7 Financial Red Flags Every Business Owner Needs to Know

Jason · 00:00Welcome to episode 244 of the Numbers Game. I'm Jace, I'm here with Nick and Marty. And guys, today I wanted to kick into an episode that was around spotting trouble Before It's too late, financial Red Flags. What do you think, guys?

Marty · 00:13Mate, I'm, I'm all ears. 'cause, uh, if there's, uh, trouble to be, uh, made, you are the man to do it for what I've seen on social.

Marty · 00:20So, uh, you just, you just keep doing what you're doing 'cause uh, it's certainly exciting.

Jason · 00:25Look, I, I wanna make this as punchy and efficient in a sense. Like, if you, this is what you need to know. If you're in business or you've got friends or family in business, these are the things that you need to start listening out for and, and kind of paying attention to.

Jason · 00:36And the reason I bring this up is I've been doing this for a while and I have such a care for small business owners and their success. But more than ever in my career right now, I am seeing not just, you know, in my own business, but I deal in the CPA, I'm on the Victorian Public Practice Committee, I'm the chair of the committee.

Jason · 00:55Um, I do some work with Xero, as in Xero's partner Advisory Council, and I, I'm

Jason · 01:00quite well connected to a lot of accounting firm owners and there has never been more. Over time where we're facing voluntary administrations, liquidation, small business restructures. These are all insolvency events where businesses are shutting down.

Jason · 01:14They are liquidating. The A TO is sending out more director penalty notices than I've ever seen in my life. When you think about it as well, the A TO. Debt is at 110 billion or more up from roughly 54 billion a few years ago. So the atos debt book has doubled in the last couple of years. It is monstrous, which means they have ramped up their debt collection and the flow on effect is that businesses are in trouble.

Jason · 01:42So I wanted to talk through the financial red flags that we see at Future Advisory when we go through client's books, and also the ways that you can look out for it in your family, friends, and your own business. So yes.

Marty · 01:52Are, are you finding that directly in the accountancy industry as well? Like from what you hear?

Marty · 01:58Internally with,

Marty · 02:00and is it smaller groups? Is it larger groups?

Jason · 02:02Oh, so no, accountants are fine. We, we are under the pump. Uh, we, we've got, you know, lots of business people are coming to accountants. If anything, it's, the accountants are drowning in work that is compliance and compliance driven. Accountants are probably struggling to get to the advisory work, which helps small business owners turn it around.

Jason · 02:21And that is why, I mean, you see the growth of like. Business coaches and, you know, financial advisors and those kind of things outside of the traditional accounting space, when it comes to small business advice or advice on how to grow or, or take control of your business, um, accountants, you know, I'd say generally a lot of accountants are too busy doing.

Jason · 02:40The lodgements and the compliance and the basses and the tax returns to stop and take a back, a step back and go holistically, is this business okay? Are their margins right? Are they hitting benchmarks? And how can I help them be more profitable?

Marty · 02:53So yeah. Okay.

Jason · 02:54So basically red flag number one. If you have credit card debt and your

Jason · 03:00overdraft is always maxed out, so that is red flag number one.

Jason · 03:03If month to month you're paying off your credit card just to then add more debt to your credit card again, and you are never knocking down that balance, you think about your credit cards are usually. 18 to 22% is that, that's about what you guys would think for credit card interest rates.

Marty · 03:19Yep. Around that.

Marty · 03:19Yep.

Jason · 03:20Yep. You got 18 to 22% on credit cards. You've got the average overdraft. Maybe it's a good secured one at eight or 9%. I'm not the finance guy. You've got unsecured overdrafted as high as. As well. 16, 17% or maybe not as high. It's not gonna sit

Nick · 03:34around 14, 15,

Jason · 03:3514%. Cool. That's why we've got the finance experts on the podcast.

Jason · 03:38So you've got maxed out overdrafts. You've got maxed out credit cards, and month in, month out, all you were doing is knocking them down to max them out again. These are long-term problems. With high interest rates, high interest debt. This is not a solution to be able to run a business. And that is why there's financial red flag number one.

Marty · 03:55Yeah, that that's a great point. Hardcore debt is a big issue,

Marty · 04:00um, in the small business sector, and that's one of the things to clean up. Everyone thinks about creating, generating more revenue, but really the, I, I think. When I listen to you speak, uh, the fundamentals of trying to create three months of expenses covered in cash is really important.

Marty · 04:18A lot of business owners don't think about that 'cause things can change pretty dramatically in business. And if you've got three months of cash flow cover, you generally got 12 months of cover 'cause you're gonna be generating revenues, right? But the other thing, once you've got that. You really anything that's over 6.5%, that's not good debt.

Marty · 04:37In relation to an asset. You've really gotta try and squash as quickly as possible. Look, I don't mind. If business owners have an overdraft, I don't even care if it's 20% right. To be blatantly honest, as long as it's not a hardcore debt. If they're just going back into credit and they've got it there as a backup, that is understandable.

Marty · 04:57But when it's hardcore debt and they're

Marty · 05:00not moving that debt, that is a falling knife. Right there. That's a real problem.

