CashflowCalling all business owners, entrepreneurs, solopreneurs, mumpreneurs, dadpreneurs – or any other fancy titles that are out there at the moment – the sooner you realise that profit is not the same as cash – the sooner you will start to plan for a fabulous financial future.

You see here is the thing – I speak to business owners all the time who simply get frustrated (*insert swear words here if that takes your fancy) at having to pay tax for their business – when the bank balance has run dry.

“That is right – there are no pennies left in the piggy bank yet the ATO seem to think you owe them money. Sound familiar?”

How can that be? Where do they think my money goes? It is not just an endless supply? These are the questions we get asked all the time in our financial coaching sessions – and sadly a lack of financial understanding topped with not being able to “afford” advice that could save thousands of dollars in money and hours in stress and sleepless nights, are the two main culprits for these constant questions.

“So do you want to know how you can have a healthy relationship with your business profit, your bank balance and the ATO (yes it is possible)?”

Well if you can nail these 5 tips, then you are well on your way to never bitching about profit or tax again – and you may even put some money away for a rainy day, which you probably are not doing right now (but I bet you are nodding your head though).

1.Understand where your cash flows in AND out of your business each month. That is right – it means getting down and dirty with your numbers. Really looking at them – and if you are only running a Profit and Loss report each month that is simply not good enough. You need to understand drawings, assets purchased, loan repayments – just to name a few of the transactions that effect your cash but not your profit.

2. Have a budget and actually review it each month. We love budgets. In fact we geek out over a bloody good spreadsheet. But a budget is not something you create then ignore for the next 11 months. We use our budget each month to guide our spending, and also to tell us when to stop spending. Yes that is right – if used properly, a budget can act as a gate keeper of your bank account. “Computer says no” – totally applies here – so step away from the credit card and stop spending in areas that are not effecting your sales or growth of your business.

3. You earn you pay. And by this I mean wages. There is a big misconception in sole trader business structures that owners taking a “wage” is a tax deduction which in effect reduces profit. WRONG. Yes, by all means, take drawings – I mean gosh you have to live and I am sure you have worked damn hard. But when you take those drawings – don’t spend it all. Some of what you are drawing out, needs to be put aside for the tax man. In a company structure, if you take drawings – often this is a genuine wage (and tax deduction yay) – however this means the company needs to consider tax withholding and superannuation.

4. GST is not your money. One client recently complained to me that they paid too much GST when their sales were over $200k in a quarter. They asked me how to reduce their GST bill. I kindly told them to make less sales – problem solved. Their response – why would we want to earn less money? You see – you generally can’t have your cake and eat it too. But number one rule when dealing with GST, is that GST is not your money. Never has been, never will be so never, never, never count it as part of your cash flow to fund your business.

5. Profit means you are making money. Now I know sometimes I state the obvious – but wouldn’t you rather be making a profit than making a loss? Wouldn’t you rather be able to draw a wage (because your business is making a profit) and being able to live the lifestyle that you want? Wouldn’t you rather grow your business and be successful? Well if you answer yes to any (or all) of those questions, then part of your planning with your accountant should be around your business structure and planning for tax. I would much rather earn $100,000 a year as a wage and pay tax on that throughout the year, than earn $18,000 a year just to say I don’t have to pay tax. Food for thought.

“So what I encourage you to do is to really start thinking about where the holes are in your business around tax, profit, cash flow and your general money mindset. Magic won’t happen overnight, but the sooner you can start to understand the areas you need a bit of hand holding in, the better.”

Yes, tax and accounting advice costs money (heck I have bills to pay too) – but if that meant shaving thousands of dollars of your end of year tax bill, having accurate and reliable information at your fingertips, and a plan to ensure cash is flowing in the right direction – isn’t that an investment worth investigating?