Biz Talk: Structuring Your New Business (Part 3)

Part 3: Profit vs. Cash Flow

On day one, when you action all your planning, you’re looking at that startup bank balance.

With my Sydney PA Hire journey, I started on 1 August with ten grand, which sounds too low. But I had an audacious plan, which worked brilliantly.

The business had run on last-minute billing in advance, no matter whether it was a $100 dry hire or a $5,000 production. I switched to prepayment on order. Initially, some loyal customers objected, so I part-billed them. The net effect was instant cash flow, money in for work yet to be completed.

Airlines and hotels do it all the time, and when COVID came they didn’t have the cabbage to refund, did they? That’s the peril of the plan.

With cash flow sorted, I went on an orgy of expansion. Someone booked a stage and then another enquiry came in. So I bought another stage. We ran out of Bluetti batteries, so I doubled the stock. The business didn’t have a ‘larger’ PA. Now we do. On it went as we were spanked by the busy season until, around mid-December, all the jobs started to dry up.

I’d put aside a war chest to get us through and used the quiet month of January to do maintenance and the annual test-and-tag chores.

Cash in the bank isn’t automatic profit. It is there to fund the operation for the financial year. Profit materialises at midnight on 30 June when the books are closed off and all the deductible expenses are accounted for.

If you are madly expanding using cash flow, you can start to wonder about your profitability.

That’s why a properly structured bookkeeping system like MYOB or Xero, maintained and managed every other day by someone who is a bookkeeper or understands bookkeeping, is critical. You can and should run a P&L (Profit and Loss) statement every month.

The other side to this is the balance sheet, which is where some asset purchases end up and your initial and ongoing cash inputs (owner funds introduced) are recorded. It’s also where any drawings are recorded (owner drawings). These, as a warning, trigger a tax debt.

Don’t rely on the P&L alone!

PROFIT

I was using surplus cash (profit) to expand. In bygone times this had produced a tax problem, back when you could only claim 15% depreciation. It meant for each $100 of profit you put back into gear, you’d be assessed for tax on 85%.

In my headlong rush of the 1980s, that produced a double whammy because once you hit profitability and thus received a tax assessment, they slammed you for provisional tax (tax paid in advance) each quarter as well. This still applies and will catch you flat-footed if you don’t plan for it.

(Rely on absolutely nothing Julius says about tax. Engage an accountant. See next subject!)

Now we have the instant asset write-off (IAWO) of $20,000 per asset for businesses with turnover under $10 million. According to the 2026–27 Federal Budget this $20,000 threshold is set to become permanent! It is a wonderful tool.

The definition is important. My stage is many units of Intellistage each of which can be hired individually. So I’m happy that I am able to use the IAWO.

According to me, a line array is 12 or 24 individual items valued at under $20,000 each. If I were operating at that level, spending half a million bucks on a system, I’d get an accountant’s opinion first about IAWO because you wouldn’t want to get the treatment wrong and face the tax issue!

Drawing money from your business comes in three forms: wages, dividends (profits taxed and taken) or drawings. The latter is the one we talk about next.

ACCOUNTANT

I’ve had three accountants in 53 years. The first guy was awesome for 20 years until my wife (and partner) split. He seemed to have a genuine close affinity (no hanky or panky suspected at all) and took sides. This mattered because breaking up the business was wildly difficult due to a monster in the basement called ‘director loans’.

These nest in your balance sheet as owner drawings and, in our case, had metastasised into a ten-ton gorilla. We owed the tax office almost half a megabuck. The problem was that it wasn’t equally split, which is unusual but explained by an inheritance for one of us that was invested into the business.

Director loans are repayable! And each year you are taxed on an interest component. They are dangerous if not managed. So Accountant No. 1 worked out a scheme that was messy. We had four companies and real estate, and it took a long time to resolve.

Enter Accountant No. 2, who worked from a little cottage in Mount Kuring-gai near the station. He was young and attentive and produced excellent advice and solutions for many years. His firm grew, added partners and acquired an old bank branch as HQ in an upmarket North Shore suburb. The charges went up and up. Then he met Kate. Anyone who knows my wife understands she has superior skills in many things, coming from a brilliant family, unlike your humble writer, ‘slumboy’ here.

At one year-end, Kate looked over the accounts and said those immortal words: ‘This does not add up’.

Sure enough, the novice newbie who was now dealing with us, since all the partners were looking after REALLY wealthy people, had ‘forgotten’ the prepayments.

These were funds we held against future sales, as our business had this category of transaction at the time. It was potentially a bad mistake, and it was time to move on.

Kate asked around and found a suburban accountant (No. 3) who has been, and continues to be, brilliant. They charge about $300 to do a BAS and about $1,500 for the annual accounts. That matches what we pay the accountants we use in New Zealand, so it is very reasonable.

I generally don’t have a law firm on retainer any more (although I did when publishing) and don’t frequently need one. But I always have an accountant on speed dial. Choose a good one and listen to what they tell you!