Return on Investment – What is yours?

A key benchmark for your business is your return on investment (ROI).

This tells you whether or not all the effort put into the business is returning an appropriate level on the equity you have invested.

Most financial experts will tell you that your ROI is the most important measure of all, a statement that I endorse. Why? The answer is simple – your ROI shows whether your business is worth all the effort you put into it.

You want to ensure you are getting a good return on all of the time and money you have invested in your business. If not, you may as well be working for someone else on a wage and save yourself the trouble.

Now, of course, as an ambitious business owner I know you don’t even want to consider that, but it’s important you get rewarded for your blood, sweat and tears.

So what is a good return?

Unfortunately, I cannot give you the exact dollar figure or even percentage because the reality is, your business is different from that of your competitor down the road. What I can give you, though, is a way to work out if you’re achieving a good return. You simply need to work out whether your operating profit is greater than the cost of capital.

How do you do that?

The DuPont Analysis.

The DuPont analysis is a performance measurement that was created back in the 1920s and has stood the test of time as a simple but powerful way to determine the financial performance of your business.

It is the way for you to convert your profit and loss statement and balance sheet into a meaningful analysis of your ROI by demonstrating the return you are generating on your assets and equity. You can then determine what drives that return, and whether you are earning the return you want.

For a free copy of my DuPont Analysis template, go to www.adpartners.com.au/dupont.

It is very simple to use. You just need to enter the following information:

  • Gross revenue
  • Variable expenses
  • Fixed expenses
  • Interest expense
  • Other income
  • Total assets
  • Total liabilities.

The excel worksheet will then calculate your various ratios and confirm your ROI.

Once you perform the analysis on your current numbers, you can then change some numbers around to see what the impact would be if you were to make some amendments to your business. For instance:

  • What if you increased revenue by two per cent while keeping costs at the same level?
  • What if you reduced expenses by five per cent while maintaining revenue at the same level?
  • What if you reduced interest expense by three per cent?
  • What if you reduced or increased assets by five per cent?

You will see the impact these changes have on your profit margin, your asset turnover and ultimately your return on assets.

Now you’re starting to really see where your business is financially and what you need to do to get you to where you want to be.

Once again, don’t forget to download your free copt of the DuPont Analysis at www.adpartners.com.au/dupont.

If you need any assistance, do not hesitate to contact us.

Refinancing – yes or no?

Why refinance an existing loan?

The answer is quite simple.

It is always prudent to review your existing loans to make sure you are getting the best option available, especially since the cost of refinancing has dramatically reduced in recent years and lenders have become very competitive.

Some benefits of refinancing include:

  • You could secure a lower interest rate, thereby reducing your repayments and improving your cash flow, or reducing the length of the loan.
  • You could access increased finance for further investment, particularly if you have a good repayment history and your business has improved since the establishment of the original loan.
  • Restructuring the type of loan may suit your future requirements. For instance, moving to a line of credit will provide you with access to money for future requirements without you having to apply for separate loans, which could be costly and time consuming.
  • Consolidating existing debts will ease your cash flow and administrative requirements.
  • Refinancing may allow you to release your personal assets as securities against existing loans.

Refinancing is simply about making sure you are in the best possible financial position with your lending, interest rates, servicing and access to future funds.

There is no need to overcomplicate it, as refinancing can most definitely help you achieve your goals.

It is not always an option you will need to take, but there will be times when it could do great things for your business.

If you would like to know more and how refinancing could help you, do not hesitate to contact us.

Active vs Passive Income – Who cares?

I care and so should you.

Q: Why?

A: You want to minimise the amount of tax you have to pay.

The type of income you earn will influence your structure, and is linked to the tax minimisation strategies you use.

Your income might be active, passive or both.

Active income comes from a trading business, where you are supplying a product or service and dealing with customers, suppliers, workers, etc. For example, a building company is a trading business.

Passive income comes from investment activities, where you are doing little or no work, like having an investment property that earns rental income.

