With tax debts soaring to an average of $80,000 for small and mirco Australian businesses, we ask ourselves how can we, as Profit First Professionals, help steam the flow of poor cash management, and in turn reduce the stress levels of our fellow Aussies who are doing it tough financially?
It’s a staggering statistic that the UNSW Tax and Business Advisory Clinic have shared. With 60% of Small Businesses in Australia being micro businesses (1 – 4 employees), it is no surprise that many small and micro business owners are in the midst of a financial storm, many experiencing financial pressures like never before.
“With an average tax debt of over $80,000, it is not surprising that over a third of our microbusiness clients rate their financial distress levels as a 10 out of 10,” Ann Kayis-Kumar an associate professor in the School of Accounting, Auditing and Taxation at UNSW, said.
For the average microbusiness visiting the clinic, it is believed that this is a culmination of eight years of overdue tax returns, and a number of external factors, (such drawn out pandemic commercial lease payments, as well as the increase in interest rates affecting loan repayments) which has provided the ‘perfect storm’ of financial woes impacting many families across the country.
According to NAB, 1 in 3 Australians identify money as a significant stress in their lives. It is not just business owners who are experiencing this stress, it is widespread and does not discriminate whether you are based in the city or the country. So, what can we do to help ease the burden?
This is where Profit First takes its place center stage, spotlight shining bright. With 268,000+ readers, the Profit First book, written by Mike Michaelowicz, has well and truly established itself as the go-to money management methodology for many businesses across the globe. And that is because it works!
What makes Profit First different from other money management philosophies is the way that it revolutionises how business owners view and then manage their income.
So, what is it all about? It may sound counterintuitive, but when business owners put their “profit first”, they actually need to flip the way they look at their expenses.
Traditionally in business, profits are calculated by taking expenses away from sales, like this:
SALES – EXPENSES = PROFITS
However, with the Profit First method, the equation becomes focused on calculating expenses, like this:
SALES – PROFITS = EXPENSES
This change in perspective is the ultimate key to how the Profit First methodology helps business owners to sustain cash flow, increase income, and build profits.
Along with putting profit first, there are two other important elements to ensuring ongoing profitability in business: bank accounts, one for each of 6 main financial functions of your business (Profit, Tax, Owners Pay, Revenue, Operating Expenses, Materials & Subs) and percentage allocations, these can vary business to business, but as a general rule we suggest starting with these: Profit 5% Tax 15% Owners Pay 50% OpEx / MatSub 30%.
For more information about Profit First, check out this blog.
Of course, there is more to Profit First than just the book. That is why we have certified Profit First Professionals who can help business owners get on top of their cash flow and help eliminate their debts.
One of our favourite money management strategies is the Debt Snowball. By attacking the smallest debt first whilst making the minimum repayments on all the other debts, you start eliminating your debt feeling empowered. When you have a plan in place to eradicate debt and set your finances up for the future you can break the cycle and say goodbye to debt stress.
If you feel the pressure rising from these constant interest rate increases, or perhaps you are also finding it difficult to get your tax payments under control, then do not delay. Let’s help you orchestrate a plan to help you achieve financial stability and freedom. Click here to be paired with a Profit First Professional who can help you and your business. Our PFP’s have a tool box of debt reduction strategies and can work out a customised plan for you and your business.