Over the past few years, thousands of Australians have changed the way they work, starting their own business either to boost the income they make from their ‘day job’ or to step outside the employment rat race altogether to enjoy the freedom of being their own boss.
During the prolonged COVID-19 lockdown in particular, people have been forced to be creative to earn a living and the result has been the creation of thousands of new small businesses.
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 the 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.
You could potentially borrow on the security of your private home, but that 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 (eg, Uber drivers) - who argue 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 that 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 cashflow 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 business owners can seem to be constantly busy running their business without realising they aren’t actually making any money – hence why so many small businesses fail.
An online presence is key to success for many SMBs because it allows 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 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 temporary full expensing 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 an adviser who can steer the business to sustainable growth.
Mark Chapman is director of tax communications at H&R Block.