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Taking money out of the business for yourself before paying liabilities will send you spiralling into a financial black hole before you know it. So will the twisted notion that paying less tax = more cash for you. Contrary to popular belief, the 10% of all revenue that makes up your GST obligation or the superannuation your staff are due is not YOUR money. The ATO doesn’t take kindly to business owners who operate with this sort of mentality. So if it’s not your money then don’t use it. Physically put it aside in a ‘do not touch until due bucket ’ and pay your obligations on time. Not ahead of time, but on time.
The same goes with income tax. If you don’t pay taxes, you either aren’t making any money or you cheated on your taxes: both of these are bad situations to be in! The strategic approach of many small business owners is to record as little profit as possible at the end of the year in order to pay less tax. So year after year, small business owners make decisions in their businesses based on intentional lack of profitability. Now profit for many SBO is actually a measure of their personal pay cheque, and yet with this thinking they work to lower it. Sometimes this can be a sound strategy, but think it through. By doing this in your own business, you condemn yourself to a life of poverty just to avoid having to pay taxes. Do you see the problem with this thinking? But I digress…
Cash flow is really determined by the 4 forces that act against it:
- Taxes - You must either set aside money or pay chunks of taxes as you go to avoid the April surprise (or October surprise if you extend how long you stick your head in the sand)
- Debt - Lines of credit are crack cocaine for entrepreneurs: kick the habit as soon as you can!
- Core Capital - Retain after-tax profits until you reach your core capital target, which is generally defined as 2 months of operating costs in cash with nothing drawn on the line of credit and your anticipated taxes set aside
- Distributions - Reap your reward and finally take after tax profits to diversify your wealth outside of the business
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