​​There is a lot to consider. We recommend you go step by step through the elements of the above equation. 

The last thing you want to do is take too much money from your business, leaving it unable to pay its upcoming bills. Cashflow is vital to small businesses; you should view it as your blood flow. A cashflow budget is a great tool to utilise to ensure that your business will have adequate cashflow to keep functioning.  

​Inflows
Let's consider how your business gets cash. Do you have regular customers? Do you have customers that pay you on a weekly/monthly basis? Are there historic trends that can help you determine likely future cash inflows?
Ideally you want to get as much money into your business as fast as possible. Do you have customers that don't pay or are slow payers? Some simple strategies can fix this. Your customers are busy too and they may simply have forgotten to pay you. Sometime it requires only a gentle prompt. Did you know that you can set up your accounting software to automatically do your debt collecting for you? Payment reminders can be set up to send a gentle nudge to your customers.
This will save you time and allow you to focus on actual problem clients.
If the gentle prompts aren't working it may be worthwhile considering upfront payments or offering discounts for on-time payment for large customers going forward.

Outflows
​You need to know what cash your business requires to run. Common outflows include suppliers, software subscriptions, wages, insurance, GST, income tax (we will talk more about this later).
Is there a regularity to your outflows? Consider weekly wages, monthly software subscription payments, annual insurance premiums. What are the payment terms? Are there any discounts for paying early or penalties for paying late?
You want to make the most of the cash in your business.

Net Cashflow
Once you have determined your inflows and outflows you can determine the net cashflow of a business. Pick a period that works best for you eg monthly or weekly, add up your cash inflows and minus your cash outflows. For the moment do this excluding income tax (we will discuss this later). This is your net cashflow for the period. We recommend keeping in reserves at least a month of cash outflows as a buffer for your business.

Just as you don't empty your personal bank account each month you shouldn't empty out your business bank account either. Why? You want to be able to protect your business from unforeseen events and rainy days, like lockdowns. 

How much should I keep in reserves? Great question. This will be different for every business.  The business outflows you calculated about will be a great help in determining this. We recommend stockpiling at least one month of business cash outflows. That way if your business was to receive no income over the next month you would still be able to meet your out flows.

Generally you have to spend money to make money. But you want to do this wisely. You should be setting aside part of your business profits to spend on making your business grow.

​Growth funds should be spent to make your business more efficient or effective.

​Efficient
Investing in better systems or equipment will allow you to service more customers or customers faster. For example investing in a new coffee machine allows you to make twice as many coffees in the same time, or investing in good accounting software allows you to invoice your clients faster, reducing time spent on financial admin and speeding up the potential for cash to arrive in your business bank account sooner.  

Effective
Invest in projects that allow you to provide better services or goods to your customers. This could be investing in training for you or your team or a new marketing campaign. You can't effectively service your customers if they don't know about you.

We recommend making a list of potential growth purchases and prioritising it in accordance with what will make the biggest impact to your business. 

Unfortunately taxes can't be avoided. How much tax you pay depends on your entity structure and whether you have other income sources. We will explore this by looking at two of the most common structures for small businesses, Sole Traders and Companies.

Sole Traders
Many small businesses start as sole traders as they are the simplest entity to set up. As a sole trader your business is effectively an extension of you. Tax wise you are treated as one in the same. Your business profits are therefore taxed at individual tax rates.
Business profit is calculated by adding the income generated by your business less the business expenses required to generate that income.

Shown below are the current Individual tax rates for Australian Residents for the 2021/22 tax year.  For current rates please refer to the ATO website.

As a sole trader it is important to be aware of any other income you are earning as this will push up the tax payable on your business profits. I find examples the best way to understand.

For example if you also have a part time job and earn a salary of $30,000 a year and have business profits of $20,000, then your taxable income is $50,000. Simplistically every dollar of  your business profits is taxed at 32.5% plus 2% medicare levy. If you calculate the tax on taxable income of $30,000 (just the salary component) and then $50,000 (the full taxable income) the difference between the tow shows that for the business profits of $20,000 effectively $4,874.87 of tax would be payable.

Let's look at this same example but with no salary. Your business profits of $20,000 is equivalent to your taxable income. Therefore the first $18,200 is tax free! Between $18,201-$45,000 your business profits are taxed at 19% (no medicare levy is payable for the 2021/22 year if your taxable income is less than $23,226). For the same business profit you are now paying tax of  only $342.

Company
If you run your business through a company then you will pay tax on your first dollar of profit. The current company tax rate in Australia is 30% however many small businesses actually fall under the classification of a base rate entity. For the 2021/22 year base rate entities pay tax at 25%. More details about base rate entities can be found here.

For example if business profits of $20,000 were achieved for the year and your business is a base rate entity, tax of $5,000 would be payable.

Utilising Individual tax rates with a company structure
​As you can see from the above examples if the only income you have is the $20,000 of business profits in a company structure you are $4,658 worse off ($5,000 -$342). 
However if you pay yourself a director's fee or wage this becomes a tax deduction in the company and reduces the company's profit and also its taxable income. This wage is then assessable to you at the individual level.  See the below example.

