Gearing for growth

The two- to three-year mark is an interesting time for most businesses, and brokerages are no exception, says the managing director of Trail Homes, Nick Young.

“At this point, a solid business will have a defined offering, a good grasp of their market and a strong reputation,” Mr Young says. “They will have ridden through the rollercoaster of being a start-up and be in a more stable place where the focus is on consolidation and growth. To effectively and sustainably grow their business, we encourage brokers to align with an accountant to ensure their structure supports their immediate and ongoing objectives, that they’re making the most of the tax breaks available to them and in general planning for a prosperous future.”

According to Justin Mastores, managing director of accounting and advisory firm Rees Group, at two- to three-years down the track, brokers should actively be assessing the following with their accountant:

1. Company structure

Review the company’s structure to make sure it is tax-effective and is protecting their assets — whether that be a trail book, property or other. In particular, consider:

• whether the current structure is the best way to manage income tax and CGT (and if not, whether it can be restructured without any tax implications);
• if a partnership should be restructured;
• if their assets are protected with the current structure (including family assets);
• whether the structure is set up to allow future acquisitions and growth;
• if the structure is the most effective for exiting the business in due course;
• whether the company is for the CGT exemptions, including the small business 50 per cent CGT exemption and/or the 15-year exemption for CGT.

2. Tax planning

It’s beneficial to have a cash flow projection (business and personal) as well as a rolling tax cash flow plan (which works out a payment plan for ATO debt against revenue generated). This avoids the common trap of not looking ahead, and being burnt, by cash flow limitations, particularly if the business is going well and projections aren’t necessarily front of mind.

Mr Mastores says: “We see a lot of brokers in hot water as they’ve pulled out too much and subsequently delay payments to the ATO — which they’re really clamping down on. This has been compounded by the change in legislation, allowing the ATO to disclose tax debt to credit reporting bureaus. Companies targeted are ABN-registered businesses with more than $10,000 debt that is 90+ days overdue in an effort to encourage payments to be made in a timelier manner to retain a good credit rating. We can’t overstate how critical it is to build trust and equity with the ATO.”

To help stay on track:

• Keep a separate GST account and separate funds for business and personal accounts.
• Have a buffer of three to six months operational expenses to avoid being underfunded.
• Lodge or pay tax and BAS on time.
• Address problems upfront.
• Understand the difference between the company’s money versus your money.

3. Reinvestment into the business

• Technology: Industry changes quickly, as do customer demands and expectations. By the end of a broker’s first year in business, they should be running on an online cloud-based software such as Xero or MYOB.
• Staff: After two to three years, brokers typically have a loan book generating around $50,000 per annum and overall turnover of $100,000 to $150,000. The next consideration is often which staff to hire. The primary area of support required is in loan processing and administration. Assess the economics of whether this position is done internally or outsourced offshore, which is becoming more commonplace.

4. Business planning

Be strategic about how to plan and run your business. Make sure you’re considering your short, medium and long-term goals, and assess how these are tracking regularly with an adviser (at least every six months).

A common challenge for businesses of all sizes is cash flow — and brokerages are no exception — but there are a number of ways to acquire funds, including the sale of portion of a trail book.

Mr Young says: “There’s been a significant upswing in brokers selling a slice of their trail book to invest in business growth while retaining the rest as a secure ongoing annuity stream. The ‘self-funded’ cash injection is an increasingly popular alternative to a loan, particularly when clients are separated from the transaction. Common uses for the funding include paying ATO debt, hiring staff, upgrading technology, investing in marketing, moving to a bigger premise or buying out a business partner.

“We encourage brokers to be astute about growing their business and accelerate their trajectory by aligning with accountants, and other professionals, who can provide guidance on planning and growth measures.”