- Not planning out your cashflow
All professional services firms have an issue with work in progress, billing and accounts receivable. At the best of times it can take 3 months from commencing work to getting paid. Bad debts and late payment are not usually a problem for medical services but the Covid-19 cancellation of elective surgery did cause significant interruption to business.
You are a business and you need to plan your cashflow like everyone else. If it is going to take 6 or 12 months for business to go back to normal then you need to have cash reserves or finance facilities to deal with this. You need to know when your expenses are due and make sure that the money will be available.
Even the best businesses can fail if they don’t manage their cashflow adequately or invest enough money to appropriately capitalise their operations.
- Failure to pay income tax
Large tax bills are a fact of life for most medical specialists due to the high personal service incomes earned and inability to use a company or trust structure.
When you move from being an employee in a hospital, receiving a net salary, to a self-employed individual it can be a difficult adjustment. As an employee, the company takes care of your PAYG and tax bills are rare. During the first year of self-employment, the ATO doesn’t ask you to pay any tax. It’s not until you lodge your tax return that they will assess you for it.
It can take up to 2 years after you started in business to pay taxes. They will not only make you pay tax for the first year, they will also ask you to start paying PAYG for the second and third years. This can result in hefty payments being due all at the same time, possibly swallowing up nearly all your income.
- Participating in dodgy tax minimisation schemes
The days of investing in Avocados and Tree plantations are well and truly over but there is a constant stream of people promoting tax schemes as a quick fix to the above problem. With 30 June looming they go up a notch.
Most of these schemes are not very effective and can end up costing a lot more than the original tax bill. Sometimes just being properly organised to claim the all the deductions you are already entitled to, keeping proper records, regular super contributions and charitable donations are enough.
Negatively geared investment property is a proven strategy that can alleviate your tax bills but it is also a risky strategy that is not suitable for everyone. At some point you have to unwind it to pay back all the loans. It would be better to pay capital gains tax on half your gains than income tax on all the full amount.
At some point you have to accept that income tax is a part of life and while your tax bills might be big there are millions of Australians who wish they had that problem.
- Not living within your means.
Everyone wants to have nice stuff and finance companies are eager to lend you the money to buy it. It’s very easy to fall into the trap of assuming that good times will last forever, but in business, customers will choose to avoid or defer spending on your services when their cashflow is tight.
If you don’t have a clear picture of your net income after tax it’s hard to budget and essentially, you won’t be able to save money. Your budget should include all of your business expenses, Tax Payments, insurance and regular superannuation contributions. The bare minimum living expenses and regular unavoidable costs such as school fees and family holidays come next.
Luxuries can be included if there is a surplus after paying for everything else, not before.
- Succumbing to stress
If the job was easy everyone would be doing it. You get paid a lot because the stakes are high and your specialised body of knowledge have clients trusting that only the best will do. Dealing with difficult patients, hospitals and pressure deadlines can take a big toll on your life.
When your income can fluctuate it’s very tempting to overextend yourself in order to maintain cashflow, pay your tax bills and sustain a nice lifestyle. That takes a toll physically and mentally. Many succumb to alcohol and substance abuse or suffer other health problems.
At some point, you need a break, and that has to be factored into your cashflow planning. Otherwise, your career might not be there for as long as you hoped it could be.
A good retirement plan can go a long way towards reducing the stress in your life.
If you would like to talk more about any of these issues please feel free to get in touch.