Your business structure – complex or simple?

A complex structure that involves various layers will have more compliance issues attached to it, than a simpler structure.

For example, a structure consisting of a company and a unit trust with two discretionary trusts as unit holders may provide the ideal structure for a smaller business that will also make some investments. However, such a structure requires that four entities be accounted for in addition to the business owner’s individual returns. In addition, trading between the structures will add an extra layer of complexity.

By contrast, if your business is held in a single unit trust and you are the sole beneficiary, it will be far simpler to manage. However, you may not experience the same benefits when it comes to tax minimisation and asset protection.

Where does this leave you when choosing a structure? Do you just leave it to your accountant? Do you just pick whatever sounds like the right thing?

Unfortunately, there is no one-structure-fits-all-scenario. Therefore, your particular circumstances need to be taken into account.

Trading businesses generating income are best kept simple. I am an advocate for the KISS (Keep It Simple Stupid) philosophy where possible. This is where it comes to the fore. As a general rule, the smaller the business the more likely a sole trader or partnership structure may be the best option. The larger the business (and depending on access to family members who can be beneficiaries), the more likely a company or trust structure would best suit.

The complexity tends to become a reality when there are business partners and there is an investment or asset holding in addition to the trading entity.

If you own an asset or plan to purchase an asset in connection with your business, you would be best advised to hold that asset in a separate entity, whether or not you have partners. Without partners, a simple discretionary trust may suit your requirements so you can access CGT concessions. With partners, an additional entity, such as a unit trust, may best suit your requirements, with each partner owning their share of units in their own discretionary trust.

Finally, keep in mind that simple or straightforward structures will enable easier access to borrowing from financial institutions. Banks have a tendency to shy away from structures that they do not fully understand. That is not to say that it is not possible with a more complex structure, however, it is something that you need to be consider before finalising your structure.

If you would like some assistance with understanding what is the best structure for you and your particular circumstances, Please get in touch for a complimentary discussion.

Defining your values – it’s YOU.

Values are the guiding principles that dictate your behaviour and actions. In both your personal and professional life, your values can help you determine whether or not you’re on the right road to reaching your goals. They are your GPS.

Your values influence the choices you make, in both your personal life and how you conduct your business.

Examples of some personal values are: the fundamental importance of family, maintaining a healthy work/life balance and that all people should be treated equally.

Examples of some business values are: being environmentally friendly, giving back to the community, or a commitment to innovation, such as Apple based on its motto, ‘Think Different’.

Why should you have values?

Some of the key benefits include:

  • They help you find your purpose in life and what’s important to you. If you don’t know what’s important to you, how can you know what you want from your life? When you answer this question, it will become so much clearer for you.
  • They help you clear out the clutter. Whether in business or in life, we are consumed by so much around us. You get caught up in things that you may really not want or need or even believe in. Your values will help get rid of all that unwanted baggage.
  • They help you make the right decisions, both personally and professionally. Your values will keep you focused if you are true to them. People makes decisions based on emotion far too often and therefore stray from their core values. Be clear on your values. Be clear on what you want. Always make the right decision.
  • They help guide you to act in accordance with what’s important to you. You will naturally do and say the things that matter most to you. Your core values are who you are and when tuned into them, you will act accordingly.
  • They help you to react in difficult situations. Like decision-making, when we are faced with a difficult scenario, we can act on impulse or with emotion, therefore not thinking about our response. Before reacting, stop, think and consider your values and what’s important to you. Your answer may well be very different.
  • They help you to gain compatibility with all personal and business relationships. You will be drawn to people of similar values as you will rate them highly and similarly, and others will be drawn to you. You will work better with people aligned to your values and your relationships will also be stronger on a personal level.
  • They help to increase your overall confidence. When you know what’s important to you, then other people’s opinions and thoughts do not matter. Your values will give you stability and therefore confidence to do what you want to do.
  • They help with your overall happiness. You will have a purpose, clear out the clutter, make right decisions, react well in difficult situations, improve relationships and become increasingly more confident. How can that not help with your overall happiness?

