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Sin number 14 - Not getting your finance structure right

By Greg Carroll 

 

 

How you structure the funding for your business can have some significant implications for your cash flow. 

 

When I worked in commercial lending for a major bank I would regularly have customers seeking additional working capital because of a shortfall. Once I reviewed their financials and asked a few questions it was pretty easy to see why. Time and time again I found that clients were using short term finance facilities like their overdraft to fund long term asset acquisitions like plant and equipment.

 

While they had the ease of paying cash immediately to purchase the item, it quickly soaked up the cash they needed to run their day to day operations.

 

In most cases a more appropriate funding option would have been a lease or chattel mortgage. These types of facilities would have allowed them to pay off the equipment over a longer period time and placed less pressure on their day to day cash flow. These type of structures would have also been more tax effective.

 

As a rule of thumb the term of your finance should match the anticipated life of the asset you are purchasing. The tax office publishes tables for the recommended depreciation periods of various assets. For example most computer equipment is usually depreciated over a maximum of three years. Therefore your finance term should seek to match this. Your accountant can also provide some guidance here. 

 

Are you on top of your cash flow?

Are you currently in business or planning to start a business in the near future?  Do you have cash flow concerns or want to find ways to improve your cashflow? Are there things you should or could be doing to improve your cash flow now?

 

To find out simply complete our Cashflow Review Form or complete the form below for an initial interview.

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