Starting your own business is exciting and action-packed, but to help it stay that way it’s important to get the nitty-gritty numbers stuff correct from the get-go. Deloitte Partner Stephen Nicholas offers a few words of advice.
Matthew had a vision to start his own business – he was excellent at his job and figured that running his own business couldn’t be THAT challenging – plus think of all the benefits and profits?
So Matthew incorporated a company online and began trading.
His business grew quickly and all appeared to be going well, but he soon had trouble paying his creditors on time. While he always managed to pay wages to his two staff, he wasn’t able to keep up with the IRD’s demands for PAYE and student loans.
Suddenly Matthew’s business was having demands filed against it from various unpaid creditors while the IRD were demanding payment on overdue taxes and asking for further tax returns to be filed. Matthew then discovered that he had failed to register for GST and he was going to owe substantial income tax in his second year of trading.
Matthew’s business was now insolvent and his big dreams had been shattered. So where did he go wrong and what could he have done differently?
1 He failed to seek advice from anyone or do any homework before he started
There is free help everywhere just waiting to be tapped into. This NZ government website for example is a free service and should be your first port of call. They can steer you in the right direction and have access to a wealth of knowledge.
I’d also advise people to see an accountant and a lawyer as most offer a free initial consultation. These people are experts at business and can help you in areas you probably did not know even exist. Ask them to tell you the important considerations when starting a business.
The IRD can take more than a third of your profits and are more than willing to help you to get it right. The IRD has business start-up pages on their website and you can arrange to meet up with someone. Check out their free guides that explain the different taxes on their website here.
2 He did not understand his tax requirements
You need to understand the basics of tax. A common misconception in business today is that the first year is tax-free. This may appear technically correct, but the second year can be a double tax year.
You must pay your Terminal income tax in arrears for the past year but then also your Provisional tax in advance for the next year and this can place a huge amount of pressure on your cashflow. You must consider GST, PAYE and FBT.
So know how to do a GST return and check with an accountant to ensure you are maximising your income tax and GST deductions.
Running a SME is shear hard work. Ask any small business owner and they will tell you it’s a seven-day a week job. You are now accountable to creditors, employees, other shareholders and ultimately your family.
The bottom line is to make sure your business is something you are passionate about as this will give you the motivation to propel you through the hard times.
3 He did not understand financial information or cashflow
A wise man once said, “cashflow is king” so if you don’t want to manage the financial side of the business then find someone who can. You need to gain good budgeting advice and set realistic cash flow forecasts.
Here are a few basic things to keep in mind:
· Make sure you know when your taxes are due in the next two years – you know your business best but make sure you understand the numbers.
· Keep business costs to a minimum – ensure that you collect debtors on time and understand who your creditors are and when they fall due.
· Save money for your taxes and do not take more cash from the business than can be sustained – remember that a growing business is cash hungry and you may need finance to help you through a growth phase. Speak to your bank manager and find out what you need to obtain in terms of short-term borrowing.
· Consider what accounting software to use and either get trained in how to use it or find a quality bookkeeper to do it for you.
Get informed and your business dreams will become a reality! This may all seem rather negative and and focussed on the compliance side of things but if you work with smart advisors then you can focus on growing your business and achieving the success that you went into business for!