The problem is that many people and businesses say they have certain values but, when push comes to shove, their actions are incongruent with the values they claim to uphold. For example, a builder who says he prides himself on his work, but who cuts corners to make a higher profit, values money more than he values his workmanship. Similarly, a builder who purports to value high customer service standards, but leaves a job half-completed to attend to another from a customer who gives him multiple jobs, also values money more than he values true customer service.

S. G. Night said is best, ‘The truth is in your actions.’

Unfortunately, there are many of us that struggle with this concept, whether that is because of the fear of missing out, greed, or simply wanting to please everyone and putting their values ahead of yours.

So how can you determine your true values, rather than just listing a range of attributes you’d like to have?

Dr John Demartini, a human behavioural specialist, educator and best-selling author, explains that values arise from our voids, in other words by what we perceive as most missing. What you perceive as most missing (void) in your life therefore becomes what you perceive as most important (value). The bigger the void, the more important the value. The more important a value is, the more discipline and order you will have associated with it.

To determine what these are, Demartini has developed the Demartini Value Determination Process – a 13 question assessment centred around what you do, how you do it and how you think and feel about it.

Demartini’s 13 questions are:

  1. Look carefully and specifically at how you fill your personal or professional space.
    What are the three items that you fill your space with most? What three items stand out in your space?
  2. Look carefully and accurately at how you spend your time. What are the three things that you spend your time on most? You will make time for things that are really important to you and you will run out of time for things that aren’t.
  3. Next, look at how you spend your energy and what energises you the most. What are the three things that you always find energy for? You will always have energy for things that are truly highest on your values list and that inspire you.
  4. How do you spend your money and your resources? What are the three things that you spend your money on most? You will feel reluctant to spend money on things you perceive to be unimportant.
  5. Where are you the most ordered and organised? Where do you have the highest degree of order and organisation? What are the three things that you are most organised in? Where are you most organised?
  6. Where are you most reliable, disciplined and focused? What are the three things you are most reliable on? Whatever is highest you value, you will be disciplined to do.
  7. What do you inwardly think about most? What are your innermost dominant thoughts? What are the three things that you dominate your thoughts on?
  8. What do you visualise most about how you would love your life to be that is gradually showing fruits and coming into reality? What are the three things that you visualise, envision, or daydream about most and bringing about?
  9. What do you internally dialogue with yourself about most that is meaningful and that is gradually coming true or into your life? What are the three things that you internally talk to yourself about most that are manifesting?
  10. What do you most talk about in social settings? What are the three things that you converse with others about? What are the three things that you keep wanting to bring into conversations?
  11. What inspires you or are you inspired about most? What is common to the people who have inspired you? What is common to all the things, insights, experiences or events that have repeatedly inspired you?
  12. You are most willing to stretch yourself and persistently act towards goals that have the most meaning to you. So, what are the three most consistent long-term goals that you have persisted working towards that have stood the test of time?
  13. What topics of study inspire you the most? When you enter a bookstore, which section do you make a beeline for? Which topic of magazines do you subscribe to? Which section of the newspapers do you turn to first? Are there nonfiction TV shows or film documentaries that you seek out?

Your values are YOURS and yours only.

You know them and all you need to do is to understand how they can help you determine your what, why and how.

Please share your values – we’d love to hear about them.

Defining your mission statement – the how and why.

The first step in choosing your destination is defining your mission statement.

A business mission statement defines your goals, ethics, culture and behaviour. A complete mission statement defines what the business does, not only for its owners, but also for customers, employees and the community as a whole.

A personal mission statement, on the other hand, is what you want to focus on, accomplish and become in your personal life. It is what guides your actions, behaviours and decisions towards what is most important to you.

As the owner of your business, the two will most likely be closely aligned.

Some examples of mission statements within the building industry include:

  • Bunnings: Our ambition is to provide our customers with the widest range of home improvement products at the lowest prices every day, backed with the best service. Our team members are the heart and soul of our business.
  • Lend lease: To create the best places. We work closely with clients, investors and communities in Australia, Asia, Europe and the Americas to create unique places. Places that leave a positive legacy and inspire and enrich the lives of people around the world.  We do this through putting safety first and delivering innovative and efficient solutions which provide long term sustainable outcomes for a range of stakeholders.
  • Metricon: We’re all about building homes where you’ll truly love to live.

