Mixing business with pleasure.
Recently, Suncorp released a report SME vs ME that revealed almost two-thirds of small business owners’ wellbeing is suffering because their business and personal affairs were too intermingled.
The report findings explained that personal finances are being used to manage cash flow, and sole traders and new business owners (less than three years) are not being adequately paid through their businesses, and that only 20 percent are making contributions to their superannuation.
Many would regard this behaviour as fairly normal, as a spokesperson for the Suncorp report acknowledged:
Business owners aren’t motivated by instant gratification or quick success. It takes at least three years for a business owner to feel confident and satisfied about their business’s profit generation and outlook.
From our perspective, as insolvency practitioners who work with many SME business owners on failed businesses every day, we agree with the comments arising from the survey.
We see the effects from the substantial risks that business owners take on, which often lead to personal challenges resulting in exhaustion, and high stress and pressure on financial obligations. We see the effects in two separate and distinct areas: company directors, and sole traders.
Many company directors treat the company bank account as their own. In short, company funds are also being used to pay personal expenses. This creates a loan account that the director owes to the company. In a company winding up, liquidators are then forced to issue directors with a demand for the balance of the loan account. Other examples of intermingling include, a leased motor vehicle that a spouse uses solely for private use; a company credit card used for day-to-day personal household expenses; school fees and home renovations paid for by the company. This can result in the director filing for personal bankruptcy, and risks their personal assets. Directors paying for personal expenses with company funds effectively erodes the corporate veil—which serves to protect directors, personally, from a company’s failure.
Putting aside the blatant crossover of business funds and facilities as personal resources, when company directors don’t have a capital base as security for bank finance, their home or relative’s home is often insisted on as collateral. The emotional stress carried in possibly losing that asset can be enough to question if 'being in business’ is worth it.
Sole traders don’t find themselves in any more of an enviable position.
Without the benefits of the corporate veil, sole traders take a raft of risks, including ‘sole’ responsibility for debts, employees being paid, tax obligations being remitted, and landlord terms being met. The pressures of this cocktail of obligations culminates in the sole trader often being paid last, if at all. And often there is no clear sense of being ‘on duty’ and ‘off duty’. Again, personal bankruptcy is a real outcome if things don’t go favourably.
Of course, many people go into business to be their own boss, and control their own future. We understand and admire those who do. Our wish is for those sole traders and company directors to not mix ‘business and pleasure’ in the businesses books and records, which applies to credit cards, drawings, and any leasing assets (e.g. a vehicle) and more. Our wish is for the other 80 percent of SMEs surveyed to contribute to their superannuation funds.
Our purpose is to help SMEs in whatever phase of business planning or operations in conjunction with their trusted advisors. Our message to SMEs is to speak with an insolvency practitioner, like those at Worrells, to get the benefit of their insight and experience so they can be in business sustainably while preserving their wellbeing.