If your business is generating active income, your priority will be minimising income tax.  You will likely also want to access Capital Gains Tax (CGT) small business concessions on the eventual sale of the business, unless your intention is to pass it down to family.

If your structure is to derive passive income, you are likely to place more importance on the minimisation of CGT liability in the sale of the investment.

While it’s possible to have a business that will derive both passive and active income, it is often advisable to separate the two activities in two separate structures. First, this enables you protect the assets of one business against the assets of the other. Second, having separate structures for the different income types will allow you to minimise tax, as you can choose the most appropriate structure for each income type.

You can see now that it will make a difference.

If you need assistance to determine whether you existing structure is right for you or how to go about starting the right structure, please do not hesitate to contact us.

Benchmarking your business…..to be better.

The use of business benchmarks can help you gauge where your business is in comparison to other like businesses. This isn’t about trying to be the same; it’s about trying to be better.

For example, if you find that your business is spending far more on labour as a percentage of your sales than most other businesses like yours, you need to ask yourself why. Is your business more labour intensive because of the type of jobs you do? Do you pay too much for your labour? Do you employ too much labour? Do you utilise your labour efficiently? Do you have a low cost of materials? Is your labour/material mix combined more or less than the industry average? While there could be genuine reasons for your specific labour percentage, it is critical you know not only what it is, but why it is.

Reflecting on where your business stands across a range of common benchmarks can give you tremendous insights into what needs to change, and how you can achieve your goal. In some cases, a small tweak might be enough to save thousands of dollars a year, and in others a major change might be required. The most important thing is that, once you look at the numbers, you’ll know what’s wrong and you’ll be able to make an educated decision about your next steps.

Which benchmarks should you be focusing on? The common ones include profitability and expense management and return on investment.

Expense management

In the building industry, the main profitability measure is benchmarked on net margin, rather than gross margin, so it takes into account total expenses before tax.

As there are a number of different trades within the building industry, benchmarking against your specific trade is important. If you are spending 90 per cent of your turnover on expenses (therefore making a ten per cent profit), but businesses in your trade typically only spend 75 per cent on their expenses (therefore making a 25 per cent profit), that’s a sign that there are areas where you could improve. On the other hand, if you’re making 25 per cent profit in a trade that averages 15 per cent profit, that is a sign that you’re doing something right.

Here are some examples of the different business benchmarks for a few categories in the building industry (across Australia) based on turnover of greater than $500,000:

Trade  Carpentry Tiling   Electrical Plumbing Painting
Total expenses 80–90% 75–85% 75–85% 80–90% 75–85%
Materials 30–40% 20–30% 30–40% 30–40% 20–30%
Labour 25–45% 25–45% 25–35% 25–35% 35–50%

 

As you can see, there is a 10 to 15 per cent variation on each measure, as each individual business will have its own operational setup and processes. Irrespective of which trade you operate in, the philosophy is the same – you need to know where you fit and whether you are achieving the best returns you can for your business.

Note that the above figures are only a guide and not a definitive target you should work toward. Your main focus should be what you can improve to create a greater margin and, hence, a greater profit.

If you need assistance with measuring your benchmarks, we’d be only too happy to help.

How do you choose your virtual CFO?

Where do you start? What do you look for? Who is right for you?

 

Listed below are the most important attributes you should seek in a virtual CFO:

Qualification: They must be qualified to a minimum level of Certified Practicing Accountant (CPA) or Chartered Accountant (CA). This will confirm that they are educated to a superior level, as these organisations not only require the tertiary qualifications, but they also require postgraduate studies and continued professional development for every year they run their practice. This will provide you with a technical-ly skilled and educated team of professionals to work with you.

Experience: They must be able to display that they have at least ten years of experience working with businesses on all facets of tax compliance, financial reporting and analysis, strategic planning, cash flow management, financing and advisory services. In addition, the more experience they have in your industry, the better service they will be able to provide.