The benefits of having a mission statement which defines who you are, what you do and the values that guide you are:

  • Marketing your business to potential clients – differentiating yourself from your competition by specialising in a certain field or product or target client. Becoming the best at what you do.
  • Assist you in your business planning – as it sets the scene as to why you do what you do. It can help your business attract finance, investment and/or business partners.
  • Gives you purpose and motivation – far beyond just making a profit. It will help guide you to determine the types of products and services you will provide.
  • Helps you with your decision-making – providing you the framework within which you will operate. It’s your compass, your map, your steering wheel.
  • Provides direction to help you through the challenges that business will throw your way – by keeping you focused on what you want to achieve. Sometimes, the easy decision will create a short-term fix. Your mission will help you make the long-term beneficial decision to ultimately get to where you want to go.

If you don’t have a mission statement, on the other hand, you will find yourself having to spend time and resources rectifying poor communication and unwanted cultural behaviour whether that be with clients, employees or other stakeholders. Communication is extremely important in business and it is incumbent upon the owners of the business to clearly communicate to internal (employees and contractors) and external (clients, suppliers, banks and so on) parties their desires for their business. If all parties do not know what the owner wants to achieve, the business will likely not get there, despite the owner’s efforts. Poor communication will lead to poor decisions and ultimately, poor results – whether that is labour-centric (processes) or material-centric (supplies/suppliers). Both can have significant adverse effects if not managed well and the key to that is communication.

So how do you define your mission? Start by answering the following questions:

  • Why did you decide to go into business for yourself? What were the drivers which led you to make that decision? Was it centred around your own personal desires or that of family, or did friends influence you?
  • Who is your ideal customer? Who do you want to provide your services to? Is it private clients or other businesses? Is it residential or commercial? How will your service make a difference in their lives?
  • What do you want your business to be known for? How do you want your customers and the general public to view your business? How will you influence that view?
  • What are the essential products and services you will provide? How will they be different to your competitors? How will you position yourself in the market? Will it be based on price (low-end) or quality (high-end) or a mix of both?
  • How will your level of service differ from that of your competitors? What will you do differently? How will you be better? Do you know their strengths and weaknesses? How will you take advantage of that?
  • What type of business owner will you be? Will you lead by example? Will you delegate responsibility and authority? Will you empower your employees? Will you mentor your employees?
  • How will you interact with your suppliers? What type of relationship will you have with them? Will you want to have a close relationship with few or a distant relationship with many? How can they help? How can you help them?
  • Will you use technology to your advantage? How will this work? How will it benefit you? Will your processes be more efficient?

Answering the above questions will confirm to you why you are in business and what it is exactly that you really do.

Once you have an idea of why you do what you do and what your business stands for, it’s time to put it into a single statement – a mission statement.

A mission statement will require your time and effort, however, it will be well worth it.

After working through the questions above, I recommend you speak with all the people connected to your business, not matter how big or small your business is. You will gain some great insight into what it is you do well and, if the conversations are honest, some things you might need to work on. They are just as important to you in your business. You should take advantage of the things you do well and work hard to improve on those things that you do not do so well, because they are important to the success of your business. That is where you will derive the most benefit and see an upward spike in your business.

Take the time to do this thoroughly and completely. While a mission statement is generally rather short (that is, only up to a few sentences), it is important for you get the right words together to truly define your mission. Use words wisely to best describe your mission. Less is more, but only if it tells your story.

Once your mission statement is complete, it should be a part of all your marketing and advertising. It should be what drives your business and excites your customers.

Sometimes we simply go through the motions thinking we know what, why and how we do what we do. Don’t just exist – focus on what’s truly important to you and drive every decision and every action to achieve what it is that really matters to you.

We’d love to hear your story and if you think we can help, don’t hesitate to get in touch.

How well do you manage your work in progress?

Work in progress is when you have been given an order for a job and you are in the process of working through it towards completion. Depending on the size of the job, this period can be quite lengthy and so you will need to manage the process well. After all, the sooner you complete the job, the earlier you can invoice and therefore get paid.

