It’s surprisingly simple, yet accountants suggest not enough business owners do it – often causing undue stress and difficulties down the track for business owners.
What is this simple trick? The humble savings plan and a separate bank account, says Alexander Laureti, partner of accounting firm LMS Advisory.
“It's … important to have some kind of disciplined saving plan for the business, so that if you make your money in six months of the year, you've got to put aside for those lean times as well,” he explains while speaking on the My Business Podcast.
“It's always the temptation that, there's money in the bank, let's go ahead and spend it: let's go ahead and draw it. Let's reinvest on some essential business items. Let's do some upgrades. Let's change our equipment. There are many things that businesses can choose to do.”
“If you've got a business with strong fixed costs – whether you're earning a million dollars or whether you're earning a hundred dollars, and anywhere in between – you really need to be disciplined in putting aside a little bit of money along the way. Whether you call it a war chest, or a savings plan, or an emergency fund, that you can then have to access if anything goes wrong with the business, or to fund future growth.”
According to Alexander, the simplest savings plan you can possibly implement is simply to automatically deduct a portion of every incoming payment and transfer it to a separate savings account.
“I've found that's been quite successful, [and while] not every business does it, I think would be a very good idea … to set up a separate business account, which they call a GST account, or a compliance account, or a separate savings account, which earns interest,” he says.
Alexander says all funds in this account should then be strictly treated for statutory obligations such as GST, BAS, tax, superannuation etc.
“Really, your business is responsible for collecting a payment on behalf of the government and on behalf of doing the right things for the employees as well,” concludes Alexander.