1. Getting the wrong balance of debt and equity
When starting up or growing a business you might have the best idea and business plan in the world but if you don’t have sufficient capital (i.e. cash or equity in assets that can be offered to a bank as security for a loan) then you can’t pass ‘go’.
Planning to have the right balance of equity and debt is critical. You need sufficient capital in reserve to meet unforeseen cash flow needs. And with interest rates at a near all-time low, you should seek a ‘safe’ level of debt that can be comfortably serviced to avoid having a nervous bank on your back every few months.
2. Building insufficient profit margins into each sale
‘The juice has to be worth the squeeze’ as they say. By this we mean that the business owner deserves to make a profit that reflects the blood, sweat and tears they put in and the risks they take in owning the business.
All too often business owners only make a small profit, and after deducting their living costs (drawings, wages or distributions) there is very little profit left over for reinvestment in the business or for personal wealth creation outside the business.
The banks love to see business owners planning for and achieving success in the form of ‘cold hard’ net profit.
3. Financing medium to long term assets from cash flow
Don’t burn your cash capital by buying fixed assets.
Many business owners don’t realise that it’s possible to finance almost any business asset, and not just at the time those assets are purchased. It is possible to get finance to release cash from existing business assets that have value and are not currently being used to secure other loans.
It is possible to raise finance secured by debtors stock, any type of plant and equipment and any type of real estate asset.
4. Using the ATO as your bank
Business owners should avoid entering into repayment arrangements with the ATO if you have sufficient cash flow to meet your tax obligations. Banks detest tax arrangements and it can seriously compromise your ability to borrow money or renegotiate your existing loans.
Ask your tax advisor about how to best manage your business tax obligations specific to your financial situation.