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Managing cash flow when running your own business

Running your own business offers the chance to control your destiny

Running your own business offers the chance to control your destiny, but don’t be tempted to mix business and personal spending; it can prove disastrous. Anthony Fensom joins us again to tell us why.

While it can be tempting to use your own business as a personal cash cow, when it comes time to sell, buyers will want to see evidence of its profitability. For this reason, it pays to keep proper records and run it separate to your own affairs right from the start.

In a hypothetical example, the owner of a retail business might claim that it is generating $100,000 annual profit instead of the reported $20,000. But buyers base the value on stated profits, and in this case, the business could be worth only $60,000 and not the $300,000 it might claim if it kept its records in order.

Separate business and personal accounts

Owners should set up their business as a separate entity with all income and expenses for the business paid using its own bank account. Based on an established budget, wages for the owner can be transferred into a business high interest savings account.

“You might estimate that the business will generate $200,000 in income with expenses of $100,000, so plan to keep $50,000 as a working reserve and transfer the other $50,000 into a separate account as drawings or wages,” says Grant Loechel, senior financial adviser at iPlan Financial Services Australia. “At the end of the financial year, if there’s additional income it can be withdrawn as profit.”

According to Loechel, once the business starts earning more profit the owner can consider increasing their income.

“You should be earning at least 20 to 30 per cent profit as a reward for the risks of ownership. If you’re only earning what you could earn elsewhere as an employee, then you might as well go and work for someone else.”

Dealing with tax

Business owners should track their financial position on a monthly basis to avoid any unexpected surprises, such as tax.

Ensure the budget sets aside funds for goods and services tax (GST), pay as you go (PAYG) tax instalments and superannuation to avoid a nasty shock at the end of the quarter, as well as a possible tax penalty for late payment.

Businesses with annual turnover below $2 million are eligible for a range of tax concessions, including:• Simpler depreciation: Immediate deduction for assets worth up to $6500.

  • Capital gains tax: Retirement exemption on the sale of a business asset, worth up to $500,000.
  • Excise: Change from a weekly to monthly reporting cycle.
  • GST: Payable by instalments, variable on a quarterly basis.
  • PAYG: GST-adjusted instalment option and other concessions.
  • Fringe benefits tax: Exemption on car parking provided to employees.

For home-based businesses, it is possible to claim costs including occupancy, running expenses and motor vehicle use, although these should be clearly documented.

By putting the right foundations in place and accessing available concessions, individual owners can give their businesses the best possible chance of success.