Jeremy Tauri: Do your sums before growing assets

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After a reasonably tough five years, small businesses are starting to become a bit more confident. And they're beginning to act on that confidence and look to expand their asset base to cope with increasing demand.

The latest GDP figures show a 4.2 per cent increase in business services activity and a 2.2 per cent lift in wholesale trade, due to machinery and heavy equipment wholesaling.

But if you are considering spending on your business, it's worth checking in with your accountant. Even if you're just replacing older assets, here are things to consider.

First, have you done your numbers? If you're investing a big chunk of money into assets you need to be sure you can afford it. An increase in assets can mean increased insurance and labour cost, and other hidden extras. Do your sums.

Plan and make sure there is working capital available to support any changes in cash flow that may occur before the gains kick in. Consider how the purchase will affect tax and GST.

Shop around and look for deals on your assets. Don't be shy to ask for a sharp price or some good finance terms if on offer. Those people selling you large items understand how relationships are important, especially if they see you only every three to five years.

Leasing can sometimes be a better option because there's a point of contact after the deal is done and an opportunity to resell or upsell at a later date, when the equipment needs to be upgraded again.

Sometimes the tax differences of leasing versus buying can be marginal but it's worth doing the comparison. Usually, the decision comes down to the type of gear you're buying and why you're buying it. If you're buying a long-term asset, fund it using long-term debt. Its best not to use cash you have in the bank to fund asset purchases outright.

Use any extra cash flow you may have to pay off any non-taxable debt and, where you can, borrow for your business assets.

Check the risk on your business assets. Assets may be safer owned in a separate company or trust. The company owning the assets then leases the plant or equipment to your trading company. Although there is another set of books to do this is an especially useful way to manage risk. If you're not sure, ask for advice.

• Jeremy Tauri is an associate at Plus Chartered Accountants.