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What do long-term and short-term financing involve?

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What do long term and short term financing involve
What do long term and short term financing involve

Maintaining healthy cash flow can be challenging; between ongoing expenses and bills, poor cash flow can severely impact your customers, staff and bottom line. Business owners need to understand the differences between short and long-term financing when developing a cash flow strategy.

There are various sources of financing available, with each being useful for different situations. Choosing the right source and mix is key for good cash flow, with financing options often being classified into two categories based on the time period: short-term and long-term. To find the right plan for you, determine your needs and then match a financing option to meet those needs.

Long-term financing:

Long-term financing options can help you invest in overall improvements to your business, for a period of more than 5 years. Capital expenditures, such as upgrading equipment, buying additional vehicles and renovating are funded using long-term sources of finance. Businesses can consider using the following options;

  • Leasing – structuring a lease to match the useful life of the asset. This will help to preserve your cash and working capital for other uses.
  • Term loans  – from financial institutions, government and commercial banks. These allow you to accurately forecast your monthly cash flow through regular payments.

Short-term financing:

Short term financing, or working capital financing, looks at needs that arise in relation to financing current assets – for a period of less than one year. Working capital is the funds that are used in the day-to-day trading operations of a business. Short-term financing can help you to pay suppliers, increase inventory and cover expenses when you do not have sufficient cash on hand. Depending on your business’ requirements you might consider using one of the following options;

  • Overdraft – extends your cash resources and protects your business’ credit rating.
  • Line of credit – funding when you need it that is then paid back when you have surplus cash, offering flexibility, value and control.
  • Business credit card – a convenient, fast payment method.

Why you should not ignore record-keeping

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Why you should not ignore record keeping
Why you should not ignore record keeping

For businesses operating in a fast-paced and dynamic environment, the task of keeping records can fall secondary to everyday business operations. However, failing to efficiently keep up-to-date and comprehensive records can hurt your business’s long term operations.

Probably the most important reason behind sound record-keeping is that it allows you to learn and grow from your own business experiences. Keeping your records in check will help you understand the current situations of your business and also project future profit or losses. In addition, good record keeping will also show you where your business needs improvement or re-invention. Here a few records to keep that will prove invaluable in the future.

Purchases and expenses:

The items you buy and sell to your customers and the costs of running your businesses. Supporting documents for both of these include invoices, email records, credit card slips, cancelled cheques, cash register tapes and account statements. These can help you to determine whether your business is improving, which items are selling, or what changes you may need to make.

Deductible expenses:

At tax return time it’s handy to have an assortment of receipts and documents that outline your

deductible expenses. These can be the costs of travel, transportation, uniform and entertainment.

Assets:

The properties that you own and use in your business. These records verify information regarding your business assets, such as when and how you acquired these assets. They will also help you to determine the annual depreciation when you sell the assets. Examples of these records include the purchase or sales invoices and real estate closing statements.

Financial Statements:

Keeping accurate and up to date, financial statements will help you at a time of lending applications. These finances include income statements as well as balance sheets that show assets, liabilities and the equities of your business at a specific date.

What life insurance options does your super provide?

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What life insurance options does your super provide
What life insurance options does your super provide

Over 70% of Australians have life insurance through their super fund. This acts as a financial safety net through your super if something unexpected happens.

There are 3 main types of life insurance that super funds usually provide:

  • Life cover: Also known as death cover, this type of insurance pays a lump sum or income stream to beneficiaries when you die or have a terminal illness.
  • TDP (total and permanent disability) insurance: If you become disabled or it is unlikely that you will be able to work again then this insurance will pay you a benefit.
  • Income protection insurance: Also known as salary continuance cover, pays a regular income for a specified period (length of time or up to a certain age) if you are unable to work due to temporary disability or illness.

Pros of life insurance through super

  • Cheaper premiums: Super fund buys insurance policies in bulk so it is cheaper for their customers
  • Easy to pay: Automatically deducted from super’s balance
  • Fewer health checks: Super funds accept default level of cover without health checks – particularly useful if you have a high-risk job or health conditions. But, remember that you should check the product disclosure statement (PDS) to see exclusions and treatment of pre-existing conditions.
  • Increased cover: You have the flexibility to increase your cover above the default level but you may need to answer some questions about your medical history.
  • Tax-effective payments: Employer’s super contributions and salary sacrifice contributions are taxed at 15% which is lower than the marginal tax rate for most people.

Cons of life insurance through super

  • Ends at age 65 or 70: While outside of super, your cover will continue as long as you are paying premiums, but TDP and life insurance tend to end at 65 and 70 respectively.
  • Limited cover: Since default insurance isn’t specific to your requirements, your cover might be lower than what you would receive outside of your super.
  • Cover can end: In some cases, changing your super fund can cause your contributions to stop or your super account to become inactive – this will end your cover and you will end up with no insurance.
  • Reduces your super balance: Since premiums are deducted from your super balance, you will have fewer savings for retirement.

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