In my previous experience working as an accountant I have met many passionate, energetic and charismatic business owners and entrepreneurs, who had a strong ability to generate sales, lead people and generate business opportunities. Then why did some of their businesses struggle financially?
Although a key requirement, for a business owner it isn’t just about having the ability to generate leads and sales. They also have to be capable of managing the business in an efficient way.
Three pillars of a well-managed business are: making a profit, securing a healthy cash flow, and spending the business’ money in an efficient way. Some businesses however, place too much emphasis on minimising taxes rather than maximising profitability.
For example, home business owners would regularly spend money in materials or services not necessarily because they are required business expenses, but mainly with the idea of getting a tax write-off.
Minimising tax is obviously a very important goal to achieve in any business, but this should be achieved in the context of the most important objective, which is to maximise profits. Profits will create a virtuous cycle by providing funds to be reinvested in the business for growth; for distributing income to the owners, to reduce debts and ultimately pay tax.
In the lending industry, there are major benefits to be achieved by any business in reporting healthy profits and strong equity positions. Strong profits and equity will give confidence to the banks and lenders when assessing your business’ finance application.
In their assessments, lenders rely heavily on the profits as shown on accountant-prepared financials, in conjunction with income tax returns lodged with the tax office.
Business owners have a lot to gain by choosing to maximise profits as their main goal. This will facilitate access to finance to grow, expand and build long term wealth.