Communication: They must be good communicators and be able to clearly explain and demonstrate the advice they provide so you are able to clearly understand that advice. They should not only be able to work well with yourself, as the business owner, but also with all your key employees that they are likely to liaise with over the life of the relationship.

Analysis: They must be analytical in nature. Any accountant who has the relevant qualification and experience is able to prepare annual tax returns. CFOs, however, are much more. Not only are they able to prepare all of your compliance requirements, they are able to review and assess the financial position of your business and provide feedback on which areas need attention. Having done that, they will then of-fer different solutions.

Strategy: They must be strategic thinkers, always looking towards the future and to you achieving your goals. Your virtual CFO should be able to work with you to develop strategies that suit your long-term vision and then help you deliver those strategies. Having delivered those strategies, they need to be flexible and adaptable to be able to cope with changing competitive dynamics, differing customer needs, new technologies and the ever-changing regulatory environment.

Risk: They must be very mindful of all the exposures to risk in your business. Risk is rapidly becoming one of the most important factors in business and, with continued regulatory changes and restrictions, it must be front of mind at all times in every facet of your business. The ability to make your business resilient and strengthen your structure and processes is a key trait to look for in a virtual CFO.

Technology: They must be up-to-date with all relevant technology that can assist you in the financial management of your business. Technology continues to evolve and you want your virtual CFO to be able to evolve with it. This will not only create efficiencies in your business, it will also provide opportunities to innovate.

Passion: They need to care about you and your business and your continued growth. This will ensure they do everything in their power to help you reach your goals.

Before deciding on your virtual CFO, you should do a little research on them. What you should be looking for is whether they meet the criteria listed previously. Some of those attributes can be easily determined, such as their qualifications and experience. However, the remaining attributes will require meeting with them.

Think of the first meeting with your virtual CFO as an interview – this is someone you will be working closely with and, hopefully, for some time. Just some of the questions you could ask include:

• I see your firm is (CPA or CA). Are all your accountants qualified accordingly? (Remember, you might find yourself working with different members of the team.)
• You appear to have the experience in years but have you worked with many busi-nesses in building and property development?
• Can you give me some examples of the type of clients you currently working with that would be similar to me?
• Can you give some examples of how you’ve helped similar businesses with their tax compliance?
• How have you helped similar business owners protect their personal and business as-sets? Can you give me an example?
• What strategies have you used to help your clients improve their cash flow?
• Do you use and/or do you clients use the latest technology in their business? If so, did you recommend and/or implement the systems? How has it helped them?
• Have you not been able to help a business owner better manage his finances? If so, why? What was the outcome?
• Some of my strategic goals are (explain some of the goals you’d like to achieve in the next one to three years). What are some ways we could go about achieving them?

Depending on your level of comfort, you may wish to ask more questions and be even more specific about how this virtual CFO can help you. That’s totally fine because you need to be sure.
Having gone through this process, the only attributes that you didn’t ask about are the ones that will answer themselves, being communication and passion.

It’s now up to you.

Getting the most out of debt finance

As long as your business can service the level of debt and has enough security to support the funding, debt finance can be a viable way to fund business operations. You will benefit by retaining ownership in respect of the growth and profitability of the business. Why give it away if you can afford not to?

There have been many businesses that have benefited from the use of debt financing as it has enabled them to grow, arguably, more than what they might have without it.

Consider one of my clients, who operates a business from an office warehouse that he used to lease for an annual rental amount of $66,000. The lease agreement had annual four per cent rent increases built in, which was a benefit to the landlord who was not only receiving more rent each year, but was also increasing the value of his property given commercial value is generally based on yield (or the percentage return on investment). In the first couple of years, it suited my client to rent given his personal circumstances, and the rent expense was fully tax deductible.

