In this week’s video Nathan talks about how the cash economy can ultimately be killing your business. So first up, what is cash economy?
What is Cash Economy:
The cash economy is economic activity which is not accounted for as required by law.
Those who operate in the cash economy may simply hide income or pay staff cash wages and not remit tax on their behalf. As nice as it sounds to not have to pay tax on certain aspects of your business, each of these activities are ultimately holding your business back from being truly successful.
Here are 3 examples of why operating in the cash economy could be holding back your business from growing and succeeding.
To be summed up clearly, if you do not have the profit in your business, a bank is unlikely to lend you any money. A bank is not going to provide finance for your business when your true profit is not represented in your financial statements. From a banks perspective you are considered as a higher risk. For example, if your business is earning $100,000 a year yet your books only present a $50,000 yearly income, a bank is not going to grant you the same loan value that someone who has shown a $100,000 profit in their tax return.
Operating in the cash economy is also going to hold you back and cause problems in both your business and personal finances. For example, any new plant and equipment will be hard to finance, and one of two things will happen:
- You will be unable to obtain finance.
- You will obtain the finance; You may have to seek finance from a nontraditional lender, where the interest rate will be much higher compared to those who show their actual true reflection of their financial performance and position.
You may be denied a personal finance for a home loan. Not getting the finance for a home could cause housing issues for you and your family, having to stay in your current property or downsize may not fit your family needs or continuing to rent. Finance for an investment property will result in the same outcome as the personal finance for a home loan.
When operating your business in the cash economy, employers have found it appealing to pay their stuff cash so that they can avoid workers compensation or paying staff superannuation. Put simply, an employer paying cash is not going to report the wages paid through payroll software and declaring with the ATO.
Firstly, what is workers compensation insurance? Workers Compensation is an insurance policy that covers lost wages or medical bills when an employee injures themselves in the workplace. If you are paying your staff cash and not reporting their wages to the ATO, the employees will not be covered by workers compensation, ultimately making you legally liable for any work place injuries or loss of wages.
This is not so much of a problem until your employee injures themselves in the workplace or you incur a compulsory workers compensation audit (that’s not to say we’re encouraging cash wages till you get caught or things go wrong!!). An employee who has injured themselves in the workplace (especially when the injury is severe) is very likely to mention this to their GP (Doctor), their GP will fill in Workers Compensation forms and the insurance provider will get in contact with the employer. The employee is especially going to seek this sort of process when they have to pay for their recovery process and have no income to support their weekly bills.
For the safety of you and your staff working and owning a business in the cash economy can ultimately become financially dangerous. If you have no workers compensation or the appropriate level of cover, you the business owner could be personally liable.
Selling Your Business:
For some businesses there comes a point in time when an owner may want to sell. However, if you have been operating in the cash economy, running most of your business off the books you are going to have a difficult time selling your business for it’s true value.
When selling your business, the purchase price is going to be heavily impacted and determined by how profitable the business actually is. When an accountant or business broker values a business, they can only use data that is reported in your financial statements, which means that all cash sales are ignored.
Typically speaking a business valuation will be based off three to five years of business activity, which is taken off the financial statements of the business. So, for all your hard work over the years, (the sale price could be funding two very different retirement plans – Cairns every summer vs Bonnie Doon every summer), the final sale price will not represent the effort and hard work you have done to build a successful business.
We as accountants understand that paying less tax as a business owner is a nice thought but operating in the cash economy is not the way to go about it. At NGR Accounting we can help decrease your tax legally through the ATO. Whether its tomorrow or in a year the ATO is going to figure out how you are operating your business.
If you are currently operating in the cash economy and have decided that for success means that your business no longer should operate as a cash business, then reach out to us at NGR and we can help you find the right strategy to help you reduce your tax legally.