Many Australian small businesses are suffering from cash flow pressures; is your business one of them? The Profit First Tax Strategy can help. Thanks to a perfect storm created by the increased cost of goods, a crackdown from the ATO to recoup debts, and stagnant interest rates (which are yet to be lowered), households have less disposable income, resulting in many businesses experiencing a downturn in sales.
The Rise of Insolvency and the Role of the Profit First Tax Strategy
Many small businesses are finding this a real challenge, with many facing insolvency. In fact there has been a 39% increase in failing Australian businesses seeking external administration according to the latest data released by ASIC.
Did you know the ATO is trying to collect more than $50 billion in tax arrears? Most of which are from small businesses. This is due to COVID and the ATO being more lenient on businesses to assist in keeping the doors open and the lights on. The ATO has recently said goodbye to their ‘good cop’ era and has swiftly moved back into their more comfortable role of playing ‘bad cop’.
Managing ATO Debts with the Profit First Tax Strategy
Whether the outstanding taxes to be paid are from GST, unpaid PAYGW, PAYGI or even unpaid employee super the ATO has many businesses in their sights.
ATO deputy commissioner Vivek Chaudhary said, “Businesses appear to be de-prioritising payment of tax and super when they should be provisioning for these bills like they would with any other business expenses.”
In this instance, we agree wholeheartedly with Chaudhary. All businesses should be provisioning for all expenses within their business, thus to avoid being caught up in this latest financial crisis.
This is where Profit First comes into play. Profit First does exactly as the ATO suggests above. It helps business owners allocate funds for specific functions, avoiding debt issues like taxes, supplier payments, or other expenses.
The Five Key Bank Accounts in the Profit First Tax Strategy
The secret to success is setting up five bank accounts.
- Profit – Savings Account
- Tax / GST – Savings Account
- Owners Pay – Savings Account
- Revenue – Transaction Account
- Operating Expenses – Transaction Account
When money enters your revenue account, distribute it by a set percentage to four different bank accounts. To read more about the percentages click here, or book a call with us to talk specifically about your business.
When you make these allocations, you set money aside for a specific purpose. The main idea of Profit First is for business owners to prioritise their profit first, rather than relying on what’s left over. Knowing you have money ready to pay your tax brings immeasurable peace of mind.
We see many clients who are struggling with debts, whether they be tax, creditor, or even superannuation payments. With the Profit First Tax Strategy, insolvency isn’t the only option. There are many ways to handle bad debts, and Profit First Accounting can help you overcome them. We are here to support and guide you through this arduous time. No matter how big it seems, the first step is to seek the right advice and make a change.
As a mastery level certified Profit First Professional I am here to guide you through the process. I utilise Profit First within my own business and personal finances. I’m a strong believer in ‘practice what you preach’. If this is the cash flow solution that you have been looking for, please contact us. We can help you create a payment plan with the ATO if you’ve received a payment notice. Together we can help your business to thrive, even in these challenging times.
