Small business is the engine room of the Australian economy and with the numbers of small businesses growing rapidly, allied to the explosion in the ‘gig’ or ‘sharing’ economy, there are thousands of Aussies confronting the challenge of getting a business off the ground for the first time.
So, if you’re a budding entrepreneur, what do you need to know to make your business a success and which pitfalls do you need to avoid?
Funding the business
Obtaining finance can be an issue for any business, but it can be a particularly acute difficulty for small businesses in start-up phase.
For a start, although you might think you have the best business idea in the world, convincing sceptical, risk-averse banks can be a real challenge, particularly if you don’t have a proven, successful track record in business already; something most start-ups – almost by definition – don’t have.
Another barrier can be that banks and other financial institutions will only lend on a secured basis and if you’re starting up with nothing more than a good idea in your head, the chances are you have no business assets with which to secure the finance, unless you’re willing to borrow on the security of your private home, which is a step too far for many small business people.
Avoid tax traps
For small businesses, the biggest tax trap is failing to distinguish the company’s money from the individual business owner’s money. Small businesses owners often fall into the trap of taking money out of their company and failing to account for it properly as either salary or a dividend. In that case, the ATO can deem the amount taken out to be a loan and tax it as an unfranked dividend if the situation isn’t rectified (either by repaying the outstanding amount or putting in place a complying loan agreement). The same treatment can be applied where business owners use company assets at no cost, for instance a company owned property or boat.
There are also many examples of people – particularly in the sharing economy (e.g., Uber drivers) who argue that they are not really in business at all but are undertaking a “hobby”. They aren’t – they are in business. The sharing economy, through sites like Uber, Airtasker, etc is causing a big increase in the number of small businesses as people move into offering services through sharing economy facilitators.
Other major issues include:
- “Cash only” businesses failing to correctly record all turnover
- Not realising you need to register for GST (particularly common for taxi drivers and Uber drivers, because they need to register from the first dollar earned)
- Not focusing on keeping records (for example, because you are too busy running the business) leading to missed BAS and tax return deadlines, missed tax payments and poorly kept records
Manage your bookkeeping
Small businesses are often poor at keeping records (especially micro businesses) leading to panic and stress around GST and income tax deadlines. In addition, small businesses often aren’t prepared to invest in bookkeeping, either by buying a suitable software package and doing it themselves or outsourcing to a third-party bookkeeper (which is often seen as an optional cost which can’t be indulged). This leads to stress as tax obligations fall due and can also make it difficult to keep an eye on business performance, which can make dealing with banks and creditors difficult.
Maximising cash flow is a persistent issue for small business. Not keeping on top of your bookkeeping can lead to failure to speedily collect cash from debtors and trouble with irate unpaid creditors. Small businesses owners can seem to be constantly busy running their business without realising that they aren’t actually making any money – hence why so many small businesses fail.
An online presence is key to success for many SMBs by allowing them to access new markets, at home and overseas. Investing in a good website and net presence (including online sales) can be vital to differentiate from the competition. The abolition of the GST low value threshold, meaning that imported goods are now liable to GST on low value items (of the type supplied by organisations like Amazon and other online retailers) gives Australian businesses a renewed opportunity to grow.
Invest to grow
Spending capital on productive assets (via the $30,000 instant asset write off tax break for instance) is good business sense over the long term because it has the potential to lift productivity and hence profitability. But an initial unwillingness (or inability) to part with the money upfront can hold back a small business from unlocking that potential.
Similarly, keeping your own skills and those of your employees at the cutting edge will give your business an advantage and will flow through to greater profitability in the long term.
Be proactive and get help
Small businesses will often pay their accountant to do their tax return and that’s it; they are often unwilling to pay for advice which might improve their business over the long term. A good accountant should be more than a number cruncher; they should be a business adviser who can steer the business to sustainable growth.
Mark Chapman is H&R Block’s Director of Tax Communications. He is the author of “Life and Taxes: A Look At Life Through Tax” and has over 25 years of experience as a tax professional in both the UK and Australia, specialising in tax for small business and individuals.
H&R Block are offering small business and start-up’s a helping hand with the initiative; ’Grants for Growth’. Now in its second year, the grant offers support to budding entrepreneurs who need an extra boost to transform a dream from ideation or start-up phase to mainstream. The ‘Grants for Growth’ competition is open to small businesses and sole traders operating in Australia that have less than 20 employees. There will be 12 lucky winners of the grant who will receive $5,000 in cash and $5,000 towards H&R Block Business and/or Bookkeeping services. Runners up prizes will also be issued each month. Budding entrepreneurs and small businesses can enter via hrblock.com.au/grants-for-growth