My Company is Profitable and I Am Paying Tax, But There is No Cash in the Bank. Why?
Business owners often ask where all the business’ cash has gone. Even after having a profitable year, there is often the harsh reality that there is no extra cash in the bank. First thought may be that the books are wrong or someone has made a mistake.
More often than not, the explanation is hidden in the business balance sheet. Sure balance sheets can be tricky to understand and they are often overlooked. But if you are trading as a company, then they are more important than ever and its likely that the culprit you are looking for is the Director Loan accounts. That’s where you will generally find your missing cash.
If you see the words Director Loan on your company balance sheet, then this relates to you.
These loans are caused by business owners taking more money out of the business than what is being paid to them as a salary or dividend. Usually this happens where directors use their business bank account as an ATM or help themselves and draw thousands of dollars to fund holidays, cars, renovations and other personal expenditure.
What’s the solution to the problem? The only cash you should take from the company is your salary. If you want more cash, then pay yourself a bonus or increase your salary. This way it is being taxed appropriately AND importantly, not creating more director loans. Directors should take a step back and treat themselves like any other employee and manage their personal finances separate from that of the company.
Far too often accountants deal with Director loans as part of the year end compliance without explaining to their clients how they are occurring, how to avoid them and the negative implications they have this year and for future years.
Before taking any extra cash from a company you should speak to your accountant to find out what you can take, and how best to take it without creating negative tax consequences along the way. Make sure that you have a relationship with your accountant that allows you to ask questions like this along the way (and get answers). If you don’t have that relationship, then you need to find it.
Contact Link Advisors today.