7 Financial Red Flags For Business Owners
Economic times are tough and as a result, Australian business owners currently owe over $110 billion to the ATO with small business insolvencies on the rise. What makes this news even tougher to swallow is knowing that so many business owners don’t see it coming until they’re already in strife too deep to wade out of.
On a lighter note, there are clear warning signs to be aware of so that if you spot one, you can take action. Here are seven financial red flags every business owner should have on their radars.
Red flag #1: maxed-out credit cards & overdrafts
If you’re leaning heavily on credit cards or an overdraft to cover day-to-day expenses, it’s a sign that cashflow is under pressure. While short-term credit can be a useful tool, relying on it regularly means your business is living beyond its means.
Fix it: Put a cashflow forecast in place (or get us to do one for you). Even a simple spreadsheet projecting your next 3–6 months can help you see when money is coming in, when big bills are due, and how to avoid getting yourself into an overdraft situation. If you are living beyond your means and can’t see how to cut expenses down quickly, pick up the phone. This is where a good advisor comes in!
Red flag #2: late super payments
Paying your team’s super late isn’t just bad form — it comes with hefty penalties. Miss a deadline and you’ll face the ATO’s Superannuation Guarantee Charge, which includes interest and admin fees. Worse, it’s not tax-deductible.
Fix it: Automate super payments as part of your payroll process so they’re never an afterthought.
Red flag #3: lodging BAS & tax returns late
Falling behind on your BAS or tax returns is putting your head in the sand at its finest. Delaying might buy you a little time, but it creates bigger issues down the track — including penalties and ATO scrutiny.
Fix it: Treat compliance as the non-negotiable that it is. Work with your accountant to create a process that keeps you accountable for your tax obligations. It might be a monthly catch up, setting up direct debits or coming up with a reminder system.
Red flag #4: spending GST, PAYG & tax savings
That extra cash sitting in your account might look tempting, but remember: GST and PAYG aren’t yours to spend. Dipping into these funds to cover operating costs is one of the fastest ways to end up in hot water with the ATO.
Fix it: Set up a separate bank account and transfer tax money into it each week or month. Out of sight, out of mind. If this is an ongoing issue for you, call us!
Red flag #5: drawing business funds without Div 7A management
Taking money out of the company for personal use without proper Division 7A planning can land you with unexpected tax bills. What feels like a “director’s loan” can easily become a compliance nightmare. A refresher for those scratching their heads: you can’t simply pull money out of the business to use at your whim if it’s over and above your wage. This money has to be treated as a loan and requires strategy and planning.
Fix it: Talk to your accountant before pulling money from the business. If you need access to funds, make sure it’s done through a compliant structure.
Red flag #6: ATO payment plans
It might feel like a relief when the ATO agrees to a payment plan, but be careful of becoming too reliant on them. It can mean you’re already behind and paying interest when you shouldn’t be. Worse, these plans can mask deeper cashflow issues that won’t go away on their own. Note that interest paid on ATO payment plans is no longer tax deductible either!
Fix it: Use payment plans as a temporary lifeline, not a strategy. Get advice on how to restructure or stabilise your cashflow so you’re not living in permanent debt.
Red flag #7: not knowing your breakeven point
If you don’t know the minimum sales you need each week or month just to cover costs, you’re flying blind. Without a breakeven point, you can’t tell whether your business is truly profitable or slowly sinking. Having your eyes fully open to your numbers is paramount to longterm business success.
Fix it: Work out your breakeven: total fixed costs ÷ gross profit margin. Once you know the number, you can set sales targets with confidence.
Rising interest rates, higher cost of living and lingering tax debts have pushed many businesses over the edge. Insolvency rarely happens overnight, it’s usually the result of ignoring red flags for too long.
If any of these red flags sound familiar, don’t ignore them. Talk to your accountant or adviser early — the sooner you get a plan in place, the more options you’ll have.
