Know your limits: Understanding your level of financial commitment
We all love a feel-good story. Which is why the modern-day business world seems full of gung-ho tech startups that were up to their eyeballs in debt before a lucky break bailed them out.
But for every Jeff Bezos – who warned early Amazon investors there was a 70% chance they’d never see their money again – there are countless entrepreneurs who over-extend themselves before crashing and burning into obscurity.
The safer bet for small business owners is to be well aware of your financial commitments and limits so you can focus on running a business that boasts a healthy cash flow.
“It’s very important to identify each risk, calculate the financial implications and verify the sustainability of the business on an ongoing basis.”
The ATO’s advice on cash flow
The Australian Tax Office (ATO) reports that its data shows nine in 10 small businesses report having faced cash flow issues in the past year.
“It’s probably the number one problem businesses cite when they’re in tax trouble, and it’s a focus for us at the ATO,” an ATO spokesperson says.
“A small business owner who learns about their cash flow – how to map it regularly and take action when necessary – can avoid having cash flow issues.”
When the ATO sees small businesses operating well, it’s usually because they’re getting the basics right.
“They keep good records, they run their business with the help of technology – such as point-of-sale software and accounting systems – and they seek advice from a tax professional when they need it,” the ATO spokesperson says.
They add that the more digitally advanced a small business is, the more likely it is to be on top of its tax obligations.
“Taking advantage of digital advancements allows us to build a tax system that works better for small businesses by integrating with technology they already use to help make meeting obligations easier,” the spokesperson says.
The ATO’s five-step financial commitment planning process
Here’s how the ATO recommends businesses plan for regular financial commitments in five simple steps:
- Business activities: know which of your business activities trigger tax obligations.
- Important dates: know the dates these obligations are due and then set reminders.
- Gather your figures: adopt good record-keeping practices, and regularly estimate the cost of your obligations so you’re not caught short.
- Set aside funds: use multiple business accounts and regularly move the estimated cost of obligations into a holding account. This will help ensure the money is ready when you need it, and help separate your business finance from your personal finance.
- Pay on time: take advantage of discounts or other benefits by paying on time.
Keep a close eye on your financial obligations
However, Beeraka says all too many businesses overlook the importance of cash flow, budgeting and planning, and by the time it’s finally caught their attention it can be too late.
“It’s vital that businesses budget their cash flows monthly for at least 12 months ahead,” Beeraka says.
“Once you understand your cash flow, then you’ll have the information you need to focus on various other aspects of your business such as funding, advertising, cost savings, recruiting more staff or negotiating with suppliers.”
To help you stay on top of your incomings and outgoings, and find out where your finances might need a boost, use Prospa’s cash flow forecast calculator.
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