After a couple of years, he decided to buy the property he was renting as it suited his business requirements and had potential for some expansion. He successfully acquired the property for $1.35 million at a rate of 3.8 per cent, which meant his interest cost on the full loan amount was $51,300 per annum ($14,700 less than his rental payments). Beyond the annual cost savings, a secondary benefit was that he now had an asset that was increasing in capital value year on year.

As you can see, taking on the debt of the mortgage was a sensible business decision.

If you decide that debt financing is your best option then it is important to review a range of finance products from different lenders, as there are many options out there in today’s market and you need to find the best option for your needs.

Not only are there various lenders, there are also various finance types, such as a bank overdraft, line of credit, credit card, cash flow lending, debtor finance, fully drawn advance, mortgage loan, interest only loan, lease and hire purchase and chattel mortgage, just to name a few.

The important thing here is to make sure you match the type of finance with the reason for the finance. That is, you want to match the term of the loan with the life of the asset you are funding.

Let’s look at an example.

You need to upgrade the motor vehicle you use for your business, be it your ute, van or truck. Having made the decision to purchase the vehicle, the next decision is how you will pay for it. Let’s assume paying it all up front is not an option, so you need to finance. Your options include a hire purchase agreement, a chattel mortgage, a line of credit or a personal loan.

Motor vehicles have an effective business life. In an ideal scenario, you would want to use that vehicle for a period of time where you are receiving the maximum benefit, both operationally and financially. Typically, that period is between three and seven years, depending on the type of vehicle, the kilometres you will drive and how it will be used (will you be carrying building materials in it or a regular basis or not?).

The most popular finance options for vehicles are hire purchase agreements and chattel mortgages. They are both taken out for a defined period of time (in years) and have the option of a balloon payment at the end of the period, meaning an amount you need to pay to buy it outright and pay back the finance. The balloon payment can be anywhere from zero to 50 per cent, depending on the length of the finance period and how the vehicle will be used. As a general rule, the shorter the period, the higher the balloon. The more the vehicle is driven, the lower the value of the vehicle and hence the lower the balloon.

The fundamental difference between a hire purchase and a chattel mortgage is that with the hire purchase you do not legally own the vehicle until the finance is paid out, whereas with the chattel mortgage you own the vehicle from day one. Other than that distinction, they both have very similar attributes from a financial perspective.

A line of credit, which is used solely for tax deductible business costs, could be a cheaper option as the interest rates are generally lower. If you have a line of credit already in place, it has the added advantage of no extra application process or fees. If the line of credit is not in the name of business, then you will need to apportion costs and allocate accordingly. For example, you may have a line of credit for an investment in another entity name, such as a trust, and the vehicle you are acquiring is for the business in the trading company. Therefore, you need to work out the amount of interest apportioned to the vehicle and account for that in the business company accounts so you get the full benefit of the tax deduction. This option is not ideal from the point of matching the finance to the asset and has the added complexity of one loan applying to various entities. While the line of credit is an option, from a trading business perspective it is generally used to manage working capital, not for motor vehicle purchases, as it is available on a long-term basis and generally secured against your property.

The other finance option for the vehicle is a personal loan. I would suggest this as a last resort due to the higher interest rates that are attached to such loans. It is very unlikely you would be in a position to have to use such a facility and I would not recommend it, other than in extreme circumstances.

In summary, this example shows that a hire purchase or chattel mortgage fits best, as its purpose is solely for the vehicle.

When dealing with banks and other lenders, you need to understand that they tend to be a little conservative regarding your business potential, especially when compared to your own thoughts. Of course, you know how well your business will perform with some additional funds; however, the banks need a little more persuasion and then there is that frustrating issue of red tape that they may force you to try and break through to get anything achieved.

What are banks looking for? Your bank wants to know as much about you and your business as possible so they can assess whether you are suitable for a loan. Some of the things the bank will want to see include:

  • A description of your business, including and a brief history and where you are now.
  • Your personal financial information, including personal assets and existing loans.
  • Historical business financial information, including your profit and loss reports, balance sheets and tax returns (likely for a minimum of two years).
  • Projected financial information, including cash flow forecasts and/or business plans.
  • Details of what you require the loan for and why.
  • If you have business partners, their personal information.

