I am forever hearing small business complaining about the tax they pay and asking how to reduce their liability. I find this very interesting as if these business owners spent as much time focusing on increasing revenue then the tax issue would not be such a focus.
I agree … No one likes to pay tax … but at the end of the day Government needs taxes to fund services to the community like police, education, health, roads etc.
The point a lot of small business owners forget is that the main focus of any business decision should be based on the return that the investment is going to provide. If the investment does not stack up then any potential tax advantages are not worth considering.
I suggest that the first criteria when considering making an investment is – does the opportunity provide a suitable return for the risk you are taking e.g. if you were to invest $100,000 purchasing a business what return would you want to make on your investment. A simple starting point in considering the return on investment is to look at what would one of the big four banks offer you to invest the money with them – (somewhere between 3% and 5% depending on the period the money was invested for etc).
So, if the bank was offering say 4% with minimal risk, then what is the risk/return you should be seeking from a business that does not have a credit rating, may have little management skills and lack policies. Maybe a 20 to 30 percent return would not be unreasonable, for if you were not to achieve this type of return would you simply invest your hard earned money in one of the banks or government bonds where risk is low.
Same applies if you are looking to invest in, for example, property. For example, if you were considering purchasing a commercial unit in Strathpine on Brisbane’s north for say $250,000 you would need to consider the return on investment, tenancy trends, out-goings etc and see how it all stacks up well before considering tax benefits.
Having said this, once you have determined whether the investment is sound from an economic return perspective, then look at how tax can be minimised within the boundaries of the legislation.
The bottom line to any business decision should therefore always focus on expected returns for risk first and only then look at the tax consequences before making a final decision.
Welcome to Part Three of four Blogs in which we will look at 8 money habits business owners should make sure are NOT occurring in their business.
Not seeing how the little things add up
“While I’m here I’ll just grab some of this and some of that – I’m sure we need it or it will be useful somehow in the business.” or “I know there is a fee if I withdraw from this ATM, however, my Bank’s ATM is outside and round the corner, and the time it would take me ….”
Sound familiar? It’s the little purchases and expenditures that start to add up and can significantly affect cashflow and health of the finances. Make sure you monitor what office supplies and purchases are needed and when .. and only spend to the plan! If you need to withdraw money, either keep a petty cash float or go the extra mile to your bank- those charges can really add up.
Generally think … do I need to spend that money … am I maximising the money I am spending … so there are no nasty surprises at month end.
Not planning for retirement.
Of course we’re planning for retirement … the retirement funding plan is established and superannuation is set up – usual questions such as, is there enough contribution and is the fund performing well, are being asked and monitored.
But what about the business at retirement time?
Plans need to be developed to migrate the business when it is time to enjoy the fruits of your labour. Is it intended to sell the business? If so, what lead time would need to be considered? Will the business be wound down? If so, how will this occur?
As with start up, at business end we need to plan, plan, plan.
Call me today if you need help managing your business’s wealth – (07) 3264 4783
Welcome to Part Two of four blogs in which we are looking at 8 money habits business owners should make sure are NOT occurring in their business.
So far we have looked at:
- Spending without a Budget
- Carrying a Balance on Credit Cards
Read on for this blog’s money habits not to have.
Not Monitoring Interest Rates
Whether it is your investment rate or what you could get on a borrowing refinancing it pays to continuously monitor borrowing and investing prices. No one wants to lose money if they could have got a better investment rate – and no one wants to pay more than they have to for debt. With profit margins reducing and costs of running businesses rising it is good management to stay on top of interest rates and trends which impact both your business and personal finances.
Not properly insuring for income protection and disability
Anyone who runs their own business and supporting themselves needs to consciously assess the risks of not properly insuring for loss of income due to injury or illness. If something prevents you from working for a few weeks or more, proper insurance could be the difference between tightening the businesses expenditure for a while until you are back on your feet and closing the doors. Business insurance coverage can be expensive with defined conditions. Do your homework and shop around for the best value for money for your price range. Remember, with the benefits of being your own boss comes the responsibility to ensure proper business coverage.
Pouring over margins and gross and net profit, a common theme is a belief that the way to salvation is through an increase in sales. However, in reality, profitability is driven by the ability to vary price and maintain control over costs.
No matter how hard a business tries, if it has increasing costs and is not able to increase price, then no amount of increased sales will lead to increase profitability – in fact, the business maybe simply increasing its loss.
But alas, I hear you say, “we cannot afford to increase our prices because then we won’t be competitive with our competition down the road”.
If this is really the case then some serious research needs to be done into the competitors to see how they are maintaining profitability. It maybe they are managing their costs better or else they maybe in the process of going out of business.
So, businesses need to differentiate themselves from their competitors so they are not governed by others’ price but by their ability to influence the market that they have a better product or service or something else that they cannot get from the competitors (competitive edge/competitive advantage).
One way of going about this is to develop a simple list of all the reasons why a customer would want to buy from your business. That is, what makes your business unique?
Alas again I hear you say, “but we sell the same goods as the guy down the road”. True, however, the answer may lie in exactly what you are selling – and that could be a million things:-
- the quality of your service;
- the after sales service;
- the way the store looks;
- the attitude of staff;
- the way the goods are presented and packaged;
- the quality of advice given by staff;
- the knowledge of products sold;
- product range; and so on.
Next, you do the same for the competitors ie. what are their strongest selling points? Once this is worked out, a business is in a position to play to its strengths and eliminate or reduce weaknesses while at this same time developing ways to counter the competitors’ strengths.
For most businesses, if this is done well, two things will happen. The business will be able to increase prices based on the product differentiation and if through this process generate repeat business then the controlling of costs will be easier.
Why will costs be easier to control? Simply put, the least costly way of getting customers through the door is by repeat business. They have already experienced the business and don’t need to be convinced to come back and what’s more they will recommend the business to friends and associates (the second cheapest way of getting customers).
Let’s have a look at this by way of example. If a business has a 30% margin and it increases its price by 10%, then sales can decline by 25 % before gross profit is reduced. Whereas, if it discounts price by 10% on the basis that increased sales will help and the business is running on the same 30% margin it needs to increase sales by 50% to produce the same gross profit.
So, when the business has its price and cost structure right, remember, “Cash is King”. Even with high volume sales at the right price, and costs reduced, a business will fail if it does not have good cash-flow and is unable to pay suppliers and staff when due.
Now is a good time for businesses to have a critical look at how they are operating. Reviews need to focus on all aspects of the business including customer analysis and the finances. Questions to consider are – do you know:
- who your customers are and what their spending behaviour is?
- how often do you review this-weekly/fortnightly/monthly?
- when is the last time your bank and credit statements were reconciled?
- the breakdown percentage of your costs?
- your gross profit margin and overheads? and so on.
If you think this is the role of the bookkeeper, think again. Business owners need to keep an eye on the ball, making sure the business stays financial and trends are regularly identified and monitored before you have any significant detrimental impact or conversely so you can’t be taken advantage of.
Of course your bookkeeper and/or business advisor can assist with gathering this information.
Need help or more information – contact us – we can help!