Jason · 05:04Yep, a hundred percent. Now, some of the ways to fix this, if you, if this is you, you've gone, well, you know what? I pay off my credit card just to max it out again, or my overdraft is always pretty extended.

Jason · 05:14You need to get a proper cashflow forecast. That's, that's definitely step one. You need to understand what is happening with your money, so actually reviewing cash versus what your profit and loss says, or what your balance sheet says. Just having a cashflow forecast money in, money out.

Marty · 05:28Do people like, and I mean in the, particularly in the first three or four years of business, do people even know their break even point?

Marty · 05:35You, you know what I mean? I, I think people don't even understand their fixed expenses and what they need to do as a minimum to break even, let alone carry, you know, the, the, the debt position. You know, it's, it's quite bizarre when you're on the ground with it. It's, um, quite scary what you see.

Nick · 05:51I'd, I'd go deeper than that.

Nick · 05:54And so do people actually understand their responsibility as a director? That's a great point. So great

Nick · 06:00point. Talking talk small business where it might be a one or two person band, but if you're a director with staff with, you know, super, super liabilities that it need to be paid tax. Mm-hmm. Um, there's legislation on, you know, the responsibility as a director and if you don't understand the stuff that Chase is talking about, then you're probably not fit to be a director.

Nick · 06:21So it probably needs to start there. Yeah. Do you know what you are required to do as a director that's running a business? And if you don't, you need to go and learn really quickly or go, you know, team up with someone like Jace. Yeah.

Jason · 06:34Stay tuned for the numbers. Game business education platform to, uh. Hit late 2025.

Jason · 06:39I reckon we'll get this up and running 'cause nobody else is doing a, you can become a director, you can get an A, BN, but there is no course or education that you are have to do before you can go and start a business or become a director.

Marty · 06:49People are generally good at a skill, aren't they? Jace, but not necessarily always great at expanding that into a business.

Marty · 06:54So spot on.

Jason · 06:56And obviously we feel pretty strongly about that. So obviously beyond the credit cards

Jason · 07:00and, and maxed out overdraft, I mean that's where talking to a team like innovate, and this is not generally plugged, but we, when we send clients over when they are in debt or credit cards or overdraft facilities, there's generally a better solution.

Jason · 07:10And it does come with having to do the hard yards of the cashflow forecast, review your pricing, look at break even. But at the end of the day, if you can refinance into a cheaper facility. See a runway or a light at the end of the tunnel and sharpen up your pricing, sharpen up your expenses, you get that peace of mind that you are.

Jason · 07:27Then have an account built up for emergency, as you said, Marty, three months worth of expenses and not relying on the credit cards.

Marty · 07:33It's like personal budgeting, isn't it? You should be reviewing your mortgage. You're seeing you get a bit of rate. You should be reviewing your energy bills. Yeah, and it's the same in business.

Marty · 07:41You should be doing that once a quarter and just optimizing really. It's, it's healthy.

Jason · 07:46No, a hundred percent financial. Red flag number two, Nick, you kind of touched on it a little bit just before late super payments, you know, the, the obligation to pay superannuation. Um, so it leads onto when you're not managing a cash

Jason · 08:00flow, obviously, you know, they, a lot of cash flow problems go hand in hand with credit card debt and overdrafts, but superannuation payments are a big serious one.

Jason · 08:09The reason I say that is as soon as your superannuation is late, it is no longer tax deductible. So even if you pay it after the due date, it's gonna sit in your profit and loss and make it look like you've made less profit. But that'll get added back at tax time, giving you a bigger tax bill. Beyond that as well, you also then need to lodge what's called a super guarantee charge form.

Jason · 08:28It's your way of putting your hand up to the a TO saying, Hey, a TOI owed 20 grand of superannuation. I paid it late. Either. Either you've paid it and you're just admitting to the hr, you paid it late. They'll then give you a um, GGIC or interest charged on that late payment and an admin fee for each of the employees that were paid late.

Jason · 08:48The alternative is if you haven't managed to pay it yet, it is your way of admitting to the a TO that you still owe overdue superannuation. They then move that into a separate account. With the A TO and you will make the payments to the a

Jason · 09:00TO for that overdue super, which eventually lands in your employee's pocket.

Jason · 09:05Now, beyond that, when you do have overdue super, again, use the $20,000 example for one quarter. If you don't put your hand up and admit it and lodge the SGC for form, you could copper penalty as high as 200% of the balance of that unpaid super. So you didn't pay 20 grand in super. Bugger made a mistake prioritized buying a new car, or, you know, paying off some other bills in my accounts payable everyone's, you know, the squeaky wheel gets the oil cool, but that 20 grand in super you didn't pay, could end up copping you a $40,000 penalty.

Jason · 09:37Other interest and admin charges on top. And then the 20 grand that you paid and the 40 grand in penalty, not tax deductible either. So it is just you're getting hit. It's a double, triple whammy from all angles. That is why one of the number one things we'll say to our clients is pay superannuation first.

