If you are easily offended do not read on!

Owners of businesses are fantastic. They build industry, create employment and pay taxes. They can also be the main reason for lack of cashflow, business interruption and, in some cases, business failure. And, before we go on, whilst it is a common theme we do know it isn’t ALL business owners. However, even the most successful can be prone to mistakes, knee jerk reactions and poor decision making. We are all human after all.

At Lock Finance here are a couple of the problems we have encountered and how maybe you can recognise some issues earlier and avoid them in your business.

New toys – talking to a liquidator recently we were told about the surplus of new utes that they seize and find very difficult to resell or realise any value from. It seems to be a purchasing trend. There are industries that require the ute as a sensible work vehicle, and other companies that do need to provide company vehicles. However there are factors to be considered.

Lease versus buy. Quite often the vehicles are bought on loan and therefore there is no value as the amount owed tends to equate to the value of the asset. Do you actually need to buy that vehicle? Is leasing a better option?

Quite often the top of the range vehicle is bought or a top model when a cheaper model will be more than sufficient to cover the need for the vehicle. This may mean the business spends $10k - $15k more than it needs – as a director how does this fit with your overarching principle of always acting in the best interests of the business? Then we see that the loan payments are larger, and the business runs the risk of the value of the vehicle falling below the outstanding debt; not a good position to be in when borrowing on any asset.

Whilst I’ve highlighted the trend for new Utes, and with up to $50k difference in cost between models that do the same, any business owner should consider:

  • What do you need the vehicle to do?
  • What is the most cost effective way of doing that?
  • Does the base model actually deliver to the business need?
  • Have you compared models and costs?
  • Is having a “pool” vehicle an option?
  • Will leasing a vehicle be more cost effective in the long run?

Is there a genuine business reason for the new ute and top of the range or are you just trying to outshine your competitors?

Paying yourself – Okay this could be an offensive red flag to some. We do agree though, as an owner, director and employee you do deserve to get paid.

But

Don’t shoot the messenger

Many successful business owners do realise that the other employees and the suppliers that keep the business running deserve to get paid first.

We aren’t saying don’t pay yourself – because if you cant then that’s often a sign of much larger cash flow problems to fix. We are saying pay yourself reasonably. Be prepared to reinvest into the business when times are tough. We have seen owners take so much out of the business “because they deserve it” that it cripples the ability of the business to pay bills as they fall due, halts trading and, in extreme cases, takes the whole business under.

When paying yourself look at:

  • The market benchmark for your role AND comparable size of your company
  • Talk to your advisors about drawings vs. PAYE vs. profit share or dividend options
  • How much do you need to maintain your lifestyle (not the lifestyle of the rich and famous)
  • Be honest with yourself

In one case we looked at the owner paid themselves an above average salary, insisted that the top sky package was essential, that a $5k per month entertainment budget was needed personally, whilst their business struggles. That business failed a few months later.

If you would like to discuss your options our specialists have extensive experience and knowledge across a broad range of industries who are committed to finding the right cash flow strategy for your business needs.