Money Management Advice for Small Business in Australia

Ever wondered why the failure rate of businesses is so high?  Are you too afraid to start your own business because you’re worried about failing?  Do you lie in bed at night worrying about how to manage the cash in your business? Don’t worry, because today I have all the answers for you and it’s far simpler than you might expect.  And if you read until the end, I have a couple of bonus titbits of information for you.

With a failure rate of 20% for new small businesses in Australia, you find yourself wondering what the problem might be.  And mostly it’s down to one simple thing which a lot of people struggle to manage:  Cash.  More specifically the speed at which it comes in and goes out.

For a new business, the problem is generally that cash is being spent faster than it is being received.  This isn’t entirely unexpected it’s a time when you have a lot of set-up costs to get the business going.  You are spending heavily on stock, websites, advertising and so on, so it stands to reason the business will be spending large amounts of cash.  The problem lies in the amount you receive and generally speaking, unless you’ve bought an existing business or a list of clients or patients, the amount you are earning either doesn’t match-up to the amount you are spending or at the very least comes in well after you need to have spent it.

You can get around this disparity by using various different tools such as seed investment which is when you ask someone to invest in your business in return for a share of the profits, taking out a loan or setting up an overdraft facility with the bank.  You just need to remember that these will all need to be paid out of the money you will be earning in the future so you need to make sure the business does actually start to earn some money otherwise it will fail.

If you are a more established business having a shortage of cash can be the result of one of two events:  1 you are going through a period of growth where there is a delay between the work you are needing to do (and spend salaries on) and the time at which you get paid; or 2 you are spending more than you are receiving and doing nothing to bridge the gap.

On the one hand you know the money will be coming in at a later stage so balancing the books might be as simple as changing how you invoice on the other, you have no idea when the money is coming in and failure is becoming more of a reality by the day.

So what does business failure actually look like.  In many instances it doesn’t need to mean bankruptcy.  There are many steps which can be taken between having a cashflow shortfall and full blown bankruptcy.  However, undeniably, whatever the outcome, in most cases you are going to be left out of pocket and depending on your business structure, you may be left in debt and at worst, having to sell off your private assets like your home, to pay for the debt.

So the incentive to make sure you manage your money well should be high. 

So how do we manage our money to make sure we have more going in that going out?  Well planning and vigilance are the two key things to be focused on.  A little time spent planning at the beginning of every year goes a long way in being aware of your finances and knowing what’s got to come in and go out.  It also tells you how much money you are going to have available to buy new equipment, expand your business or pay your tax bill.

Vigilance is the second step.  Continually checking your finances, seeing if there are ways to streamline costs or operations, use technology to reduce expenses, checking your subscriptions to see if they are still being used, renegotiating with your suppliers, they are all ways of being vigilant when it comes to the money going out of your business and knowing what it is being spent on and how.

One of the best ways to manage your money and make sure you have enough to pay bills like your tax bill or superannuation is to use bank accounts as buckets.  Here at Venta we use 5 bank accounts to manage our cash.  Each account does something different so I don’t ever have to worry about what money is available to spend on what.  We use an Income account to manage all fees paid into the business.  This is our main account, but it rarely sits about a couple of dollars because the money is transferred to other accounts to manage bill payments.  We have a tax account which is where the GST on fees is put, plus a percentage amount to pay towards our tax bills, superannuation and PAYG.  We have profit and owners compensation accounts which are designed to house the money set aside for both those things and finally and operating expenditure account which gets everything else.  It’s where all the bills are paid from (other than the tax ones).

It may sound like I spend hours each week just ding banking but I really don’t.  I literally would do banking maybe once or twice a week depending on how much we have been billing – I find it exciting to see the account balances going up so I quite enjoy doing the transfers.  Implicit in all of this is that you keep your business banking and your personal banking completely separate.  It’s cleaner, easier and far more efficient to keep everything separate.

