Fundamental financial advice for aspiring business owners
Friday, July 12, 2019/
Launching a business is exciting and exhilarating. Your hard work is finally coming to fruition and you’re getting ready to share your big ideas with the world.
But before you do, you need to make sure your finances are in order.
As the business owner, it’s all down to you — and getting the money stuff right from day one could be the difference between a disappointing result and a resounding victory.
Here are five tips to put you on the road to success.
1. Have an emergency fund
Your emergency fund is your financial safety net. It will catch you when the proverbial hits the fan and help avoid cashflow issues caused by unexpected problems.
Put aside enough savings to cover your expenses for at least six months — longer if you can. This buffer will help you ride the waves of cashflow and stay ahead when the going gets tough. It’s also a great way to ensure you can pay the bills even if you can’t pay yourself just yet.
2. Get the structure right
Will you run the business in your own name, a trust or a company? There are pros and cons to each.
As a sole trader, the setup is easy and inexpensive — and the profits go directly to you. You report your income via your individual tax return and pay personal tax rates. But you are also personally liable for any debts, meaning your personal assets will be fair game if the bank comes knocking.
A partnership, similar to above but you need to protect yourself both legally and financially when others are involved.
A company is a separate legal entity, meaning your personal assets may not be threatened if the business goes under. Big pro. But establishing a company structure is more costly and complicated, with greater ongoing costs and obligations, and there are still risks as a director.
A trust is another popular option with its own advantages and disadvantages. For more information about business structures, visit the Australian government’s business website.
3. Keep your personal finances out of it
Repeat after me: ‘I will not sacrifice my personal assets to save my business.’
Whatever happens, do not mix business money matters with personal finances. If the business starts to sink, the absolute worst thing you can do is use your personal wealth to keep it afloat.
If you’re not yet receiving income from the business, you might be tempted to redraw on your home loan to put out a spot fire here or there. One thing leads to another and before you know it, you’ve redrawn so far that you can no longer support yourself. You can’t refinance because you can’t demonstrate any income for future repayments. In other words, you’re in hot water.
The only solution here is prevention. Just don’t do it.
4. Super and income protection insurance are not optional
If you’re running a business and not putting money away in your superannuation account, you’re making a serious mistake. You must continue to pay yourself superannuation just as you would if you were employed by someone else. It’s the most tax-effective investment you can make for your future — and missing out on five or 10 years’ worth could really set you back.
Income protection insurance is another must-have. The devil is in the detail — consider agreed value and indemnity value. Indemnity means you’ll have to prove your earnings when you make a claim, and your benefit is based on that amount. I always advise my clients to go for agreed value long before they start their business so it’s locked in and you know what your benefit will be. This is especially important if you’re in the first few years of running your business, as your income may have dipped or may not even exist.
5. Commit for the long haul
Too many businesses open their doors to great fanfare, only to close just six months later. Often, their owners have seriously underestimated the cost of keeping a business afloat long enough to turn a profit. Meanwhile, they’ve signed a lengthy lease and can’t pay the rent.
You either need to be 100% prepared to hit the ground running or have enough cash behind you to weather the storm until you build some sales momentum. Be honest with yourself and don’t rush it.
If you’re not prepared, keep saving and planning until you are.
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