Think Smart when Financing your Business
From Andrew France, Senior Financial Advisor, Experien
www.experien.com.au
Having a really good understanding of the options open to you when making finance decisions is crucial. In dealing with accounting practices and small business I have seen examples of where lack of appropriate funds and poor finance options have lead to business decisions that have caused both short term and long term damage to a business, its profitability and return to owners.
Here are a few areas to consider:
Cash Flow
All businesses face times when cash flow is tight especially in the early years and during times of expansion. However, the multiplier effect of poor cash management decisions can be illustrated when marketing budgets are cut. A good marketing program is crucial to future cash flows and the opportunity it provides you with to pick the high value clients that compliment your business. When programs are cut short or cut out the impact on the business can be multiplied as cash flow dwindles even further.
Having a good line of credit in place can ease pressures. Many lines of credit punish you for running your business well by charging you line fees and fees for unused funds. Make sure you shop around and get a good understanding of the real rate you are being charged and get a product that meets your needs. Many firms find that a little bit of extra time managing debtors can ease cash flow pressures and improve profitability substantially.
Commercial Property
Think carefully through why you are buying and the direction your business is heading. Advantages of buying include owning an asset which should appreciate in value. You can borrow against the equity in the premises to grow your business and have security of tenure. The downside includes the costs associated with owning your own building. You may also face limitations as your business grows. Buying may put additional pressure on cash flows in the short term, but will leave you in a stronger position over time.
Buy or Lease Assets
Picking up furniture and computers and paying for them up front can seem like a sensible decision. However, the decline in cash flow can often leave you drawing on an overdraft facility when cash flow gets tight instead of leasing assets at a lower rate. Commercial Leases, Hire Purchase agreements and Chattel Mortgages all provide different benefits depending on the size and structure of your business and accounting policies. Research the option that makes the most sense to your business.
Growing Your Business
Structuring your borrowing and ownership of your assets from the start will help you avoid tax issues later and ensure that your assets are appropriately protected. Company and trust structures are the most common methods used however make sure that the structure you select allows you to claim all possible deductions. What are you willing to part with as security? Are you willing to involve personal assets? What property will you allow to be used? The type of security you are willing to provide will impact the rate you are charged. Some finance companies will provide you with a goodwill loan without property security. Explore ways to structure your business finance to help you minimise your personal non deductible debt and maximising your deductible debt. Keep in mind succession issues if you choose to involve personal assets.
Look after your staff
While it may well be true that your staff are your biggest asset, the chances are that your staff are also your biggest expense. The average accounting practice spends around 35% of its income on salaries while many other businesses spend well in excess of this. With Generation Y looking to move on more often, what are you doing to hold on to and develop your staff? What extra benefits are you adding to their remuneration to help keep them? Brainstorm ideas with your staff. Finance options that cost you nothing could include helping them lease a car or get a good deal on a home loan.
http://www.experien.com.au
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