Now I mentioned before that we have a bank account set-up to manage profit.  You might be asking yourself whether this is the same as paying myself a salary and the answer is no.  You see, my salary is an expense of the business for me to work in it producing client advice – just as it would be if I worked for another firm.  The Profit is the amount left over after all the expenses have been paid.  It is the golden goose and the aim of any business should be to make a profit.  Deciding on what the profit should be upfront and physically putting the money aside for it is just managing the cash to make sure we achieve our goals.

The same could be said for the owners compensation account but again, the answer is no. Why not?  I’m the one with my backside on the line financially.  I’m the one who has taken the very sizeable risk to own and run this business.  And this is my reward for doing so.  Again, putting it on one side is a way of ensuring I am rewarded for the risks I have taken.

Right, so  Bonus tip 1: the structure of your business is very important and quite often not really thought about until later on down the track but really should be considered at the beginning and yes, it will cost you money but in the long run, it’s going to save it.

So structure – this is the structure through which your business operates.  The most common type of structure for start up business is a sole trader.  It is the simplest and easiest of all the structures to set-up and can be done very cheaply.  You really just need to register for an ABN, if you want to set-up a business name you can, use the bank account structure I just went through and hey presto off you to.

What are the problems with this?  Well, it’s easy to confuse you as the business and you as the person.  I see a lot of people very confused about who does what because you are one and the same.  The best analogy I have is to to think of your business as your best friend.  You do loads of stuff together but you don’t sleep together.  In other words, go out and do the work, earn the money, but keep it separate to everything you do personally. Hence the use of so many different bank accounts.

A couple of the other problems with using a sole trader as your business structure revolve around liability and tax.  So, as a sole trader you have no protection from creditors should someone want to get some money off you.  They can go for all your personal assets and you’re left with nothing.  This can especially be a problem if you have a family as you may not want to run the risk of being homeless with kids in tow…it’s not like you can pitch up and camp on the floor at your parent’s place quite so easily.  The other, is tax rates.  As a sole trader you are taxed in exactly the same way as you would be if you were an employee which based on the tax rates at the time of writing may mean you could end up with a 47% tax rate.  That means you work until Wednesday afternoon each week before you actually get to keep the money.

As a business grows we often see people looking for a more commercial and tax attractive structure to run their business.  Whilst there are a couple of different options on this and I have done a video previously on it which I will give you a link for, by far my favourite is a company.  A company provides great creditor protection so it’s harder for you to lose your home and the tax rate is far more attractive at a flat rate of 25% for businesses with a turnover (yep, topline revenue) of less than $10million at the time of writing.  For me, it’s a win:win.

Now Bonsu tip 2: whilst you can’t and indeed never should, structure your business for tax benefit, it is always a consideration when we talk about structuring a business, so what exactly are the tax rates.

For individual tax payers in Australia, at the time of writing, the tax brackets are as follows:

2023/24:

Taxable incomeTax on This income
$0 – $18,200$nil
$18,201 – $45,00019c for each $1 over $18,200
$45,001 – $120,000$5,092 plus 32.5c for every $1 over $45,000
$120,001 – $180,000$29,467 plus 37c for every $1 over $120,000
$180,001 and over$51,667 plus 45c for every $1 over $180,000

Now this is going to change from 1 July 2024 as a result of a legislative change which has now passed into law:

Taxable incomeTax on This income
$0 – $18,200$nil
$18,201 – $45,00016c for each $1 over $18,200
$45,001 – $135,000$4,288 plus 30c for every $1 over $45,000
$135,001 – $190,000$31,288 plus 37c for every $1 over $135,000
$190,001 and over$51,638 plus 45c for every $1 over $190,000

Contrast this with a company who’s tax rates are the following:

Turnover of $10 million or less – 25%

Turnover of $10 million or more or an investment company – 30%.

I hope you’ve found this article useful, thankyou for reading I will leave links to references in this article below and I’ll catch you in the next one.

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