Providing all the above information in a complete and timely manner is the first step to showing the bank that you are well prepared and on top of your finances.

The bank will review this information to establish whether you will be able to support the loan with the required level of security, and service the loan with the required level of profits and cash flow. Therefore, the stronger your application, the more likely the bank will approve the loan. Keep in mind that your historical information is just that – historical – so you cannot do much there. Your cash flow forecast and business plan, on the other hand, are where you can really make a difference.

Finally, remember that numbers are just one aspect – don’t forget the words that should go with them to demonstrate that you know exactly what is required and where you are headed. The level of confidence you have in your business and yourself will help increase the level of confidence the bank has in you and your business.

If you are faced with your loan application being denied, rather than getting angry, turn your energy towards finding out why. The better informed you are regarding this, the better prepared you will be to either seek alternative funding or review your strategy and prepare for when you are ready to make your next application.

Armed with this information, you could approach other lenders that may wish to deal with you, as their offering may be better aligned to your requirements.

You need to make sure you exhaust all options before giving up on the loan. I have had a number of clients who have not been successful on the first attempt, but then secured the loan they wanted from another lender. There are many lenders in the market and you should keep you options open. Start with the ‘Big 4’ banks and, if not successful, approach the second-tier financial institutions. There is an option is almost every situation.

Another alternative is to review your loan requirements and establish whether you may be able to reduce the funding amount required to achieve your goals. While this is not ideal, you may find that a lower funding amount may allow you to work towards your ultimate goal as servicing the loan is more manageable. Again, it will come down to your specific circumstances and requirements.

Assuming you do successfully get funding, you can be assured that your bank will require you to undergo reviews. At a minimum, this would be annually and, depending on the level of funding and your business situation, it could be as regularly as quarterly. Being well prepared for these reviews will show the bank that you understand their requirements and demonstrates that you have good internal management practices.

Keeping the lines of communication open with your banker will ensure they are ready to respond to any request you may have. The more you give, the more they do. If you do not provide information and respond to requests, then they will feel that there might be a problem with your business and will therefore become guarded and reserved in future dealings.

If you need any assistance with any finance requirements it would like to simply bounce some ideas off us, please do not hesitate in getting in touch.

Ownership vs Control – in the structure of your business.

The structure of your business and the people involved will determine who has ownership and who has control.

Ownership and control are not the same thing. It is important you understand the difference and how it may impact you moving forward.

Control is when a person, or group of people, have a controlling interest (more than 50 per cent) across two or more businesses. Control is not limited by the type of structure that you operate in, meaning the different businesses could be operated as a sole trader, partnership, trust or company. Therefore, you cannot escape these provisions just by setting up a new company or trust, unless there is a different person in control (meaning, someone else is the director or trustee).

The key distinction between ownership and control is that the owner and the person/people in control may not be the same under the different structures you may operate your business under. For instance, in a business run as a sole trader, the business owner also has the controlling interest in the business, so the same person has both ownership and control. In a company, on the other hand, the business is owned by the shareholders, whereas the business is controlled by the director. See the table below.

 

Structure Ownership Control Same/Different
Sole trader Sole trader Sole trader Same
Partnership Partners Partners Same
Company Shareholders Directors Can be different entities
Trust Beneficiaries   Trustee Can be different entities

 

In companies and trusts, the owner and the person/people in control may or may not be the same.

For instance, Scabbit Builders Pty. Ltd. is run and managed by Brett, who has been appointed the Director of the company. Brett’s wife, Kristen, assists with the business when she can and she holds all the shares in the company. They own their family home and the title lists Kristen as the sole owner. This structure has Brett, the director of the company, as the person in control, while Kristen, the shareholder, is the owner of the company. In addition, we have the added benefit of protecting the family home as there is no responsibility attached to Kristen as she does not control the company and therefore does not have any liability should there be any legal of financial disputes.

