Run your business like a piggy bank

EXPENSES: KEEP PERSONAL AND BUSINESS SEPARATE

Run a critical eye over the balance sheet if you prepare to approach lenders to finance growth.

Death and taxes – the two certainties in life. While we spend a good portion of our time working out, eating right and minimising personal risk to avoid the former, getting too clever in avoiding the latter could cost business owners in the longer-term.

In an effort to keep taxable earnings down, many business owners will run personal expenses through their business. This behaviour can lead to challenges should the owner want to exit, or raise capital to expand.

Some business owners believe putting as many personal expenses through the business will lower taxable income. However, it is a double-edged sword. Should you wish to source financing, traditional lenders will look at your financials and, in all likelihood, your spending will prejudice your ability to raise money.

Many a business owner has also been caught on the back foot when it comes to retirement. Since so much of their personal expenses have been taken care of by the business, they underestimate their financial requirements and find themselves having to significantly downgrade their lifestyle.

This is also the case when owners try exit the business by selling it. We have seen businesses reporting millions in turnover, but only showing a few thousand rands in profits.

While it is common (and legal) for directors to take out loans from the business, if the loan account is on the books for more than a year, it will become taxable on their personal tax. What’s more, penalties will also be applied.

Business owners who are looking to finance growth should begin preparing their company to approach financiers. Take a long, hard look at just how the company is spending its income. If necessary, they should strip out any personal loans or expenses going to the owner and directors.

If they know there is growth opportunity on the horizon, they should also consider approaching lenders in the short term. Having a critical eye run over the balance sheet will help identify potential pitfalls.

As we enter a tighter economic cycle, far too many companies go into survival mode. There is always plenty of opportunity in the market, and there is still money available to fund great deals. The trick is to ensure that your business is “financing fit” at any given stage. Even if this means sacrificing some short-term lifestyle luxuries. Gary Palmer is CEO at Paragon Lending Solutions