5 tips that will keep you and your business out of financial strife
Small business owners often find themselves in strife due to poor financial management. These five tips will help you stay on the right side of the ledger.
As all business owners and entrepreneurs know, running a business is no easy task. Your business is like a child; you nurture it and hope one day to see it grow into something special. The last thing you want is for your business to crumble under financial pressure.
After countless conversations with small business owners over the years, I’ve realised there are five specific, yet simple steps anyone can follow to keep both their business and personal finances in the black.
Tip # 1 – Lodging is more important than paying
The number one rule to keeping yourself out of financial strife is to stay on the good side of the ATO. Whether you as the owner of the business are lodging your Business Activity Statements (BAS), or your accountant lodges them on your behalf, it’s essential these are lodged on time, every time. At some point, we’ve all fallen into the trap of putting things off until the last minute, but you’ll have to kick that habit, pronto!
A company I’ve worked with, (who I can’t name for obvious reasons), didn’t lodge by the required date just once. This allowed the ATO to use their power to take a portion of the tax (PAYG) as a Director’s liability – via a Director Penalty Notice (DPN) – which had extremely serious consequences for them personally and their assets. So, ensure you lodge on time, even if you’re not able to pay your BAS.
“The number one rule to keeping yourself out of financial strife is to keep your business on the good side of the ATO, and lodge your statements on time.”
It’s important to note that the legislation for owner liability is based on the timing of lodgements, rather than payment.
Tip # 2 – Don’t use personal funds to prop your business up
I often speak to business owners who have been borrowing money from their personal funds to keep their business going. And I’ve seen many of these business owners end up bankrupt, losing their personal assets and property after they continued to pump money into a failing business for an extended period.
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While I know it’s easier said than done, it’s really important to try and not do this. Plunging into your own wallet to keep a business afloat is like pouring fuel on the fire; you may end up burning a hole in your pocket. It’s always best for a business to fund its own way.
Tip # 3 – Don’t assume your accountant is on top of everything
One business I know of got into a fair bit of strife with the ATO about tax payments. The business owner thought their accountant was organising things when they weren’t.
It’s really important that as an owner of a small or medium size business, you have a good understanding of your accounts and when payments are due to the ATO. There’s a great accounting software called Xero which is a relatively easy way to keep on top of all your finances. You don’t have to be a maths whizz to understand it, and it’s super simple to use!
Tip # 4 – A company is better than a trust or partnership.
The majority of businesses I deal with have been set up with trust by an accountant (looking for the entity to be tax-effective). This setup leaves your personal assets exposed should the business fail. If you’re setting a business up with a partner or spouse, try to ensure that only one of you is exposed at the business end. (That person should not be on the mortgage for personal assets/the family home.)
If you set your business up as a partnership this too can become a significant issue, as all debts of the business are then personal debts, as well as business debts. Not a great idea!
What do I recommend? If you’re setting up a business, set it up as a Pty Ltd company so you’re protected by company law.
Tip # 5 – Put your business assets in a different company
Most businesses have intellectual property, a website, domain name, and so on. It’s a good idea to own these in a different entity from the operating company. If things don’t go well and you need to close down the operating company, those assets are protected and you’ll have more options going forward.
At the end of the day, the key to keeping your business afloat is the effective management of your time and resources. Don’t sweep the scary stuff under the rug. Take a course, use software that is available to you, or engage experts who can do the job well. If you can do this, you’ll be one step out of financial quicksand and closer to realising your ambition.
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