Here are some helpful hints to consider when managing work in progress:

  • Record all the details of the job/order. You have a licensing requirement in building to provide the customer a written quote that stipulates all relevant details of the job. My recommendation would be to have a quote for every job you do, irrespective of size, to eliminate any potential confusion or miscommunication. Ensure you detail the specifics of the job, including:
    • Start and finish dates (where possible)
    • Any payments received
    • Any progress payments to be made and timing of these payments
    • Any additional requirements to be able to complete the job (for example, reliance on contractors or the client)
  • Manage potential delays caused by the client by ensuring they are very clear on expectations of the job process and timing of payment or payments.
  • Manage potential delays caused by contractors by ensuring they have booked your job in for the designated days/weeks and that they know whose responsibility it is to provide relevant materials and equipment.
  • Manage potential delays caused by the work area in terms of location, access and power availability by planning for all those issues beforehand.
  • Manage potential delays caused by external factors such as monitoring for bad weather or being aware of other public works in the area.
  • Invoice immediately at all agreed points in time.
  • Order materials and supplies when you are ready to commence, allowing for any lead times.
  • Identify any potential bottlenecks, such as not having the right tradespeople on site at the right time, and look for alternatives, such as scheduling the job well and having others you can call on when needed.
  • Ensure that you have the right levels of materials and supplies to complete the job, as delays in receiving goods will delay completion and therefore payment.
  • Schedule all relevant labour to ensure they are ready and available when required, as other commitments could delay completion and therefore payment.

If you would like to discuss these or other strategies, do not hesitate to get in touch.

How well do you manage your debtors?

Your sales income is the main cash flow driver of your business and converting that into cash is one of the most important processes in your business.

Clients who receive sales on credit are referred to as debtors. Managing payments due from debtors can consume both time and effort if proper controls and procedures are not in place from the outset.

Your customers are key to your business, however, until you receive payment for your services, effectively you have given them a donation, and you are not a charitable organisation.

Here are some helpful hints to consider when managing debtors:

  • Establish payment terms and clearly communicate these at both quotation and invoice stage. You can also provide a reminder a couple of days prior to completing the job.
  • Implement internal or external debt-collection systems to ensure all payment terms are met. Hire an internal debtor’s clerk or use existing administration staff. Use an external service if your internal structure does not allow for it.
  • Send out regular reminders and follow up on late payments.
  • Meet regularly with your customers, particularly regular customers.
  • Review payment terms for regular customers who continue to fall outside the agreed terms.
  • When you become aware of a potential delay in a job, communicate with the customer and discuss alternatives, if possible.
  • Only agree to a completion date with your customer when you are certain you can meet the deadline.
  • Send out invoices as soon as work is complete, not at the end of the week or month.
  • Send out invoices via email, not snail mail.
  • Provide incentives to pay early, if appropriate.
  • Offer alternative forms of payment, such as cash, cheque, credit card and EFT.
  • Where commissions are payable, pay them on amounts when collected rather than on sale/invoice.
  • Identify slow-paying customers and make contact early to discuss any issues.
  • Monitor non-paying customers and keep in regular contact.
  • Enter into payment arrangements for non-paying customers.
  • Stop supply, if possible, for customers who have not met any agreed progress payments.
  • Send letters of demand for long outstanding debts. If necessary, use a professional debt collector.
  • Consider not performing any future jobs for customers who have been unreliable with payments.

Always remember that a good customer is one who pays. If you are not collecting payment from them, then your business is funding their business as well as your own.

If you would like to discuss these or other strategies, do not hesitate to get in touch.

How well do you manage your suppliers?

While choosing the right supplier is paramount to your ability to provide a quality service and outcome for your client, many business owners don’t realise that their choice of supplier will also affect their cash flow.

In some cases, you will be required to pay your suppliers upfront when you purchase materials, while others will allow you to purchase materials and supplies on credit. Both arrangements require different cash flow management strategies.

Here are some helpful hints to consider when choosing your supplier:

  • Does your supplier provide the best quality product?
  • Does your supplier have a returns policy?
  • Does your supplier offer a competitive price?
  • Do you use various suppliers for similar products? (It is important to have an alternate supplier for any given product to cover the risk that they cannot provide a product at any given time.)
  • Does your supplier offer you credit terms?
  • Does your supplier offer discounts for early or upfront payments?

