How to manage your small business finances

Do you run your own business? As of June 2019, there were more than 2.3 million active businesses in Australia, from sole traders to large corporations. But over the preceding year, Australian businesses had an exit rate of 12.7 per cent. 

In June 2020, 2.7 million businesses remained active, even during the pressures of COVID (exit rates are yet to be finalised for FY20) but the fact will always remain: handling your money efficiently is crucial, especially in the crowded Small to Medium enterprise (SME) market. But how do you make sure you effectively manage your small business finances?

Get a business bank account

Even if you are a sole trader who runs a small business that sells only your skills and time, both the government and financial institutions recommend using a business account for operating cash flow and being able to integrate your taxation software at tax time. The interest rates or terms and conditions of your personal accounts may not work in your favour either. Check out Starting a Business for more details on business bank accounts.

Keep the books in order

Profit and loss statements as well as balance sheets. The Australian Taxation Office requires that you keep your business records in order, easily accessible and legible, for between five years and seven years, depending on the records. But exactly what paperwork are you supposed to have?

  • Statements from your business accounts and credit cards
  • Payments to employees and any PAYG tax
  • Invoices and receipts for goods and services, both bought and sold
  • Register of assets and stocktake details.

You may also consider collating your business cash flow with a profit and loss forecast for your financial year. There could be plenty of paperwork but staying on top of it may help you efficiently do your tax return, see exactly how well the business is doing and could assist in providing insight for your next big business decision. Seek advice from your accountant about what paperwork you are required to retain and for how long.

Work out your limits

Similarly, as you would when buying a house with a home loan, Australian SME owners may need to consider their self-financing limits. Taking out a business loan for a new site expansion or company growth may help with your plans to expand your small business.

What factors should you consider?

Try to consider all of the variables. What kind of assets do you have as security for a business loan, and how much are they worth? What repayments can you feasibly afford over the set term? What’s your loan value ratio (or LVR, the ratio of your loan against the asset), and how big a deposit will you need?

At IMB, we have a wide range of business finance products and services that cater to businesses both small and large. Our personalised service means we can help you find a financial solution that may fit your objectives and financial situation.
 

How to manage cash flow

Cash flow can be a constant concern for any business manager. Whether you own a grocery store or are a self-employed tradesperson, cash flow might dictate your success and failure. Failure to manage cash flow properly was an identified cause of business insolvencies in the 2018 to 2019 financial year, with 51 percent.

Learn how to better handle cash flow and help prevent your small business going under.

Keep on top of your debtors

In the business world, payments can be a little more flexible than they are in day-to-day purchases. When you provide a service, you can end up with a backlog of unpaid invoices. It might be the case that you’re pretty certain that you’re going to get the money eventually, but your debtors are being a little lax and it’s affecting your cash flow.

To get that money in, you have several options and one of those is to chase them up yourself or hire a company to do so, but this may not always achieve your desired results. You might need money right now to pay your staff or to buy new products or equipment, for example.

That’s where debtor finance may be able to help you – providing you with capital right now to help keep your business afloat. It might only be a temporary lubricant for your cash flow, but it could be the lifeline you need when your business finds itself in a sticky situation where debtors are just being tardy in their payments.

Stay ahead of the game

We live in a rapidly changing world. Even the most traditional of businesses are seeing enormous levels of innovation in technology, management methods and equipment. If you want to keep ahead of your competition, you either need to do something better than everybody else or provide something that nobody else can. And most people are scrambling to do one of those two in new and innovative ways.

One factor in maintaining positive cash flow is trying to keep up-to-date with waves of innovation. The Australian Government provides a number of different support structures for small businesses interested in research and development, but these might only go so far, especially if you do not have the ability to finance these assets.

Sometimes, you might need to spend money to stimulate cash flow, and if you want the latest equipment to access new customers and expand your business, it can pay (literally) to investigate your options in asset finance.

 

What is an overdraft and how can it help your business?

Those starting a business may be aware that cash flow is a key concern, but small to medium-sized enterprises are often hardest hit when debtors and customers fail to settle their bills in a timely manner.

Understanding business overdrafts

The term “overdraft” relates to a business or company facility, whilst “lines of credit” are normally personal. These facilities give businesses and individuals access to a line of credit that extends beyond your available credit funds, ensuring you are covered for emergency expenses, late debtor payments, and other short term cash flow issues.

Business overdrafts usually have no fixed term, so you can use up to your credit limit whenever necessary, although you should be aware that interest and fees would apply depending on your usage.

One of the biggest benefits of business overdrafts is the speed and availability with which you can access cash. An overdraft facility enables you to withdraw funds via:

  • An IMB Bank branch;
  • Your company chequebook;
  • An ATM;
  • EFTPOS;
  • Internet and phone banking; and
  • Visa debit card.

What’s the difference between secured and unsecured overdrafts?

Business overdrafts are available as both secured and unsecured lending. An unsecured overdraft means that you do not need to pledge any assets to your financial provider in order to access the facility. Meanwhile, secured overdrafts require you to commit an asset (or several), such as residential, commercial and industrial property, to give you a line of credit.

Each option has advantages and disadvantages. An unsecured overdraft exposes you and your business to less risk, but your line of credit will be smaller.

Secured overdrafts usually allow you to access a much larger maximum loan amount. As an example, IMB Bank offers maximum unsecured business overdrafts of $20,000, while our secured overdraft facilities allow up to $500,000 – or more on a case-by-case basis. However, your bank may have the right to sell the assets you’ve put up as collateral if you’re unable to repay debts on your secured overdraft.

Taking the next steps

Finding the right overdraft facility for your business will depend on a range of factors, so it’s important that you discuss your needs with a specialist adviser before making a decision. If you’d like to know more about IMB Bank’s business overdraft services, please contact one of our business banking specialists today.

NEXT: Find out how your bank can help you to expand in Part 4: Growing Your Business.

 

Important Information:
This article has been prepared by IMB Bank for general information and reference and it is not intended to be advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice when appropriate, and consider the relevant Terms and Conditions or Product Disclosure Statement before deciding whether to acquire any products or services offered by IMB Bank. Lending criteria, terms and conditions, fees and charges apply to IMB loan products. We do not recommend any third party products or services referred to in this article and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites.