounting perspective for engineering and design, you need to focus on recording that time and valuing it properly for tax and cost purposes… and of course, for billing it out to the client. Unfortunately, we find that in a lot of instances, this element gets overlooked.”
Research and development
It’s essential that an engineering and design firm understands that there are some great benefits they can gain from their research and development (R&D). Impressive government incentives and grant opportunities are on offer in this sector. Marius continues:
“When you work on an engineering project, it’s not uncommon for an engineer to be developing something new – and when you do that you could qualify for the Australian Government R&D Tax Incentive (R&DTI), which is a significant program.
If you are looking at the R&DTI, it is extremely important to record your time. It’s such a big part of what you can claim back as far as resources that you’ve put into developing this new thing.
It can be complicated, but you have to start thinking about questions like what core activity you are doing, as this is central to the incentive.
For instance – if you are designing a new mountain bike, what is the core activity? Yes, you are designing a bike, but that’s not really it. You are figuring out pivot placements on the frame and this is what makes it unique. The time that is spent on that aspect of the project is relevant.
We know a bike has already been developed, that’s not new – but the new design for pivot placements is and this is how it relates to the R&DTI. The R&DTI encompasses completely new designs or the development of new materials, but it also recognises using previous knowledge and building on it, as well as using existing materials in a new way.
So, by identifying your core activities it will go a long way to meeting the requirements for the R&DTI and potentially open the door to other government grants. It is all underpinned by accurate record keeping systems. You might not get paid for the 50 hours you have put into designing the new bike, but it is still a design expense and can qualify for the incentive.
This is where engineering and design firms really benefit from tailored accounting advice. A lot of firms get to the end of the financial year, look back at their work and realise ‘I might qualify for incentives.’ Then you have the arduous task of trying to retrofit everything you’ve done throughout the year.
It can be hard to fit tasks into categories like ‘core principles’ or ‘time spent’ and you might not have recorded your work in such a way… so it is worth speaking to an accountant at the outset and setting up your systems for the possibility that there may be the incentives available to you at some point.”
The right accounting systems
Marius says that it can be as simple as using Excel to log your time on a daily basis. You don’t necessarily need additional software programs for that record keeping. But he does recommend utilising tools for your expenses.
“For all these incentives, every expense you claim back via an offset needs to have accurate records. Ideally, the receipt should be attached to that transaction and this is something that the ATO looks into more often than other types of businesses.
When you claim an offset from the ATO, it is more likely to be heavily scrutinised and grant money is watched more closely. To help manage your record keeping, Xero and Hubdoc are a really good combination. Every receipt is captured and stored against the actual transaction.
At year end when you have to supply figures for tax returns or when the ATO comes knocking, every transaction has a source document attached to it to prove what you’ve been doing.”
Don’t forget business structure
Business structure is another crucial element that you need to be mindful of. Marius says:
“The R&DTI and these types of grants are only available to a business that is set up as a company. You can’t be a family trust, sole trader or partnership to have R&D activity and access these incentives. This is because of the tax mechanism of the refunds… you have to be a company.
In fact, many claims are disallowed because they’ve never set up the company correctly. It might have been two guys who started out as partners doing all the work but then didn’t have the right business structure. Unfortunately, you can’t retrofit a company over it later on… it has to be there from the beginning.
This is why it is really worthwhile to speak to an accountant to be prepared for the future… even if there is no R&D activity now, you have to make sure you have the right structure in case it’s something that you can do in the future.”
Talk to us today
Here at North Advisory, we are specialists in accounting and finance for engineers. We understand the intricacies of your industry and know how to structure your systems to make sure you are prepared for future opportunities.