Making full use of your payment terms with any supplier is effectively like having an interest-free loan. Therefore, it is important to manage your suppliers and the payments to them effectively.

For example, a client of mine is in property development and regularly goes to Bunnings to purchase a range of materials and tools for his developments. In the past, he would pay for all the items using his own credit card or cash, at an out-of-pocket cost of $5,000–$10,000 per month.

I asked him whether he had set up an account with Bunnings only to find, to my surprise, that he had not. Bunnings, like a number of suppliers, will offer trades an account and therefore credit terms. So we proceeded to set up an account online in a matter of minutes. It provides him a $10,000 credit limit with no fees and 60 days’ interest-free terms. He even has the option to allocate job numbers to every purchase.

My client was able to free up his cash and his credit card and was able to save on interest he would otherwise have been charged. The additional hidden benefit was that he then had online statements, which slashed the amount of time he spent sorting out all the individual receipts and payments.

The real jewel in the above example is that he was able to use someone else’s money (Bunnings) to purchase items that enabled him to continue to work on his developments to finish jobs and, ultimately, get paid. Unsurprisingly, his ability to manage his cash has increased greatly.

When you have established credit terms with a supplier, ensure you pay on the agreed terms, not early or late. And, where possible, seek to extend trading terms to assist with any fluctuations in cash flow.

In every relationship, communicate regularly and maintain a good working relationship with your suppliers so any future issues can be resolved with little or no impact to your business.

Please consider these options and do everything in your power to improve your cash flow. It will relieve some significant stress on your business when cash is a little tight.

If you would like to discuss these or other strategies, do not hesitate to get in touch.

Are you taking action?

Your KPIs act as short-term goals for you to hit in order to meet your longer-term goals and big vision. However, they won’t help you achieve that vision unless you take action.

For this reason, it’s important to develop a list of immediate action steps you and your team can take to hit your KPIs.

Examples of some immediate action steps include:

  • Review the cost of materials from your suppliers. Are you buying the right materials at the right price from the right suppliers? You may be buying timber from the same supplier you buy your tools from for convenience, but you may be able to get the same quality timber from another supplier for a cheaper price, or better quality timer at the same price.
  • Review the cost of your labour – both employees and contractors. Are you utilising your employees well? Do they get allocated first? Do they get allocated to the right jobs? How do you use your contractors? Are there minimum rates you need to pay? Are you using them on the right jobs?
  • Set up clear payment terms for your customers. Do they know when to pay you? Are there progress payments? Is there an upfront payment?
  • Negotiate payment terms with your suppliers and then stick to them. Can you convert cash-on-delivery suppliers to account? Can you extend 14-day accounts to 30 days?
  • Follow up all quotes issued within seven days or, if you know that they are looking to make a decision sooner, make sure you contact them before that date. Do you set reminder calls for issued quotes? Do you contact them to offer advice or suggestions on how their project could be improved or managed better?

Once you have developed your action list, you can then rank your actions in terms of importance, based on the impact they will have on your business. Those that are the highest priority should be the ones that are costing the most time and money as well as causing the most pain to you, your team and your customers. Meanwhile, those that are minor inconveniences can wait until after you’ve addressed the big issues.

You should also ask yourself which of the action items can be completed quickly and easily, because they will be the items that give you the quickest wins and improve your position immediately. That will then give you the breathing space you need to start tackling those areas that will take a little more time to rectify.

It is all about working smarter, not harder, to start to improve your position. That is not to say that hard work won’t be involved, but it just makes sense to tick off the tasks that require less effort at the beginning.

It’s important to keep in mind that this isn’t a ‘set and forget’ process. Instead, you’ll need to measure your progress regularly to ensure that you are moving towards your goals.

Once you establish your plan, you must measure it against how you are actually performing. If you do that, it will drive you to act. To get things done. #GSD.