Jason · 09:55Move to weekly whenever you process payroll. Click the auto super button and let the super

Jason · 10:00get sucked outta your account. 'cause it is not your money and is the one pa, there is the one parcel of money you don't wanna keep and spend somewhere else because those penalties and that interest and, and what you cop and no tax deduction.

Jason · 10:10It's, it's a recipe for, as I said, it's a reason, it's a red flag. It's just sending your business straight into a direction. You do not want to go.

Nick · 10:17Super is something that people often forget about. Even myself, when I get the phone call from the, from the. Accountant saying, Hey, we gotta pay the soup this quarter.

Nick · 10:23Oh yeah. Shit. That's right. So it's, it's just creating habits to, to understand what your liabilities are. Right. And I think about our own policy in here. I. We've got a set amount of, uh, expenses that we need to, uh, retain at all time. Mm-hmm. And it's not three months for us to be transparent. It's actually less than that because we've got, um, a recurring revenue stream.

Nick · 10:46So we've, we've got a really good read on our revenues, almost sort of three to four months out. But when we look at the minimum amount we need to hold, we add to that what we've got due, um, from a GST point of view.

Nick · 11:00What we've got due from A-P-A-Y-G tax point of view. Mm-hmm. And what we've got due from a superannuation point of view.

Nick · 11:06And that's all on our balance sheet. So I go minimum expenses that needs to be held, plus we're gonna owe that to the OTO. 'cause it hasn't, it's not due yet, but it's gonna be due in the next month. Plus we're gonna go owe that for super plus. We owe that for all our payables, for all our creditors, and we need to keep that minimum balance.

Nick · 11:24Mm-hmm. And anything above that on a quarterly basis, we're then happy to distribute as dividends. But it's having that methodology that we look at every quarter and go. Add all those up. If there's not, if there's not any more than that, you don't take any money outta the business. And

Marty · 11:39JC are they bringing the, um, super payment requirement in?

Marty · 11:43'cause it's, uh, once a quarter now. I know they were, they were looking to do that. When, when is that changing? Do we know?

Jason · 11:48One July, 2026. Yep. You will, you will owe super within seven days of the pay run. Oh, right. Okay. Seven days, you know, you Yep. You, you pay on a Tuesday. By the following Tuesday,

Jason · 12:00superannuation must be paid.

Jason · 12:00Okay. In the account. So essentially it's payday

Marty · 12:02super. It, it'll resolve the problem, wont it? Unless there's no money

Jason · 12:06it Correct. It resolves the problem, but it creates. Some additional ones from a compliance point of view, sometimes super can take up to 10 days to debit your bank account. Couple of days in limbo to hit the clearing house, couple of days in limbo to hit the super fund, and then a couple of days for the super fund to book it into each of the employees accounts.

Jason · 12:25So there's a compliance issue where a year from now. You know, yeah, it's, it's middle, mid 2025 by mid 2026 when payday super's in all these clearing houses and super funds need to make sure it is snappy and fast to move that money around. We've got Osco. I could send Nick a thousand dollars now and he could refresh his account and it's there.

Jason · 12:42You know, the same thing's gonna need to happen with superannuation. When that debit's out of your account, you need it to hit the auto clearing and the superfund fast to, to beat that seven day period. So what I would say, thank you Nick. That's, uh, send done, send that right now. So for

Jason · 13:00those at home, uh, get to YouTube.

Jason · 13:01Nick just held up his bsbn account number. Start sending him money. Uh, no worries. He's desperate. The what? The, the, the one hot tip. I will say start this practice now. Like, pretend that it's payday superhero already. Start paying weekly, fortnightly, monthly at a bare minimum. Don't, don't get in this old habit of paying quarterly and, and keeping that money on standby.

Jason · 13:21Start the habit now of debiting getting the, the money direct debited every time a payroll is processed. Then when it rolls around to one July, 2026, which blink and it'll be here. You're already, you're already in the habit. You are never gonna get caught up with this no tax deduction or super guarantee charge form, or 200% penalties.

Jason · 13:37You don't wanna be in that state. And this is why. Look, if your accountant has said to you like, not paying super is, is hectic, please make sure you pay super on time. Now you know why the, uh, accountants around the country go mad for this stuff. Financial red flag number three. You are lodging your baes and tax returns late.

Jason · 13:56You are not getting your information sorted. Um, you're in

Jason · 14:00the dark, you are behind. You're dealing with historic information. You know you've been reached out to potentially by your accountant or you haven't engaged a good accountant and you're kind of trying to do it yourself. If you are lodging your baes and tax returns late.

Jason · 14:12It is literally like waving, you know, a flag to the a TO to say, come and look at me. I'm not, I don't have good practices in place to keep things in order. So generally what happens when your BAAs are late and your tax returns are late, it means your bookkeeping's not up to date. You don't have a bookkeeper or your bookkeeping's not up to date.

Jason · 14:29That's something else that goes hand in hand. If your bookkeeping's not up to date, how are you staying on top of your figures when you run your profit loss or your balance sheet to get an understanding if you're making money or not?

Nick · 14:38So I must confess,

Jason · 14:39yes, mate.

