THE Reserve Bank held the cash rate at 3.5 per cent this week, leaving a lot of business owners none the wiser as to the future state of the economy. But if you own a business, rather than looking to the external factors that you can't control anyway - interest rates, inflation, economic growth - it's a good time to focus on what cash is doing for you in your own business.
The Reserve Bank expresses an opinion once a month about the value of money, and calls it the cash rate. But in your own business, you get to decide the value of money as it performs in your business.
I break this into eight parts, and at every step you should be asking yourself the tough questions about your business.
Spending: When you look at your business, what are you spending on? What are your costs and do all of them contribute to creating revenues? Do your costs pull their weight equally? If not, why not? You can look at your spending in another way: If I stopped this expenditure right now, what would happen to my business?
Saving: Many businesses can accumulate cash, while other businesses decide to keep cash to one side to ensure they can pay essential costs such as office leases and taxes. How much are your savings earning you? Many business owners stash cash in a legacy account that is attached to the main cheque account, and it may be paying zero interest. It's just one of those things that has never been fixed, yet there are high-interest rate accounts out there and the money is on-call. It's your cash - you should be earning money on it.
Borrowing: One of the easiest ways to let money escape from your business is to pay too much for your debt. Whether it's an overdraft, a term loan, equipment leases or corporate credit cards, many business owners are trapped in the set-and-forget mentality, and they pay heavily for it. Do regular health checks of your debt, or get a finance broker to do it for you. Overpaying for finance is an expensive habit that affects cash flow.
Repaying: When you get to the end of a finance facility or you are in a position to pay it out, do you know the most efficient and cost-effective way to go forward? Do you know all of your options and how much they will cost you? Sometimes it is better to roll over a facility and other times it is better to pay out a loan as fast as you can. Other facilities - such as debtor finance - have the repayment mechanism built into the ongoing agreement. You should know what value you get from debt before taking it, and set your repayment strategy accordingly. An opinion from an external expert is a good idea.
Protecting: You can attribute a value to your cash, and understand the costs of borrowing. But how do you protect your revenues? The best businesses usually have an insurance broker who constructs layers of protection - from fire cover to business interruption. There are a lot of interesting business insurances, but you have to know to ask for them. It is worth at least engaging a broker and seeing what they would put in place - after all, the entire rationale for running a business is to create revenues, and if you lose that, you have no business.
Investing: Many businesses make sufficient profits to have a plan for the surplus revenues. Whether you as the owner take out dividends and invest in property or shares, or the business itself buys commercial property or another business, it is worth thinking carefully about how to make the surplus funds work intelligently, and it is always worth consulting an expert. This is how I think about it: Those investments should work as hard as you worked to earn them in the first place.
Tax efficiency: The Australian taxation system is complex and it is compulsory - you can't run a business without dealing with the ATO. Our tax system also has a differential component - similar activities can be taxed differently depending on your legal structure or status. I always advise business owners to stay close to their accountants and to make sure they are paying the right amount and in the most tax-efficient way. One of the biggest causes of insolvency is unpaid taxes, so it is worth getting this right.
Budget: A business owner's budget is as important as the federal government's, just on a smaller scale. The budget is not just a road map and a plan for raising revenues and spending them, it is also your official statement about what is critical and what is merely a wish-list - it assigns a value to money. A good budget should serve the business plan, not the other way around. Again, if you feel you've lost your way with budgeting, or you never stick to it, engage an expert and develop strategies for writing good budgets and working within them. It's your money - value it!
Mark Bouris is the executive chairman of Yellow Brick Road Wealth Management, ybr.com.au. Follow Mark on Twitter at @markbouris.