By checking your profit and loss statement on a monthly basis, for example, you can see whether the average margin on your jobs is increasing, decreasing or staying the same. Benchmarking your margins and comparing them to your KPIs can then highlight whether there is more room to improve, or if you’re meeting (if not exceeding) your expectations. This will greatly help you not only manage your business and minimise any financial problems, but it will help you see whether you are moving closer to, or farther away from, your goals.

If you effectively measure your performance, you will achieve superior results.

If you need a helpful hand, please contact us for a complimentary chat.

KPI’s – the internal drivers for your business.

Key performance indicators (KPI’s) are internal measures you can use to improve your business.

Think of them like a system of levers – if you pull and push them in the right way, they can lead to higher turnover, lower expenses and more profit.

How does it work? First, you’ll need to list the common elements in your business that contribute to turnover, expenses and profit. Some examples are:

  • Cost of materials (as a percentage of turnover)
  • Cost of labour (as a percentage of turnover)
  • Hourly/daily cost of labour (dollar amount)
  • Average project rate (dollar amount)
  • Average project margin (as a percentage)
  • Cost of finance (as a percentage of turnover)
  • Return on net assets
  • Debtors days
  • Cost of rectification
  • Actual vs. quoted costing (dollar amount)
  • Actual vs. quoted time (in days or hours)
  • Days lost
  • Customer satisfaction

After you make a list of areas to measure, review your profit and loss statements from the past six months to figure out average figures for those areas. What is your average cost of materials? What is your average cost of labour? Write it all down.

Once you have your historical numbers, you can use these to set new KPIs. Ultimately, you want your profit and turnover to go up, so you might set a KPI for the average amount you charge for a project to increase by five per cent. At the same time, you want your expenses to go down, so you might set a KPI for your cost of materials that is two per cent lower than the percentage you currently spend on materials.

While the focus of this article is your business’s financial health, you can set KPIs in every part of your business. There could be KPIs for the number of sales calls that need to be made each week, or the number of quotes you produce and possibly more importantly, the percentage of quotes you convert to sales. You could even have KPIs for your debtor collection process! Whichever ones you choose should be based on what is important in your particular business and the key areas that drive your business.

So write down your new KPIs – these will then act as a scorecard for your progress towards your goal.

If your KPIs are moving in the direction you want, that’s fantastic! If they aren’t, then it’s time to consider whether you’re taking the action you need to make them happen, or if they are realistic KPIs in the first place.

Like any financial measure, you should not just set them and forget them.

Always measure your actual performance on a regular basis and then review the KPI’s themselves to continually refine them and sharpen your focus and action.

If you need some help, don’t hesitate to get in contact.

Do the numbers really matter?

Financial management – you might be wondering whether it is really necessary to achieve your goals. After all, it’s just numbers.

Well, I’m not so sure about that.

Financial management is all about having accurate, up-to-date financial information so you can make informed business decisions. You want to protect your investment and make sure that you don’t do anything that can jeopardise that investment.

Good financial management will ensure that you can detect, if not prevent, any problems.

With this in mind, you’ll need to make sure that your financial controls are detailed enough to provide you with enough information to make the right decisions.

Here is a list of some key controls:

  • Compare budgets and cash flows to results. You need to ensure that budgets and cash flows are compared to actual results and that any significant variations are investigated and reviewed accordingly. Setting up the budgets and cash flow forecasts clearly define where your business is headed. Reviewing them regularly enables you to see how you are tracking so you can make any adjustments you need to get back on track.
  • Prepare financial information regularly. Financial information should be prepared and available on a regular basis so you can make informed business decisions as required. With the advent of more sophisticated online accounting systems, you can get real-time data and reports on exactly where you are.
  • Approve all price and payment terms. Ensure all sales quotes and orders are agreed and approved for price and payment terms. The better this is communicated to your customer the less likely problems will occur. It’s one thing to get the job, it’s another to get paid when you want/need to. Communicate regularly with your client.
  • Review debtors regularly for outstanding amounts. In an ideal business world, you would have no debtors because every client would pay you on completion of the job. In the real world, this is not the case. So you need to make sure you are following up with clients to ensure they pay as soon as possible. Agree to suitable payment arrangements if need be.
  • Reconcile all bank accounts. All accounts should be reconciled on a regular basis so you have accounted for all receipts and payments. That will allow you to know exactly where you sit with both your debtors and creditors and what your cash position is. In addition, it will provide accurate reporting so you’re not missing anything and are therefore looking at up-to-date reports.
  • Ensure payments are approved and recorded. All wages, salaries, commissions and contractor payments should be approved and accurately recorded. Your labour force is a major component of your costs for your business. You must check and review this cost regularly to make sure the correct payments are made and that any variation is investigated and accounted for. You need to make sure your employees’ time is managed effectively and that your contractors are charging you for the work they have performed based on either quotes provided or your expectation of hours worked for the jobs completed.
  • Record all cash payments. You need to ensure that any cash payments are recorded appropriately against accounting records. This may not sound important, but you may be surprised how much you and your business spends on its smaller expenses on a day-to-day basis. It could add up to be quite a significant amount by the end of the year, and you want to ensure that nothing is missed so you can claim your rightful tax deduction.