Nick · 14:41Um, I. I'm a culprit here. Yeah. And uh, the reason I wanted to bring this up is because I think judging by the letter I saw the other day, the ramifications are increasing.

Nick · 14:53Yep. So I have a property that's owned in a commercial, um, entity. Mm-hmm. That's a commercial property owned in an entity. So

Nick · 15:00it's not my business. We're all up to date, but I just forget about it all the time. Mm-hmm. Because it's just a rental property, but I've got a lodge, a BA statement for it. Um, and there's times where I just, I, I, I just forget it because it's minimal.

Nick · 15:13It's not part of the business. Uh, last one, I was late and I got a letter. I can't remember what it said, but I remember reading it the other day and I was like, holy shit, that's a significant fine. Um, whereas it used to be like, you know, a hundred bucks or something. I was like, whatever. Yeah. I think close to one and

Jason · 15:30a half thousand for a, for an overdue ba It was in the

Nick · 15:32thousands.

Jason · 15:32Yeah.

Nick · 15:33Um, yeah. I need to get my act together on that property. BA statement. Um. But yeah, I think this is what the a TO does, right? Mm-hmm. Which we've seen it over and over again, particularly of late. You know, you talked about the, um, superannuation. What happens if you don't pay that now? What you could be up for, um, a TO taxed it now?

Nick · 15:53Um, not tax deductible. Yep. The interest. Bigger fines for, for not lodging ba statements. So

Nick · 16:00it's clear that the a TO are just gonna keep piling on bigger ramifications to get people in order. Yeah, and think about it.

Jason · 16:06If, if you're a profit center like the a TO, they're, they're a government department that needs to generate revenue and bring in revenue for the government.

Jason · 16:13If they're sitting on a, on a debt book of 110 plus billion. Let's say they, let's say they can't collect all of that from a lot of the businesses that I said are insolvent or in liquidation. Do you know who they can collect that off by fining and sending penalties and charging interest to the good businesses that have just not lodged on time to the good businesses making money with poor practices.

Jason · 16:34They're the ones they're gonna financially suffer to make whole the government for the ones that now no longer have the money to do that. Mm-hmm. So if you are in limbo land, you're not quite the insolvent business that can't afford to pay its bills. You're a business that is not doing the practices that need to be done, like keeping on up to date, lodging, things on time, paying on time, you are gonna become the one that pays back the government the additional in fines, interest, penalties to make the government as whole as possible so

Jason · 17:00that BA return and tax return late, not only the penalties that you're getting.

Jason · 17:03Nick is definitely one thing and great to bring that up. The other thing that happens there is when you launch a bass slate, the GSTN pay as you go. Because the bass is late can now become a director penalty notice to the director. So if you'd signed and lodge that on time, prepare it, sign, lodge it on time, even if you can't pay it on time.

Jason · 17:24But what happens is if you go and I, look, I've had this conversation, you know, almost weekly, call it monthly with clients going, ah, Jace, I got the bass from you, but I didn't sign it because I can't pay it yet. And I'm like, no, no, no. If we've sent it to you, sign it and get it lodged because whether you can pay it or not.

Jason · 17:42The A TO needs to book it as lodged on time. That gives you a green flag that you've done. You've done the bit right where you've got your shit together, you've got your books together, you've lodged on time. Now the fact that you can't pay, then you get on the front foot, you call them and you, and you communicate and do a deal.

Jason · 17:58The ones who don't lodge on time.

Jason · 18:00The GST and the and and the pay as you go withholding can become a director penalty notice. The A TO can basically trigger a letter to you personally, the director and say, this debt is now your debt. If you can't resolve it within 21 days, you now need to trigger one of these events and it's pay the debt in full.

Jason · 18:16Do a small business restructure, liquidate your business. And that is why now we've got this big bulk of liquidations and SBR events and insolvency events because the a TO are getting serious. They're going, you know what? If that company goes into liquidation. We're probably not gonna see much, but if we direct a penalty notice to the director, we're gonna force action.

Jason · 18:35So that is why late basses and late tax returns, late basses especially, are a problem. Sign them, get them lodged on time. Get your books in order. Otherwise you can see where the red flags going and it's all bad.

Marty · 18:45Uh, Jace, which of your, what practices do your clients do that are very good that you see from a client initiative?

Marty · 18:53Like, do you see clients that go end of month, there's always the income and the expenses coming in

Marty · 19:00and you ready to go? Like, do you, what, what's best practice that you see in business? Because we've all made those mistakes over time and I guarantee there there might be some good ones out there.

Jason · 19:10Yeah, good question.

Jason · 19:11Um, the, the basics are a separate bank account. And just knowing an amount per week, per month per invoice to carve out to a separate bank account. So you've always got the view of that money's not my money. It's a separate account. And you know that that money is not your money. That's one of them. The other good practice is GST Pay as you go, super payable, income tax payable.

Jason · 19:30They're all tagged on the accounts watch list. So when you log into Xero in the top right hand corner, it is all of your liabilities. Like your main liabilities, a TO, superannuation, GST, pay as you go. Um, they're, they're built in the top right hand corner of the dashboard, so you can quickly sum them up.

