Managing risk when growing your business

It’s a risky business being in business for yourself, so knowing how to identify and manage risk is an important part of running a thriving business.

Anything that impedes a company’s ability to achieve its financial goals is considered a risk, and there are many issues that have the potential to derail a successful business. Some of these can ruin a business, while others can cause serious damage that is difficult to recover from.

However, taking risks is an essential part of growing a business – it’s how you thrive and expand. The key to achieving the rewards that come with risk and avoiding the devastation that can occur, is identifying and actively managing your business risk.

Assessing your tolerance for risk

The first step is to think about what level of risk you are comfortable with. A range of factors influence your appetite for risk including your individual circumstances, financial resources, specific industry dynamics, economic conditions, and business goals.

It’s important to acknowledge the relationship between risk and reward. High-risk activities may provide the potential for significant returns when you are going for growth but are also associated with greater uncertainty and the potential for larger losses.

Not all risk is equal

Some types of risk are best managed through insurance while others can be managed through thoughtful decision making and risk mitigation.

Risk taking is often associated with innovation and entrepreneurship and there are countless examples of reckless business behaviour that paid off – and as many examples that did not pay off. To expand, evolve and stay relevant in a changing marketplace, businesses may need to take calculated risks. This can encompass the development of new services or targeting a different client base, employing staff, developing new products, the adoption of emerging technologies, or exploring new markets.

Taking calculated risks involves some planning – conducting research, gathering supporting data and considering possible outcomes before making a decision. Informed, calculated decisions have a greater chance of success and doing your homework is a great way to mitigate risk in business.

Managing business risk

There are many ways to manage business risk, depending on the type of risk. Threats come in many shapes and forms and can include strategic, compliance, operational, environmental, and reputational, but one of the most fundamental risks is that of the business no longer being financially viable. All the above can impact a businesses’ bottom line so when considering your strategies, it’s a good idea to identify the risks that could affect your business’s ability to meet its financial obligations.

Setting up and maintaining a cash reserve is critical for small businesses, particularly ones with narrow margins. Half of all small businesses hold a cash buffer of less than one month which may not be adequate.i A cash reserve is a great risk mitigation strategy as it can help you get back on your feet when faced with an adverse event.

Keep an eye on cashflow

Growing a business can put pressure on cashflow, and managing your cashflow is a powerful way of managing your business risk.

If you have not already done so, creating, and maintaining a cash flow forecast helps you anticipate and cash shortages. Monitoring your cash flow over time gives you visibility of your financial situation and an understanding of any seasonal ebbs and flows.

Some things you can do to manage your cashflow include being responsive with invoicing and chasing overdue payments. Negotiate payment terms that support your cashflow requirements and consider offering incentives for early payments or penalties for overdue invoices.

For many businesses, one of the leading causes of cash flow shortfalls is overstocking, which increases the amount of cash you have locked up in your stock. Effective inventory management and working with suppliers to reduce lead times can assist with cashflow.

We can help you develop solid cash flow management and provide expert advice to make growing your business less of a risky proposition.

i https://www.jpmorganchase.com/institute/research/small-business/report-cash-flows-balances-and-buffer-days

×

Living your best life in retirement

If you’re nearing retirement age, it’s likely you’re wondering if you will have enough saved to give up work and take it easy, particularly as cost-of-living increases hit some of the basic expenses such as energy, insurance, food and health costs.

Fortunately, someone has already worked out what you might need.

The Association of Superannuation Funds in Australia (ASFA) updates its Retirement Standard every year, which provides a breakdown of expenses for two types of lifestyles: modest and comfortable.i

Based on our average life expectancy – for women it is just over 85 years and men 81 – if you are about to retire at say age 67, you will have between 14 and 18 years in retirement, on average and depending on your gender.ii

ASFA finds that a couple needs $46,944 a year to live a modest lifestyle and $72,148 to live a comfortable lifestyle. That’s equal to $902 a week and $1387 respectively. The figure is of course lower for a single person – $32,666 for a modest lifestyle ($628 a week) or $51,278 ($986) for a comfortable lifestyle.iii

What does that add up to? ASFA estimates that, for a modest lifestyle, a single person or a couple would need savings of $100,000 at retirement age, while for a modest lifestyle, a couple would need at least $690,000.iv

A modest lifestyle means being able to afford everyday expenses such as basic health insurance, communication, clothing and household goods but not going overboard. The difference between a modest and a comfortable lifestyle can be significant. For example, there is no room in a modest budget to update a kitchen or a bathroom; similarly overseas holidays are not an option.

The rule of thumb for a comfortable retirement is an estimated 70 per cent of your current annual income.v (The reason you need less is that you no longer need to commute to work and you don’t need to buy work clothes.)

Building your nest egg

So how can you build up a sufficient nest egg to provide for a good life in retirement? There are three main sources: superannuation, pension and investments/savings. Superannuation has the key advantage that the money in your pension is tax free in retirement.

Your superannuation pension can be augmented with the government’s Aged Pension either from the moment you retire or later when your original nest egg diminishes.

