What you should think about BEFORE starting a new business

We often get asked: “What should I think about before starting a business?” so we’ve put together some tips and points that we feel people would benefit from knowing.

What structure should I be in?

There’s no one-size-fits-all or one-is-best approach to structure. It depends on a few things:

• what you’re looking to achieve
• what’s important to you
• what your priorities are

Think about what you want to do with the profit: will you re-invest in the business or do you want to take it out?

Also, think about what you want out of the business when you exit: do you want to sell it or do you want to pass it down to the next generation?

Why is business structure important?

Think of your business structure as the vehicle to get you from where you are now to where you want to be. After all, if you’re heading up a mountain, a 4WD would be better suited than a hatchback. It’s the same with your business structure. The right structure for you will make a difference in how your business operates AND how much tax you pay.

Have a plan

Before you start, do up a 6 and 12-month budget for your business. Start with your costs, think of all the costs you’d spend, and OVERESTIMATE them.

Your budget is like a GPS, it tells you how to get to where you want to go. This will help you to establish how much you need to live (your profit AFTER-tax needs to be MORE than your living costs to afford the lifestyle you want).

Why is a budget important?

A budget is a financial roadmap for your future and will give you something to aim towards. This will help you to know how much you need to make to at least cover costs.

Having this budget will show you how much the business needs to make for you to live.

Clarity makes decision-making easier.

Set aside for EVERYTHING

Have separate bank accounts for different business outflows: expenses, profit, income tax, GST, etc. This allows you to see in a snapshot what money you have to pay those things

Start setting aside to contribute at least 7.5% of your profits to superannuation and increase this by at least half a percent each year until you hit the same rate as an employee would receive. It’s currently 11%.

At Proactive, we are advocates for the Profit First method, which you can find out more about in this video.

Tip: I don’t recommend the ATO’s tax calculator. Check out this one here

Why does this help?

Unless you actively set aside for certain things, the cash WILL get spent. Our brains are hard-wired to spend. By assigning every dollar a job and putting it in a separate bank account, you’ll know that it’s already allocated for something else and reduce the chances of getting yourself into a cash flow problem.

Most people don’t set aside anything for superannuation when starting out. This becomes a habit and habits once formed are hard to break.

You need to be strategic and deliberate with your money or you may find yourself with none left.

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Voluntarily enter the PAYG instalment Systems

A way to manage cash flow and income tax is to pay PAYG instalments, which is basically income tax paid quarterly in advance. Don’t wait until you lodge your tax return to pay your income tax. The money will likely have been spent by then.

Get into the habit of paying your own tax from the get-go. For information on how to enter the system, see here.

Why should I be thinking of this?

When you run your own business, you are responsible for setting aside your own income tax. By paying income tax more frequently, you’re less likely to get a surprise tax bill when you lodge your tax return. Think of it like eating an elephant –  one bite at a time.

Keep track of your performance

Have the right tools and systems in place (here’s a video overview of what we would typically use) to streamline reporting processes. Identify no more than 5 key metrics that you would gauge your success by. Compare where you are against your budget so you can course-correct before things get serious.

And very important, is to keep bookkeeping up-to-date or else you’re reliant on old information.

Why should I be thinking of this?

Poor record-keeping leads to paying more tax than you have to. You will save yourself time and money in the long run by doing things properly from the beginning.

If you don’t know where you are, you won’t know how close or how far you are from your goals. Because you can’t manage what you don’t measure.

If you want advice on what business structure is right for you, then book in a time with one of our advisors.