Jason · 19:46And say, I've got that amount of money on, on standby. Or if you don't, you know that you've got less cash than what your a TO liabilities are in the top right hand corner. And then beyond that, the, the, the next kind of step in that is the ones that have like the robust

Jason · 20:00cashflow forecast in a live sheet, like a a, an Excel live sheet or a Google sheet, um, or a reporting software like Float Sift.

Jason · 20:08Um. Different apps like that. Those ones are obviously the, the top of the tier. Yeah. We work with the monthly, we update the figures, but at a bare minimum separate bank account and a dashboard watch list of your liabilities. And,

Marty · 20:19and what about if you're in your first year, year and a half in business, just some good basic principles.

Marty · 20:25Should they be looking at their expense and revenues once a month and just. Being proactive with it in real time or once a quarter, what would you suggest from what you've seen?

Jason · 20:35Uh, look, I'd love it to be once a month. Uh, you know, I remember starting the business with Greg and because then you're your own bookkeeper, you're wearing extra hats if, if you don't have the budget on day one or month one or, or year one to be the bookkeeper.

Jason · 20:47I think Nick, you've talked about doing the bookkeeping yourself as well. Yeah. Back in the early days

Marty · 20:51I've been there,

Jason · 20:51but you know, like reconciling myself so that I know, I knew the money in and I knew the money out. Which meant that when I run the p and LI viewed it as often as I

Jason · 21:00could to become obsessed with the numbers because I knew the numbers I wanted to grow to, I knew the inputs and outputs that would drive success.

Jason · 21:07And so in the early days of being the bookkeeper and you know, using my own time, energy, resources, effort to do that in the early days, I knew it wasn't a forever thing, but it just meant that I was putting good habits in place of understanding my numbers early. So yeah, we'd love any small business owner that starts if they don't have the budget for bookkeeper day one.

Jason · 21:25You, you know, you gotta find a way pretty quick to create that budget 'cause it's money well spent. So that allows you to grow your business in other

Nick · 21:31areas. But yeah, I think what happens too, and we've been a culprit here, and, um, you know, there's, so something Marty says it resonates is death by a thousand paper cuts.

Nick · 21:40And when you, when you become a bigger business like ours, um, all of a sudden there's a lot of stuff going on. You know, there's. It, there's, it accounts, there's um, there's laptops floating around. There's, there's phones, you know, there's subscriptions, there's this, there's that. So, you know, when, when I think when people

Nick · 22:00do budgets, they quite often focus on, you know, what are the big things, revenue in, uh, employee costs, rent, things like this.

Nick · 22:06But what I've learned over the years is just the amount of little things that could compile that you say yes to. Oh yeah, we'll do that event. Yep. We'll come here. We'll do that. Uh, yeah. Someone can go to Brisbane. So if you don't actually look at that. So we look at that now every month and say, right.

Nick · 22:22What did we spend last night? Uh, last month? What did we keep? What didn't we keep? Does that then impact what we spend next month? So hypothetically, if we've got a travel budget of three grand a month, if we spent six grand last month, we're not spending anything next month. So it's those little habits that I've, um.

Nick · 22:41Learnt the hard way of saying, geez, we had a really good year money wise, but geez, look at these little costs that just added up. And, you know, they add adding up. They can be a game changer, but they can also not add it up, be easily lost, um, in everything else that's going on. So for us it's every month.

Nick · 22:59We've got the budget

Nick · 23:00built out in zero as you can build out your budget. Um, so we compare the budget to the actual, so we compare the budget budgeted spend to the actual spend, look at the gap and say, right, was the budget wrong? Yes or no? If that's a legitimate spend, we needed to adjust the budget moving forward.

Nick · 23:17If the, if the spend was wrong, why did we overspend? We shouldn't have got invoice for that. Or again, as I said, we spent too much on travel, so no one's traveling next month. It has to be the month after. So zero is such a cool tool. Mm-hmm. And it's not about being a tight ass, it's responsibility because if you don't have that stuff sorted, then you can miss not have the money to pay things like super and the a TO.

Marty · 23:40Yeah. And, and that right there is absolutely sage advice for any business owner that def by a thousand paper cuts, the hole in the bucket, as I call it, those little problems that. Sometimes go miss can compound into massive problems and it's also opportunity cost. Again, if you, if you lean on that stuff

Marty · 24:00and it's not to skimp, it's to go alright, what are the qualities around those efficiencies in order then put that capital back into more income producing activities.

Marty · 24:08So it's um, it goes the other way too. You know, once you're doing what Nick's doing then um. Yeah, you can optimize that in a more productive way in the business. Very powerful. Very powerful. Unreal.

Jason · 24:19Unreal. If you haven't looked into budgets in Zero to compare actual versus budget, Nick's story just then was exactly why.

Jason · 24:25That's the next step in your, uh, journey of what you can look into to, you know, have financial, financial empowerment really, and those decision making. It's so much easier to make a decision on whether the number was right or wrong when you're matching it back to what you'd pre-agreed or what was mapped.

