Consider these important aspects to maximise cash flow
When starting a small business cash flow and survival are the most important aspects to focus on. But as the business grows you need to think about savings and planning for the future and eventual retirement.
A small business has many advantages, in particular flexibility.
As a start try and save tax legitimately wherever possible and consult a competent business adviser. If your spouse is unemployed or underemployed consider engaging them in the business. This will lower the average rate of tax resulting in more after tax income being available to your household. The remuneration paid to a spouse should be commensurate with their duties and responsibilities to get past SARS.
A business owner often provides own funds to a business in the form of a loan. The first R23 800 in interest earned a year is tax free. There is no donations tax between husband and wife so if the loan is split into both spouse’s names then an amount of R47 600 can be earned tax free.
A business owner should draw a set monthly amount or salary to cover personal and household expenses. This should be kept as reasonable as possible and can be topped up by bonuses or profit shares (within reason). SARS allows 27.5 % of your remuneration up to a limit of R350 000 pa to be paid into a pension, provident or retirement annuity fund. Even a small business with a couple of staff members can set up a fund. This is a very important tax and retirement saving mechanism because tax can be saved at rates up to 45% and deferred for 10 to 30 years until you retire. Simplistically, if R1m is saved this might only mean contributions of R550 000 from the employee with SARS contributing R450 000 that you would otherwise pay in tax!
If withdrawals are carefully managed there is a tax free amount up to R500 000 and the balance taken in the form of a pension will be taxed on a sliding scale from 0% up to R79 000 to 26% up to R305 850 significantly below the 40% to 45% tax which might have been saved.
Individuals are also permitted to invest R33 000 per annum up to a total of R500 000 into specially designated tax free investments. This R1m tax free income for a couple can assist retirement significantly but needs to be started as soon as possible.
Most businesses highest costs are cost of sales, salaries and wages and rent. Once the business is established it is worthwhile exploring the purchase of the company’s own premises. Whilst purchase typically requires a deposit of around 30% of the purchase price a bank bond can normally be taken for the balance. A separate company or trust can own the property and the business can then pay rent which in turn pays off the bond. This rent can increase by CPI or inflation and commercial bonds are only up to 10 years meaning that the building has probably increased in value by at least inflation and is debt free after 10 years thus providing a pension to the business owner. As the bond is settled and the rent increases a second property can be purchased to flatten the tax. If the building is specialised or used in a process of manufacture or similar process, other tax deductions may be available.
The business itself
Most business owners work too hard in their business and not enough on their business. It is recommended that independent valuations of the business be performed every five years or so. This will provide a useful indicator of what the business is worth. Businesses that have a good spread of customers, contracts with a good gross profit margin and which can operate independently of the owner and where systems of internal control are well documented typically demand premium values. The owner of a business should thus consider its future value and balance this value with the amounts that are taken out. A business that pays dividends regularly also indicates that profits and cash flows are real and this is attractive to investors.
The role of insurance
An owner wishing to build wealth and protect his business needs to insure against loss. This covers stock and equipment typically. With increased IT fraud fidelity cover should also be considered. Partnership and key man insurance is also important and can ensure the continued success of a business against the loss of a key staff member or co-owner.
This article does not constitute professional advice. A qualified and experienced professional such as a business adviser or chartered accountant should be consulted before making any financial decisions.
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