Five ways to stay solvent when running a business

People often talk about personal bankruptcy, with the implication that there’s another type relating to business. But the fact is, there is no such thing as business bankruptcy. Where the confusion lies, perhaps, is that there are two separate pieces of legislation relating to failing to be solvent. For Pty Ltd.’s, the relevant insolvency legislation is the Corporations Act. Wheras, for sole traders, partnerships, and trustees of a business trust, the relevant legislation is the Bankruptcy Act.

However your business is structured, I tend to find that when you’re a small-business owner, personal and business finances are often intertwined. So here are some tips on how to avoid getting your business (and yourself) into hot water.

1. Pay the ATO every year

This may sound obvious, but as a Registered Bankruptcy Trustee firm, we often speak with small-business owners who’ve racked up over $100,000 in tax debt because they’ve avoided lodging returns and/or paying the ATO. With personal tax and GST, it can sometimes be a good idea to calculate the payable amounts weekly or fortnightly and put the money aside into a separate bank account.

For personal income tax, you can use tools such as the ATO’s Simple Tax Calculator to help you estimate your annual personal tax liability. Alternatively, you may want to commence Pay-As-You-Go (PAYG) instalments to the ATO so that you won’t be lumped with a big sum at the end of the year.

2. Don’t employ too many people too soon

Don’t be in a rush to employ a heap of people, especially if you don’t have a regular income to support their wage expenses without forgoing your cost of living.

3. Don’t rely on one client to bring in your revenue

If you have one client that brings in 50 per cent or more of your revenue, your business could be at risk. You may want to consider diversifying your sources of revenue.

In some industries, this is easier said than done, especially if your clients are large companies, but you may be able to find other income streams that will allow you to try and distribute your risk a little more.

4. Review your financial statements i.e. balance sheet and income statement/profit and loss (P&L) every month

Regularly reviewing your financials will give you an overview of your revenue, expenses and profits at a glance. Remember the saying “Revenue is vanity, profit is sanity”? It doesn’t matter if you’re making one million a year, if your expenses are over one million, your business will inevitably start heading into the red. If this happens, be wary of propping yourself up with loans in order to cover cash flow issues. If the underlying cause of negative cash flow is expenses exceeding revenue, borrowing money to compensate for those losses will only keep you afloat for so long.

5. Get professional advice when you need it

From accountants to insolvency professionals and advisors, don’t be afraid to seek advice if you feel like your business might be going backwards. Early intervention can often be crucial when it comes to solving problems before they spiral out of control.

As a small-business owner, the buck stops with you. This is a blessing and a curse for some. Ensure you put time aside to look at your finances daily, weekly or at least monthly to keep your business thriving well beyond the next tax year.

And remember, it’s never too late to take control of your financial situation, no matter how long you’ve been in business.

John Papadopoulos, Certified Practicing Accountant (CPA), Aravanis

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