What story are your financials saying about your business?

As an accountant I have come across many passionate, energetic and charismatic business owners and entrepreneurs, who had a strong ability to generate sales, lead people and inspire everyone they met.  Why then did their businesses struggle financially? As a business owner it isn’t just about the ability to generate leads and sales, though an essential requirement but you have to be capable of managing the business.  Cornerstones of a well-managed business are securing a healthy cash flow, spending the business’ money in an efficient way and making a profit.  Some in general, place too much emphasis on minimising taxes rather than profitability.

For example, business owners would go on regular spending sprees to buy materials “just in case” they were needed in the production line, not because they were actually needed at that particular moment and no expectations that they would actually be required any time soon.  Their sole purpose for doing this was tax minimisation.  In the end they achieved this goal, but in the process they compromised the business’ financial strength and made it more vulnerable to a potential solvency crisis.  This is not an uncommon scenario among small businesses owners in Australia.

Minimising tax is obviously a very important goal to achieve in any business, but this should be a subordinate goal to the most important objective, which is to maximise profits. Profits will create a virtuous cycle by providing funds to be reinvested in the business for growth; as an income distributed to the owners, to repay debts and ultimately pay tax.

Working in the lending industry myself, I can clearly see the additional benefits for businesses to report healthy profits and strong equity positions.  Healthy profits and strong equity give confidence to the banks when assessing finance facilities. To assess serviceability banks rely heavily on the nett profits as shown on accountant-prepared financials, in conjunction with income tax returns lodged with the tax office.  Add-backs, that a bank may consider, differ from lender to lender and also depend on the industry.  Business owners that choose otherwise are limiting their own chances of getting finance approved to grow, expand and build long term wealth.

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