Using your business like a personal bank? 3 red flags and how to fix them
After a good long break, I’d like to start 2018 by talking about personal budgeting. Although I deal with business finances, I can tell you that your personal budget is inextricably linked to your company’s success.
I’ve seen it happen many times in my line of work.
Time and time again, business owners make good profit and then commit the fatal mistake of spending more than what they earn. They run into tax problems with the ATO as they can’t pay their GST, PAYG and superannuation obligations. If left unchecked, it will spiral out of control until their business falls into financial ruin and their personal life in distress.
Red Flag #1: Treating the business like your personal wallet
The first common red flag is when you consistently have a debit balance loan account in your business, or what the ATO calls division 7A loan. This can happen when a business owner or shareholder, takes out money from the company for themselves without declaring it as a salary or bonus. Essentially, this amount is treated as a loan from the company to you if unpaid within a year, so your business will have a debit balance loan.
However, the ATO’s rule on division 7A loan treats this amount as “dividend” for the person who drew the money. This means you will have to pay personal tax on the amount at the end of the fiscal year. Therefore, you shouldn’t treat your business like a personal bank because you can’t run away from paying taxes.
Red Flag #2: Always scrambling to pay your debts
The second red flag is when you’re constantly struggling to pay all your bills and tax obligations. It’s the stuff of nightmares for business owners to get slapped with a huge tax bill. If you’re always using credit to pay the ATO or your personal expenses, then you will eventually run out of resources for money.
Red Flag #3: Your savings are depleting
Having a substantial amount in savings is important to your personal wellbeing. If you’re constantly breaking your piggy bank or have zero amount allocated for savings, then you need a huge reality check.
In part B to this article Craig Buntain from CFL Financial Planning explains how to take control of this situation and regain the financial power.
Specialising in Xero bookkeeping, Notch Above is a Brisbane bookkeeper and BAS Agent located in Alderley that offers Xero setup, as well as training and ongoing support. Notch Above can take care of all the bookkeeping tasks you would rather not do, like bank reconciliations, supplier payments, payroll services, debtor control and BAS returns.
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