Jason · 24:40You can see when something blows out. Um, you know, we, we had a client that had a budget for insurance of like $4,000 a month, and all of a sudden there was a month where it blew out and the conversation then went, Hey, what, what happened here? What, you know, what was that? Oh, well, you know, this vehicle, something happened and I realized it wasn't insured, so I had to insure it so.

Jason · 24:58You can then drive conversations

Jason · 25:00around why there is variances and whether it was a spend that you could approve or a spend that wasn't approved. Um, you know, someone that bought a corporate box for a, a concert and it was like, well, whoa, hang on a minute. That that blew the entertainment budget for the year.

Jason · 25:13That wasn't necessarily agreed. Maybe we need to talk about the cash flow of that. So

Marty · 25:16that's your big, that's your big ticket stuff though. But that, let's say those smaller little leakages, you know, over the course of a year is 10% of revenue. Right. It, it's, you know, a thousand bucks here, 500 bucks there.

Marty · 25:29It's all the stuff you sign off on quick and it's like, and all of a sudden you go, holy crap. You know, once you, once you, yeah. But you gotta identify the problems. And like Nick was saying, once you do that, you get a clear runway forward.

Jason · 25:42Absolutely. Uh. This app is, uh, unre. I mean, I could talk about this accounting stuff for age, so I'm glad you boys are jumping in on it too.

Jason · 25:49Uh, quick one. This one, it leads in if your BAAs and tax returns are late red flag number four, financial red flag, you're spending your GST and your pay as you go withholding and your tax

Jason · 26:00savings. Um, you know, your business might be profitable, um, means, or you're paying employees, which means there's pay as you go withholding.

Jason · 26:06It's not your money. You're making sales, you're collecting 10% GST, not your money. And then maybe there's some profit. 25% of whatever profit, not your money. Now, when that money's gone, that is money that wasn't yours. And then trying to claw that back and catch that back up is such a mission for a small business owner to try and recoup that money that they've spent that was never theirs to spend in the first place.

Jason · 26:28It means the following month or the following quarter, you basically gotta double down on how much you should have saved to be able to save enough to pay. The previous quarter's money that you spent. So we see this, this is that red flag that if there is not enough money to pay the bass, uh, at the end of the quarter, we know that the money's been spent that wasn't theirs.

Jason · 26:44They're o the client is then overspending in areas they shouldn't be. And again, if this flows into a bass payment, being a bass lodgement being late, all of a sudden, director penalty notices, there's just a flow on of big problems when you're spending money that's not yours. And,

Marty · 26:57and I think you'll see with what Chase is saying,

Marty · 27:00more revenue doesn't solve that problem.

Marty · 27:03And this is the thing business owners don't understand. We always go, I mean, I've done myself a, just get more revenue. Just get more revenue resolve itself. No, it won't if that's the behavior. So what you're saying there is again, just making that foundation really clean to be able to scale, you know, profitability and, and good behaviors overall.

Marty · 27:22So sage advice.

Jason · 27:25This can sometimes go hand in hand into financial red flag number five, but sometimes not, uh, owners treating the bank account like their own money without Diviv seven a drawdowns or director loans. Um, so, you know, let's say there is some, a chunk of money in the business bank account, um, whether the company tax has been paid on that or not, the money gets taken out, director spends it on something, and then when we're having the conversation saying, Hey, either you pay back that director loan.

Jason · 27:52Or if you can't, here's the personal top up tax you're gonna pay. No, you know, no harm in uh, buying nice things for yourself, but you gotta make sure that

Jason · 28:00it doesn't become a financial red flag for your business. 'cause the business has tax bills to pay DIV seven a loans year on year loans. So sometimes you can go cool.

Jason · 28:08You know, the 2024 financials, there was an amount withdrawn by the director. They didn't manage to repay at all. You get to the end of 2025, you've set up a director loan. 2025. All of a sudden there's two balances. 24 has become a, an official loan with a repayment. 25 started. You just see the writing on the wall when there's money being drawn from a company before the companies had enough profit to declare pay tax and declare a dividend.

Jason · 28:31Or when it's been overdrawn and it means that the a TO hasn't been paid in full or you know, there's not enough money to pay the future tax bill and that money will be back later. Director loans and DIVIV seven A loans not always a financial red flag, but often unless they're managed properly and put into the right structure and the right loan agreements and the right repayment schedule can very quickly become an issue for a small business owner.

Marty · 28:53Yeah, and. I think, um, like people sometimes misconstrue when we talk about this stuff, that we're

Marty · 29:00almost being too defensive rather than the, you know, more aggressive side in business. But all great games are built off a great defense. Like all premierships in footy build off defense first as a foundation piece to scoring heavily right and having good systems in play.

Marty · 29:17And I think. Once you, and, and the biggest pain point in business is people not addressing these things. And once they have, and the foundation set, mate, you can fly beyond your oldest expectations. You know, and that's, that's really the setup, you know, so what we're talking about here is vital not only for survival, but to create a great foundation to launch from in the future as business owners.