It is common in smaller businesses that the person or people who own the business also control the business. In the vast majority of cases it will depend on the owner’s family network and personal circumstances. The point to note here is that there is a distinction and understanding that could be of assistance when it comes to running more than one business and the possibility of minimising taxes and costs.

If you have any questions about your business and the structure you operate under, don’t hesitate to contact us.

SWOT Analysis – What does it mean for you?

You will benefit greatly from reviewing your financial statements, namely, profit and loss statement, balance sheet and statement of cash flow on a regular basis.

But what then?

It’s important to put all of that information together to give yourself a holistic view of where your business is now.

One effective exercise to assess this is a SWOT analysis. If you haven’t come across this before, SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The exercise requires you to reflect on your business’s internal strengths and weaknesses, as well as external opportunities you can take advantage of, and threats you need to protect yourself against.

 

Strengths

·         What do you do well?

·         What do you do better than others?

·         What unique resources and/or processes do you have?

·         What do others in your industry see as your strengths?

·         What factors get you a sale?

 

Weaknesses

·         What could you improve?

·         What should you avoid?

·         What does your business lack?

·         What do others in your industry see as your weaknesses?

·         What factors lose you a sale?

Opportunities

·         What opportunities can you see in your industry?

·         What interesting trends do you see?

·         What can you do that others are not?

·         How can you turn your strengths into opportunities?

 

 

 

 

Threats

·         What obstacles do you face?

·         What are your competitors doing?

·         Is regulation threatening you and/or your business?

·         Is technology threatening you and/or your business?

·         What threats do your weaknesses expose you to?

·         Do you have cash flow problems?

 

Once you have completed your SWOT analysis, you will have brought to the front of your mind some really important issues for your business, some good and some not so good. The truth is, they are all good to get out in the open so you can do something about them.

So, what do you do?

For each of the quadrants, you need to consider how you can use that information to your benefit:

  • What opportunities can you take advantage of? How can you use your strengths to take advantage of these opportunities?
  • Which of the threats can you address today, using your existing strengths?
  • How can you minimise your weaknesses? Are there opportunities you can leverage to do this?
  • How can you avoid or insure against the threats you listed?

For example, if you have identified one of your business weaknesses as lack of labour and equipment and have identified a major growth development in your area as an opportunity, then a strategy for you may be to strengthen your resources to be able to successfully quote, win and undertake the large development project in your area.

Knowing your strengths is great, taking advantage of them is something else. Knowing your weaknesses is also great, doing something about them is really something else. This analysis shows you how, and gives you the first steps to move closer to your big vision.

If you need assistance with your financial statements and your SWOT analysis, do not hesitate to contact us.

 

What are the different ways a virtual CFO can help you and your business?

You can work with a virtual CFO in a couple of different ways. How you do so will depend on the level of support you require.

You are able to use the services of a virtual CFO as little or as much as you would like, although the true essence of working with a virtual CFO is an ongoing arrangement so you receive the maximum benefit for you and your business.

The typical working arrangement with a virtual CFO is ongoing monthly or quarterly guidance and advice, including the following services:

  • Bookkeeping
  • Accounting
  • Income tax returns
  • Activity statements
  • ASIC compliance
  • Strategic planning and advice
  • Budgeting
  • Cash flow management
  • Performance management and financial reporting
  • Tax planning

The alternative arrangement is to use your virtual CFO on a specific project basis, which could include services such as:

  • Strategic planning
  • Business plans
  • Budgeting
  • Cash flow forecasting,
  • Development of key performance indictors (KPIs)
  • Profitability analysis and improvements
  • Cash strategies
  • Financing or capital raising
  • Systems assessment and development
  • Due diligence
  • Business valuations
  • Mergers and acquisitions
  • Exit strategies

The reality is that you can tailor the virtual CFO services to suit your specific needs. Your virtual CFO will take the time to understand your unique challenges and needs, and will help you develop a tailored solution to achieve your goals faster and more efficiently.

