8 Golden money rules for business owners

From digital currency to the hidden economy, intangibles to savings, ROIS to cashflow controls – GoFi8ure Executive Director Lisa Martin delivers short, sharp insights on money matters for business owners.

It’s fair to say that the Covid pandemic has hampered many business owners’ ability to manage their finances. The GoFi8ure team of accountants and bookkeeping professionals have seen the outcomes of: not sticking to budgets, failing to plan, delaying bill payments to manage cashflow, not saving money in general, buying what you want rather than what you need, impulse buying, borrowing money, as well as getting into debt and taking out short-term payday loans with killer interest rates. So here are some golden rules to help keep you on the straight and narrow path to success.

RULE #1: UNDERSTAND THE TRUE VALUE OF MONEY
Many business owners learn little to nothing about basic money management. Their primary business motivation can simply appear to be ‘keeping up with the Joneses’. That might involve dipping into business funds to purchase a new vehicle, and often there’s nobody to stop them doing it, including their banker, accountant or bookkeeper.

However, in reality, your accountant or bookkeeper is the best person to consult, to see if what you’re buying is justifiable and
affordable.

Think, and ask, before you spend. 

Transparency is another key consideration – demand transparency around invoices your business incurs. What are you being charged for? And hourly or daily? Are the margins unreasonable?

Failing to allow for provisional tax is a trap too. It’s easy when owing tax to Inland Revenue to view the whole situation as insurmountable and therefore become complacent about a rising tax bill.

Conversely, even when in control of your tax payments and accruing significant profits, the trap could be an attitude of spending
money to save tax. “You should spend to accumulate, and hopefully on the right things, such as assets,” warns Lisa.

“It’s about the psychology of money,” she says. “Money is just a vehicle to get to an end-point. How we earn it and spend it is where the value lies. If earning money is a negative experience for you, then you’ll probably spend it negatively. Similarly if it’s a positive experience, you’ll spend or invest it positively.”

There’s also the issue of becoming resigned to being in debt, and immune to more debt. On the other side of the coin, if you have money in the bank it’s easy to over-spend it.

It’s about being disciplined and truly understanding the figures.

“If only financial literacy was taught at school,” bemoans Lisa.

RULE #2: UNDERSTAND DIGITAL CURRENCY
Digital currency is known as cryptocurrency. Bitcoin is the major one. But it’s not about making a ‘fast buck’. Before you get involved, get educated, and ask your accountant how you will go about accounting for it.

Lisa warns that although crypto may look glossy and easy, some of the rules and regulations around it are still fluid, both here and overseas, and its future is still uncertain.

“There is no such thing as easy money, so please do your homework.

Talk to the subject matter experts,” she says.

RULE #3: BEWARE THE ‘HIDDEN ECONOMY’
In New Zealand, the ‘hidden economy’ (aka the ‘shadow economy’) makes up 11.9 percent of the total taxable economy. That’s considerable, but still rates quite low against other countries. This is under-the table work, the cash jobs that no one pays tax on – as well as money laundering and criminal proceeds.

“Give everything the sniff test,” warns Lisa. “If something doesn’t feel right or sounds too good to be true then avoid it.”Avoid (undeclared) cash payments. Only deal with reputable people and organisations. There are times when you need to prove incomes for tax purposes, and things can come unstuck very quickly.

RULE #4: BEWARE THE BLACK MARKET
This involves any income or earnings that are not legitimate. Refer to Rule 3. 

RULE #5: TANGIBLES VS INTANGIBLES
Together they represent the true value of your business. Looking at your balance sheet there are a number of things you can do to ensure you have cash in your bank accounts; that you’re keeping up with all your tax obligations, buying non-cash assets, and investing where there’s a future ROI (such as property and investments). These are all tangibles that work for you as your business grows.

Intangibles include the likes of keeping your customer database up to date, any unredeemed vouchers, trademarks – all of these add value to your business when the time comes to sell.

RULE #6: THE IMPORTANCE OF THAT NEST-EGG
If you are a sole trader, you are the business. It’s all very well having professional indemnity insurance, but if you can’t work, there is no business.

Even if you have employees who can help the business carry on, how long can that continue without your presence?

“Risk mitigate everything in your business – yourself, your people and your systems,” says Lisa. “That’s why you should always save a percentage of all the money that comes in. That’s over and above the money set aside for tax.”

This highlights the importance of having separate bank accounts for this purpose, she adds – labelled GST/interim tax liability and savings. And if there’s not enough left to run the business, then you need to have a serious conversation with your accountant.

RULE#7: GETTING A RETURN ON YOUR INVESTMENT
Here we’re referring to non-cash and appreciating assets, such as a commercial property purchase – assets that are generating income. The key message is to do due diligence before making that investment and having the mechanism to be able to measure the incremental returns on your investment year after year.

Again it comes down to getting good advice, based on your true financial situation, says Lisa.

RULE#8: ASSET RICH, CASH POOR – WHY CASH STILL RULES
When fluid funds are diverted to assets that generate passive income, or eliminate the requirement for your business to pay rent to a landlord, this is making your money work for you.

“Having access to fluid funds by being smart with your money, as well as financial resources you can tap into, and the ability to keep up with your liabilities, all proves why cashflow still rules in business,” says Lisa. Avoid paying unnecessary interest fees and rents, she adds.

As for business credit card use?

It can only be justified if you can make use of the 30-day free-credit allowance, and you pay the balance in full.

“Remember business is about paying your liabilities and bills in a timely manner sand minimising interest payments. Paying off credit cards and mortgages are your first priority,” explains Lisa.

“We live in uncertain, yet emotional times, which means we can be tempted to spend unnecessarily. So it’s important to be non-emotive, to think things through, and do your homework.”

Knowledge should be your priority, she says. “Learning about discipline and money management is so vital. Business is not about chasing the ‘almighty dollar’ – it’s about creating positive experiences for other people to enjoy your business.”

www.gofi8ure.co.nz    0800 GoFi8ure (0800 463 488)