You need to put in place all these controls to ensure that your business is protected.

A regular review of these procedures will ensure that you have good financial controls in your business so you can spend your time on growing your business and achieving your goals.

To see whether your business could do with some assistance, take our free financial health check at www.adpartners.com.au/financialhealthcheck.

We’re here to help.

Succession planning – Structuring your business

None of us like to think of a time when we won’t be around anymore, but this needs to be considered up front so you can plan for it effectively.

Whether you plan to sell your business on your retirement, leave your share to your partners or hand it on to your children will influence the type of structure you choose. It’s also important to consider what you would like to happen should you pass away while you are still holding the reins. You need to consider who will control the income and assets of the structure and how this control could be changed, if required.

If you plan to sell, will you sell the entire business or just its assets?

Before answering that question, you need to ask yourself whether your business has a value in the open marketplace. Many business owners run their businesses and generate good incomes. Unfortunately, when it comes time to pack up the toolkit, their businesses do not have real value to anyone else because they themselves are ‘the business’. The business cannot run without them, hence there is no value. A harsh reality, but definitely one that is better knowing now rather than later.

If you find yourself in this position, you may be able to sell your business’s assets, but will likely struggle to sell the business itself. If, on the other hand, your business could run effectively without you in it, you have options.

If you have a company structure you have the option of selling the shares in the company or just the business interest the company operates. If you sell the shares in the company, then the capital gain or loss sits with the shareholder that sells the shares, which could be an individual or a trust, depending on how the company was structured when incorporated. That shareholder will need to report the capital in their tax return. If the company sells the business interest, on the other hand, then it is the company that has made a capital gain and loss, and it would need to report that capital gain or loss accordingly.

If the business is operated under a trust, on the other hand, it would be difficult to sell the interests in the trust. Trusts are established for the benefit of its beneficiaries, which are generally family members when it comes to discretionary trusts (the most common trust structures established for business).

If you are operating your business in a discretionary trust, or planning to do so, please consider your succession planning as, if you are likely to sell your business to external parties, you will likely be selling the business assets, rather than the interest in the trust.

If your intention is to pass the business to your children, a trust can be a cost effective and easy option, as your children are already beneficiaries of your trust irrespective of whether they are named beneficiaries or not. It is standard in discretionary trusts that your children, along with siblings, parents and so on, are all unnamed beneficiaries. There is no obligation to distribute any funds to them at any stage, but the option is there for you should your circumstances warrant it (such as when your net business income is at a high level and you wish to save tax by utilising as many of your family members lower tax rate thresholds).

Another consideration is small business CGT concessions on the sale of your business or its assets. When it comes to CGT, an individual and/or trust is able to access the CGT 50 per cent discount while a company cannot, therefore this should be kept in mind when considering succession planning and choosing your business structure. If your business is considered to be a small business entity (with turnover of less than $2 million), additional CGT concessions – like the 50 per cent active asset reduction and the $500,000 retirement concession – will play a significant part in your decision.

We can sometimes be guilty of only thinking about the present when starting a business. If that is the case, you could cost yourself significant dollars when the time comes to leave.

Consider all options and speak with your Trusted Adviser before making the final decision on the structure of your business.