Nick · 29:41Yeah. And Marty, you say defensive, but I would say it's, it's not defensive. And, and the whole reason is, is. This is money that you need to keep your business in operation. So if you are earning a certain amount of money, a certain amount of that's gotta go to the a TO. If you pull money outta your business, a certain amount of that's

Nick · 30:00gotta go to the to to the a TO.

Nick · 30:02So there's no point in you investing money in your business to grow. If you haven't got in the bank account what you need to keep the doors open, because then all the money you've invested is pointless anyway. So it's just understanding that if I've got this much money in the bank account, um, what do I need to go to super, what do I need to go to the the a TO?

Nick · 30:23Then you can identify what you actually have left to invest and then continue to grow your business. Because the reality is if you don't do that and you use the money that you are going to use, um, or that was required for super and the a TO to grow your business because you back yourself, well that's great, but what if you back yourself but it doesn't work?

Nick · 30:44What if it's completely outta your hands and something doesn't work? That liability doesn't disappear, so it's, you say defensive, which I totally agree. Some people might say this as defensive, but for me it's just being aware. Yeah, it's being aware of what your current situation is not. That's how

Nick · 31:00much money is in the business account, and how much money do I actually have left to invest or to draw out.

Nick · 31:06Yeah. And then if I do that. What are the

Marty · 31:08ramifications? Corporate responsibility, you're right Nick, and it's not sexy, but it's important.

Jason · 31:15And look, the, the other thing with the div seven a loan that, that's the kind of elephant in the room, is if it's not managed properly and you get audited by the A EO, it becomes an unranked dividend.

Jason · 31:23Whether you've got frank and credits in the company or not, you know, whether you've prepaid some tax, if you meet the requirements of a structured loan agreement and a minimum repayment by a certain due date per the loan agreement. There's no loan agreement in place that becomes an un frank dividend and you pay top marginal rate of tax as the individual director who took that money.

Jason · 31:42So that's the more, the point of like managing it properly is the big thing. You know, having the conversation with your advisor, making sure it's done properly so that the a TO doesn't get extra tax that they're not entitled to.

Nick · 31:53Yeah, and there's, there's absolutely nothing wrong with Diviv seven A loans.

Nick · 31:56Hmm. I've got one. I've got one in full

Nick · 32:00transparency, but I know. I know what that means, and I chose to go that way, but I, I know what the, what my responsibilities are with it. So again, it's, you know, not to repeat myself, but it's, this isn't about defense, it's about awareness of every decision that you make and what happens on the back end of that and what, and what your responsibility is by, you know.

Nick · 32:20Uh, because you made that decision.

Jason · 32:21Yeah, a hundred percent. Uh, this one heading into the 25, 26 year is a big one. Some big changes from the a TO that you need to be aware of is that interest on an a TO payment plan or interest paid to the A TO is no longer tax deductible from one July, 2025. That's the GIC, the interest, general interest charges from the a TO.

Jason · 32:39So let's say you've got a payment plan. Let's say you put a couple of hundred grand or whatever the amount is on a payment plan for your small business with the A TO. And every time the a TO charges you interest each month, your accountant or your bookkeeper, um, is booking the interest as an expense in the p and l and adding the balance to what you owe on the balance sheet to the a TO.

Jason · 32:58Now, in the past, that's been tax

Jason · 33:00deductible interest. The current rate is around 11.17%, give or take. Uh. Probably picked a random number, but it should be about that, uh, for last quarter, which meant that, that, that 11% interest you're paying to the a EO is tax deductible, one July 25 onwards, not tax deductible, which means, you know, on a debt like $70,000 to the a EO for two years, you are looking at $8,250 in general interest charges, looking at paying about three, three and half thousand dollars per month.

Jason · 33:26Now, if that interest is non-deductible. The cost to you is actually more than the 8,250 because that gets added back at tax time and you'll pay another 25% as long as you're a company. What you may want to compare to now is getting in the room with a good broker. Know a few from, uh, our good friends here at Innovate and weighing up your options to go, am I actually able to pay back my HEO debt within two years?

Jason · 33:48Am I comfortable with not getting a tax deduction for that interest? I'm paying? Maybe I can get a better interest rate anyway. Maybe I can get eight or 9% in a business loan over five years. That tax deductible is gonna

Jason · 34:00be, that interest is gonna be tax deductible and all of a sudden my cash flow is 1450 a month instead of three and a half thousand dollars, give or take a month.

Jason · 34:07So you got more cash to reinvest back in the business to grow to be sustainable. Um, so big one there. Red financial red flag number six. If you are constantly got HTO payment plans, that is the red flag. Right now though, the bigger fla red flag is that your interest is not tax deductible. So look at potential restructuring the debt that you have on your books.

Jason · 34:26If it's with the a TO, no longer good debt. Never good debt.

Marty · 34:29Nick, what do you, what do you think on that with, if someone's got that type of tax debt, are they better to tie it into a commercial? Property to try and get a lower rate and make a tax deductible? Or would you keep that separate in something more like an unsecured facility at a higher rate?

Marty · 34:47Uh, I know it's dependent on the client, but what, what's, what's your thought process in what would be optimal?

