Managing Money for Business & Pleasure

Ask any new business owner what keeps them awake at night and the answer will probably be managing cash flow. Life would be so much easier if you knew exactly what your revenue and expenses were going to be from one month to the next. Just when the bank account seems to be building up nicely, along comes a provisional tax payment, GST, or PAYE. On top of all that, money needs to be set aside to grow and develop the business, whether that means investing in more staff, more stock, or increased marketing. Last of all on the priority list comes drawings, that is, the meagre amount you are supposed to pay the mortgage and the grocery bills with and somehow have a bit left over that lets you enjoy life, because after all, that’s why you went into business isn’t it? The problem is that while you know how much you need to live on each month, business cash flow fluctuates from one month to the next.

The key to managing cash flow is to remove uncertainty. That means finding ways of smoothing revenues and expenses and planning ahead. One of the most common mistakes I find with self employed clients is that they don’t clearly separate business expenses from personal expenses. Personal credit cards and bank accounts are used for business expenses, travel, petrol, and business telephone expenses while holidays and new lounge suites are paid for from business accounts. Mingling business and personal expenses creates more uncertainty. Business cash flow fluctuates while personal expenses are relatively constant and combining the two means that your total cash flow becomes uncertain. Your business, no matter how small, should have a separate bank account, overdraft and credit card. This makes things a lot easier too when it comes to preparing your GST return and end of year accounts, as you don’t need to sift through your personal bank statements to find all the business related items or vice versa.

Once you have separated your accounts, uncertainty can be reduced further by taking a regular fixed amount of drawings from your business. First, set aside funds each month from your business income to cover your tax liabilities. Ideally, tax money should be kept in a separate account and by setting aside a percentage of your revenue each month you shouldn’t get caught out with a tax bill that you can’t pay. The amount that you withdraw for yourself will be determined by two things – the minimum amount you need to live on, and the average cash flow, after allowing for tax, from your business. For example, you may decide you need a minimum payment of $4,000 per month after tax from your business. Your business cash flow after tax may vary from $2,000 per month to $8,000 per month with an average over the year of $6,000 per month. Taking out a regular amount per month will mean that some months you take out more than the business earns. That can be dealt with by always ensuring that your business has a cash buffer big enough to cope with the difference. In this example, you would need a cash buffer of, say, $6-8,000 – enough to cover two or three low revenue months. The result is that your business bank account will fluctuate from one month to the next, but you will have a regular predictable income to live on.

If your business goes well, over time you will build up cash in your business account using this system. Once you have built up an excess, you will have a choice as to how you use this surplus. It can be used to further develop your business or it can be drawn for personal investment or spending. It’s a good idea to seek advice from your accountant as to the tax implications of taking additional drawings from your business. To ensure that you make the best use of your accumulated funds, have a plan in place as to how you are going to use them. If you have clear personal and business goals you will be more inclined to use your surplus funds to get ahead than to use them for an impulsive purchase. That doesn’t mean it’s all work and no fun – for example, one of your goals might be to reward yourself with an overseas trip when you get to a certain level of business.

You know the old saying “never mix business and pleasure”. By applying this principle to your cash flow, you will be successful in your business while still being able to have fun, without sleepless nights.