One of the benefits of having a virtual CFO is that they are flexible and can adapt to your changing needs. As your business grows, so does their level of service and support because you are not just working with a single professional, you have a team of professionals behind you.

A good CEO (You) needs a good CFO to help drive their business forward.

For any questions you may have regarding virtual CFO services, contact us and we’d be only to willing to assist.

What are you funding options for business / investments?

You can fund business operations and investment from debt (a loan from the bank or another third party), equity (your own funds), an equity partner (taking on an investor) or internal funds (profits).

Each of these options comes with its own set of risks and advantages, and it can sometimes be difficult to figure out the best option, or whether you should look for financing at all. Consequently, finance can be an extremely difficult and frustrating for business owners and, as such, needs to be planned for and executed as carefully and thoroughly as possible.

Let’s consider the four types of financing, to help you determine which is right for you.

Debt
Risks Advantages
You may not be able to generate sufficient cash flow from your business operations to service the debt. You retain control over your business by not having to answer to partners or investors.
You may be unable to repay the principle at the end of the loan period. The profit and growth of the business is all yours as you would not have to share it with partners.
The level of security required for you to finance may leave your personal assets vulnerable if you cannot meet repayments. Fixed repayments are agreed to from day one and you can better manage your cash flow.
You will need to pay interest on top of the sum borrowed, making the financing more expensive. Lower cost of capital (interest payable) and raising debt finance (bank fees, insurance fees, legal/accounting fees).
You may be vulnerable to changes in interest rates. Interest and associated costs are tax deductible.
If you are in the early stages of business, it can be difficult to get external finance.  

 

Personal equity
Risks Advantages
Putting your own money on the line means you bear the risk of the business and its ability to achieve the growth you require. You can raise funds without exposing your personal assets to risk.

 

While it does not impose any significant cash flow requirements, it could take longer to generate the level of funding required. You have no exposure to interest rates.

 

You might lose your capital if the business doesn’t survive. Less burden as there are no monthly loan repayments, improving cash flow.
No tax deductions are available as there are no servicing costs. An improved financial profile with lenders and/or investors.

 

It can place strain on family relationships should personal financial obligations (such as meeting mortgage payments) be put under stress. If you have prior credit issues, accessing debt could be a problem, whereas personal equity will bypass this hurdle.

 

An equity partner
Risks Advantages
You might lose control if they seek to acquire a share of your business. You could benefit from mentoring support from the investor.
If you sell a share of the business, this could trigger a capital gains tax event. Easier access to funds with less compliance requirements than banks.
Potential conflict with the investor. No exposure to interest rates.
Greater pressure from the investor to achieve growth and higher returns. External resources could add strategic input and alliances.
Need to establish an exit strategy. A more stable financial structure.

 

Profit
Risks Advantages
Funds used from the business may impact negatively on business operations. Increased profitability as there are no direct costs imposed on you and your business.
Reduced funds for working capital. You have no exposure to interest rates.
Inability to cover unforeseen costs. You retain control over the business.
  The growth of the business is all yours.
  Your assets are not vulnerable to creditors.

 

When it comes to choosing which financing option is right for you, there are a number of factors to consider.

If you are fortunate enough to have a profitable business and have maintained your cash reserves, using these funds can be one of the most favourable alternatives.

However, while the ideal scenario would be for all operations and investment to be funded by your profits, this may not always be possible due to cash flow requirements. Your ability to generate increased cash flow through good management of your working capital is very important. You need to be able to generate excess cash from your business operations to ensure this funding option is best suited to your circumstances. For this reason, you’ll need to look at all possible alternate sources of funding to ensure you adopt the one most suitable to you and your business.

If you need some assistance with any funding requirements, do not hesitate to contact us.