Nick · 34:54Look, it's very client dependent for sure. Um, first thing is do they even have the security? That's the first thing.

Nick · 35:00Um, a lot of people don't, even if they do have this security longer, a lot of people don't wanna go down that path because they don't want to tie up the asset.

Nick · 35:08Yeah. Which makes me laugh sometimes 'cause I'm like, just because they don't have security of your asset doesn't mean you're in the clear. Very true. Like a lot of people have that mentality, and I completely get that from an asset protection point of view. But I guarantee if you don't po pay the bank back, they'll find a way to get the money if you've got assets.

Nick · 35:22So, um, you can get unsecured at about 9%. To Jason's point, you could secure it against the, a residential property at probably about, you know, five and a half, six. Um, if it was interest only. So I would definitely, um, for me it's unsecured. Um, and I'm happy to pay the extra because I would rather keep the, the assets, um, to build more assets equity for, for other things.

Nick · 35:45Yep. So, but then, you know, I think there's also the question of can you get the finance, um, first thing banks are gonna say is, why do you have a tax debt? How are you running your business? So they're obviously lending you the money, uh, to take the a TO out.

Nick · 36:00So. What we are seeing though, Marty, is banks are becoming, um, more open to, to paying down tax debt or paying out tax debt because they know that there's gonna be an opportunity because of this late recent change with the a TL not, uh, interest spend not being tax deductible.

Nick · 36:15So, um, if we're putting it to a bank, we've just gotta put a good story around it. Um, you know, why they have tax debt, you know, what are the future cash flows of the business look like and whatnot. But if it's secured, it's obviously easier. Because, um, they've got some, they've got something to. Give them, get their money back pretty quickly.

Jason · 36:33No, I love it. And thank you for the input, Nick. So, uh, the final one, and we'll round it out here and wrap it up. You have listened to me for a little bit longer than some of our eps, but this, I'm just passionate about this, these red flags that we're seeing. I'm, I'm sick of seeing good, hardworking, small business owners doing it tough and going under.

Jason · 36:48So these are the things you gotta look for. The final one here, the financial red flag. Marty, you kind of alluded to it right back at the start of the episode. It's. A business owner that has no understanding of their breakeven

Jason · 37:00point. So by not understanding their breakeven point, they don't know how much revenue they need to generate to then be able to be profitable.

Jason · 37:07So you're making sales, but you've got no idea. You know, if you're gonna be, have enough to have a breakeven at the end of the month, um, you know. Month in, month out, with a few clients that we're meeting with, we're seeing the bottom line being in the red. And, and the question is then, oh geez, you know, I, I thought I was bringing in enough money to beat all my expenses.

Jason · 37:24So these, these conversations, unfortunately can happen and they're common. The small business owners, you need to understand your breakeven point. You need to know what you need to bring in month to month, week to week, day to day to be profitable. And that is what being in business is, is all about. You need to make money, otherwise there is no point doing it.

Jason · 37:42If you continue to invest in a business that isn't making money, all these red flags start to appear. All these financial red flags appear and you start to do it really tough and then you become a statistic. You add to the atos 111 plus billion dollar debt and your business is gone.

Marty · 37:56It's, it's a really great point.

Marty · 37:57I think that, um. People that

Marty · 38:00have businesses that produce products, it's a little bit more complicated on the cost of goods in regards to manufacturing the product to get to that break even on top of the expenses, particularly when they first start in services. We sort of know what the remaining income's gonna be after wages and costs, but, um, that product production is another element that sometimes business owners come unstuck.

Marty · 38:21Like they basically sometimes have to be. Generating twice what they're thinking just to cover their, you know, cover their break even point. So that's, um, a good one to run through those numbers, know where you stand, know your exact numbers, and what your minimum that you have to hit as a survival point.

Jason · 38:37Yeah, a hundred percent. And we, you know, we've had conversations with manufacturing clients that are like, well, if I, if I put my prices up, I won't manufacture as many items. But then it's like, well, if you're doing the items at. Break even or losing money on them. Yeah, you shouldn't manufacture that many.

Jason · 38:51Anyway, let's, let's, let's pull it back and make sure we understand. So, um, appreciate the time listening to this episode. We appreciate all of our audience, all our listeners, and all

Jason · 39:00the support we do get here at the Numbers game. Thank you for tuning in and listening. Um, please go and rate, give us your reviews, send us emails, um, or contact Jason or Marty, LinkedIn, Instagram.

Jason · 39:10We're around. Not sure about this TikTok business, but I've heard we're on there as well now. So go and check out TikTok if you haven't been over there before. Um, until next time though, if you do notice any of these financial red flags, take it seriously. They, they're sometimes not just admin slipups, they're indicators that your business could be heading for a bit of pain.

Jason · 39:26So reach out and talk to us or talk to your advisor. Talk to someone who can help you out here. 'cause we don't wanna see you become a statistic. And until next time,

Marty · 39:33sometimes you gotta address the red to go to green. Game over.

Jason · 39:38This podcast is for educational and informational purposes only. The conversations are of general nature and do not qualify as financial or tax advice.

Jason · 39:46We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the company's discussed. ---