You have business profits of $20,000 and choose to pay a director's fee equivalent to the tax free threshold of $18,200, your company will also be required to pay super at current 10% rates. Let's see how much tax is payable at the individual and company level.
Individual Taxable Income = $18,200  and no tax is payable assuming no other income​
Company Taxable income = $20,000 Business profits - $18,200 wage - $1,820 super = $-20. The company is now in a loss, so no income tax is payable.
Total tax payable = $0

Based on current tax rates the above strategy will provide benefits up to individual wages of $90,000 where the average tax rate is 24% as opposed to the company rate of 25%/30%. 

If you have been an employee it is likely that your employer would have paid super for you. Super is money invested for your future so that you do not have to depend on the government pension or work for the rest of your life.

Whilst super is mandatory for employees over 14 earning more than $450 a month (per current requirements), if you are a sole trader there is no requirement to pay super. Whilst it isn't required it doesn't mean you should not pay it. Think of it as investing in future you. You also get a tax deduction for paying super. Who doesn't like paying less tax?

We recommend paying super at similar rates to those as if you were an employee, currently super is paid at 10% of your wage. If you have calculated that your business can afford to pay out $1,200 a week, then you should be sending $109 to super and keeping $1,090 for yourself. 

There is a lot to take in here especially if you are new to business. Let's see how this all works with an example to help you apply it to your own business.

Sarah is a sole trader and runs a coffee cart. She mans the cart most days but employs a friend to help run her cart 2 days a week, 8 hours a day at $20 an hour. Based on the past 3 months of business Sarah has averaged $10,000 in income. Her monthly software subscriptions are $250 a month and pays $250 a week rent for the location of her coffee cart. She estimates she pays 30% of her sales to suppliers.

Sarah has calculated her Net Business Cashflow as follows:

To  calculate her wage Sarah divides $3,395.93 by 1.1 to work out her monthly wage is $3,087.21 and super payable of $308.72. Of course you do not have to take the whole amount as a wage you may choose to add a larger buffer to your cash reserves or growth fund or even purchase that first item off your growth purchases list.

If you have any questions please feel free to reach out. If you have enjoyed what you have read and would like to continue your financial business education journey check out our Financial Business Coaching.

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Tax Invoices
You must have a tax invoice to claim a GST credit for purchases that cost more than $82.50 (including GST). If your tax invoice does not specify the amount of GST included in the price of your purchase by only stating that the price includes GST, you can work out the GST amount yourself by dividing the price by 11. The answer is the amount of GST credit you can claim (provided you use the item wholly for business purposes).

GST Free vs GST - NT
GST Free items are those that don't attract GST, such as raw food, healthcare services and water services. The GST N-T tax code should be used when the transaction is not reportable, for example: cash transfers between your business accounts, depreciation, directors fees, security deposits and most government charges.

Set Up Your Accounting System Correctly
Did you know that most accounting software allows you to set a default GST code for each separate account? This can be a big time saver if set up correctly and will help ensure that you are claiming the correct amount of GST. However, to claim GST you need to ensure that you receive a valid tax invoice (includes an ABN) and also shows that GST has been charged. It is best practice to attach these tax invoices to the relevant transaction in your accounting software. 

Non Deductible Expenses = No GST Claimable
You cannot claim GST for any non-deductible expenses such as entertainment or private use portions of motor vehicle expenses. When you enter expenses which have a private portion, you can actually spilt the two portions of the expense between two separate accounts: one private with no GST claimable and one business-related with GST claimable. Ensure that you meet the ATO's record keeping requirements when determining the private portion of expenses. Refer to our resources section for a comprehensive ATO guide. These items should be coded as GST - NT ( Not Reportable).

Bank Fees, Merchant Fees, Interest paid and received 
No GST is charged or claimable on standard bank fees. However, GST is claimable on merchant fees, as this is actually a service. It is best practice to have separate accounts to recognise these expenses as they have different GST treatments. No GST is charged on interest paid or received.

Government Charges
No GST is charged on Motor Vehicle Registration, Land Tax, Council Rates, Water Rates, ASIC Fees or Stamp Duty. If you are in doubt you can refer to the tax invoice provided. These items should generally be coded as GST- NT apart from water rates, which are GST Free. 

International Transactions
As GST is an Australian tax you will not be charged GST on transactions you incur whilst travelling overseas. Importation of goods valued at more than $1,000 will however attract GST. Generally GST is not required to be levied on the exportation of goods or services, as long as they are exported within 60 days of either the supplier receiving payment or issuing an invoice, whichever occurs first. The transaction is still required to be reported at G1 Total sales.

Keep your records
Keep all your tax invoices and other GST records for five years as per ATO requirements.

Personal Super Contributions
Making additional superannuation contributions before June 30 could mean valuable extra tax deductions. Note these deductions are available only for contributions made out of after-tax funds, meaning that contributions paid by your employer or salary sacrificed do not qualify. Be careful, as you can contribute only $25,000 a year to super (which includes employer-paid and salary-sacrifice super). Significant penalties apply for exceeding this cap.
 
You must notify your superfund that you intend to claim this deduction and you must receive acknowledgement of this request from your fund. Further eligibility criteria can be found on the ATO's Website. Note, super deductions are only considered “paid” once they are received by your fund. For Employers this is also true make sure that your June super is paid prior to 30 June to be deductible this financial year, for those using the small business super clearing house payments are required to be made by 23 June 2020 to be deductible for the 30 June 2020 year.

Employee Super
Employers are required to pay their employees' super before 30 June to be deductible this financial year. For those using the ATO Small Business Super Clearing House, payments are required by 23 June 2020.