Your income and assets will be taken into account if you apply for the Age Pension but even if you receive a pension from your super fund, you may still be eligible for a part Age Pension. You may also be eligible for rent assistance and a Health Care Card, which provides concessions on medicines.vi

Money keeps growing

It’s also important to remember that the amount you accumulate up to retirement will still be generating an income, whether its rentals from investment properties or merely the growth in the value of your share investments and the accumulation of money from any dividends paid.

You can also continue to add to your superannuation by, for instance, selling your family home and downsizing, as long as you have lived in the home for more than 10 years.

If you are single, $300,000 can go into your super when you downsize and $600,000 if you are a couple. This figure is independent of any other superannuation caps.vii

Planning for a good life in retirement often require just that – planning. If you would like to discuss how retirement will work for you, then give us a call.

i Retirement Standard – Association of Superannuation Funds of Australia
ii Life expectancy, 2020 – 2022 | Australian Bureau of Statistics (abs.gov.au)
iii https://www.superannuation.asn.au/media-release/retiree-budgets-continue-to-face-significant-cost-pressures
iv https://www.superannuation.asn.au/resources/retirement-standard/
v https://www.gesb.wa.gov.au/members/retirement/how-retirement-works/cost-of-living-in-retirement
vi Assets test for Age Pension – Age Pension – Services Australia
vii Downsizer super contributions | Australian Taxation Office (ato.gov.au)

×

Federal Budget 2024-25: Tax Implications

Major tax cuts were the centrepiece of the Albanese government’s third Federal Budget, even though the changes have already been announced and legislated.

Small businesses can breathe a sigh of relief, with the popular $20,000 instant asset write-off hanging on for another year and a valuable bill rebate on the way to help with the burden of high energy bills.

Tax cuts for everyone

From 1 July 2024, all 13.6 million Australian taxpayers will receive a tax cut, with the average taxpayer’s tax bill being $1,888 (or $36 a week) lower.

Under the new rules, the lowest tax rate reduces from 19 per cent to 16 per cent, with the 32.5 per cent marginal tax rate reducing to 30 per cent for individuals earning between $45,001 and $135,000.

The current 37 per cent marginal tax rate will be retained for people earning between $135,001 and $190,000, while the existing 45 per cent rate now applies to income earners with taxable incomes exceeding $190,000.

Low-income earners (under $45,000 p.a.) are the biggest winners from the changes. A single taxpayer with a taxable income of $40,000 who pays $4,367 in tax in 2023 24, would have received no benefit from the original Stage 3 tax plan, but now receives a tax cut of $654.

Boost for tax compliance

On the revenue side, the Budget includes savings of $2.5 billion in tax receipt measures through a crackdown on the shadow economy, fraud, and tax avoidance.

Taxpayers can expect the ATO to continue its recent tougher stance, with technology upgrades to enable better identification and blocking of suspicious activities in real-time and a new compliance taskforce focussed on recovering lost revenue and stopping fraudulent refunds.

Foreign residents will pay an additional $600 million over the next three years due to strengthening of the capital gains tax rules applying to this group.

Law change for old tax debts

However, one controversial measure, labelled ‘robotax’ by the media, may be abandoned, according to the Budget papers.

The ATO had been calling in historical tax debts, some accrued more than a decade ago, saying it had no choice under current laws. But the government now intends to change the tax law to give the ATO discretion about whether to collect the individual, small business, and not-for-profit debts.

Instant asset write-off retained

The deadline for the $20,000 instant asset write-off will be extended to 30 June 2025, allowing small businesses with annual turnovers of less than $10 million to immediately deduct eligible assets.

In addition, $23.3 million will be spent boosting adoption of eInvoicing to help improve small business’ cash flow and productivity.

Relieving energy bill pressure

Direct relief for small business energy bills will come in the form of a $325 rebate, while there will also be new funding for reforms to help businesses find their best electricity contract.

Assistance for smaller entities

With trading conditions remaining difficult, small business will receive $641.4 million in new targeted support. This includes $10.8 million to extend both the NewAccess for Small Business Owners program providing free mental health support and the free phone-based Small Business Debt Helpline.

An additional $25.3 million will be provided to expand the Payment Times Reporting Regulator and help improve payment times.

Nuisance tariffs abolished

From 1 July 2024, 457 nuisance tariffs will be abolished by the government to cut business compliance costs.

New funding to expand the government’s Digital ID system is designed to lower the administration burden for small businesses storing identification data on their customers and employees.

Anti-money laundering crackdown

The Budget includes $168 million over four years to pay for reforms to Australia’s anti-money laundering and counter-terrorism financing regime. Tighter rules are expected to result in lawyers, accountants and real estate agents being required to undertake due diligence on their customers and report any suspicious activities. Information in this article has been sourced from the Budget Speech 2024-25 and Federal Budget Support documents.

It is important to note that the policies outlined in this article are yet to be passed as legislation and therefore may be subject to change.

×