Is your Business Foundation Shaky?

For any business to thrive, it must be built upon a strong foundation.  Shaky foundations can lead to some dire consequences including:

  • Less than optimal business profits
  • Lack of cashflow
  • Significant high-interest debt
  • Significant Tax Office Debt
  • Potential liquidation of the business
  • The potential loss of personal assets including the family home
  • High-stress levels

Why is it that many small and medium-sized businesses have such a shaky foundation?

There are generally three reasons why this might be the case:

  • The business was started with no real plan (i.e. this is often because everyone is just so excited to get going on the new venture);
  • The business was started with no or poor professional advice; or
  • The business was started with good advice but, through the passage of time, that advice is now out of date and it hasn’t been reviewed and updated.

So, what are these foundations which are so important to the success of a business?

 

Business Structure

A good business structure allows for the following:

  • Asset Protection – both business and personal assets
  • Tax Minimisation – both now and upon your exit from the business

In my career as an accountant, rarely do I get a new client whose business is correctly structured and this has often either cost them significantly in extra tax paid over the years or it has resulted in a loss of significant personal assets when their business has failed.

Poor business structuring is usually a result of the following:

  • To save money, the owner set up their own structure;
  • The owner’s advisor didn’t take the time to explore the wide variety of issues which need to be considered when structuring;
  • The business owner didn’t understand their structure and, as a result, weakened it by using it incorrectly over time; or
  • The structure wasn’t reviewed and updated regularly.

Business Capitalisation

In my experience, the vast majority of small and medium-sized businesses are undercapitalised which means that they don’t have the necessary cash to fund the business, especially in times of growth.

This usually happens because either there is no plan in place at the outset or, if there is a plan, it is not consistently reviewed and changed to reflect the ever-changing circumstances of the business.

Undercapitalisation can be the death of a business. Without a proper plan or budget, business owners will look after the “today” and worry about the “tomorrow” when that day comes.

This often manifests in them using funds which should be set aside for tax liabilities (e.g. GST or PAYG Withholding) or employee super to fund ongoing business expenses in the hope that that money will be available when it is needed at the end of the quarter.

This is rarely the case. The result is high-interest debt with either the Tax Office or a bank through the use of personal loans or credit cards.

This is a steep, slippery slope that too many businesses fall down.

Business Financial Model

Many owners of small and medium-sized businesses are excellent technicians (i.e. they are really good at what they do) but lack an understanding of what makes their business tick.

As a result, they work significantly harder than they need to for less than they ought to get. Further, in hard times, they resort to just working harder which is natural.

The issue is that if you work harder on the wrong things, at best it will do you no good and, at worst, it will propel you down the wrong path at a much faster rate.

Understanding your business financial model allows a business owner to plan the business based on financial and non-financial drivers and identify exactly what needs to be done for the business to be successful.

This results in a tangible action plan for the business owner to concentrate on, rather than just a vague “I need to work hard” mentality.

It also allows a business owner to review what is happening in their business, identify exactly what isn’t working and tweak that driver so that it and the business is back on track.

Other Issues

In addition to the above major issues, there are a number of other issues which really need to be locked down to ensure that your business’ foundations are in place, including:

  • If you have debt, ensure that it is the right type of finance, in the right entity, at the right interest rate.
  • Ensure that you have the right insurance cover, both business and personal, that it is paid for by the correct entity.
  • Ensure that you have wills in place together with, if appropriate, testamentary trusts.
  • Ensure that you are across your HR requirements including paying the correct amount. Ensure that you protect yourself by having an employment contract for all employees.

Where to from here?

If you are working extremely hard and not getting the results you feel you should be, if you have cash flow issues and/or owe the Tax Office money, or if you are paying more tax than you think you should be or if you don’t understand how your structure works, there’s every chance that your business is built on shaky foundations and I strongly recommend that you get professional advice to help you.

 

Go here for more great advice https://www.exceedia.com.au/contact/

Cheers Craig