Making Milestones

This month marks a significant milestone for me. It is exactly ten years since I took the plunge, left the security of my job and set up my own business.



I have many memories of those first few months – the excitement, the challenges and the feeling of, at times, being terrified by the situation in which I found myself. Most businesses fail within the first five years and having now passed that critical point, life feels much more comfortable.

There are two things in particular that I recall being horrified by in my first year. Getting my first phone bill was a real shock and I contemplated what I might have to sell in order to pay it! The other nightmare was the realisation that, despite being strapped for cash and needing every dollar to grow my business and support my family, a seemingly huge percentage of my revenue had to be put away to cover GST and income tax. It is a little-known fact that more businesses fail through falling behind with their tax obligations than for any other reason. One of the advantages of being in your first year of business is that you don’t have to pay provisional tax because your income and expenses are unknown. That does not mean, however, that you don’t pay any tax at all! During your first year, you still have to set aside the tax you need to pay so that you have the funds available at the end of the financial year. The best way to do this is to set up a separate bank account for your tax money, but you can also make voluntary payments to IRD throughout the year.

Once you have completed your first year, your profit for that year forms the basis for calculating your provisional tax payments for the following year. Provisional tax is really just an estimate of what your tax bill will be for the current financial year and while it may seem like a huge burden, if you are paying it at the correct rate then you should have very little additional tax to pay at the end of the financial year.

If you are operating your business through a company, you may find you need to pay Fringe Benefit Tax; for example, for private use of a company car. As your business grows and you take on staff, there are of course PAYE and KiwiSaver contributions to pay. Remember too, that as a self-employed person, you are still able to make contributions to a KiwiSaver scheme and it is a good idea to do so to get the annual Government tax credit.

Keeping on top of your tax obligations is one of the ongoing challenges of any business. Good planning and budgeting is essential to make sure you are setting enough money aside. Some small businesses have a policy of setting aside a certain percentage of all their revenue as it comes in to cover tax obligations. Others choose to set aside a certain amount each month based on their estimated obligations. Keeping in regular contact with your accountant will help you make good estimates of how much tax you need to pay and when. If your accountant is not good at keeping you informed about your tax, then find another one.
Taking money out of your business to live on is another challenge to be dealt with. Unfortunately, as the owner of your business, you are the last in line when it comes to distributing your business income. Your first obligation is for tax, then your employee and creditors must be paid and whatever is left over after that is what is available for you. I have always found it best to take a fixed amount per month out of my business and I keep this to a minimal level. When I build up a surplus in my business, I can then choose how I wish to use the surplus; whether it is to develop and expand my business, invest, or use for personal expenses, such as an overseas holiday.

If you find it a struggle to live on what you take out of your business, make sure you are obtaining all the financial assistance available to you, such as Working for Families tax credits and accommodation supplements.
Managing your money carefully, conservatively, with good planning and good advice from your accountant will help you become one of the minority of businesses that survives more than five years.

Liz Koh
www.moneymax.co.nz