Settling your tax debts
As the old saying goes, “only two things in life are certain, death and taxes”. In the current economic climate, many businesses are dying off, but the taxes associated with them don’t necessarily “die” so quick. Getting into debt with the tax authorities is never a good idea, but if your business is failing this may be inevitable. Over the years I have had some experience with tax authorities (mainly the Irish Revenue Commissioners), so here are some tips:
1. Contact the tax authorities as soon as possible. Informing them not only buys some time, but it may also begin a negotiation process.
2. Assess the taxes owed. Once you know what is owed, you’re in a better position to see how bad the problem is.
3. Assess all assets and liabilities of your business. If you are a sole trader or part of a partnership, assess all personal assets, liabilities and living expenses. Undoubtedly the tax authority will do this exercise so you might as well be one step ahead.
4. From 2 & 3, you should be able to start a negotiation process. As I said in 1 above, by contacting the tax authority early, you have a much better chance of doing some kind of deal.
5. If you can make a deal to pay a lower amount than you owe, or to pay by instalments, be sure to stick to the arrangement or inform the tax authority if you have problems.
While dealing with tax debts is not the nicest thing in the world, try to be honest and do a realistic deal where possible. Ignoring the problem makes it worse. And, particularly if you are a sole trader, ignoring a tax debt can affect any future business prospects.
Are you afraid of numbers?
Numerophobia is the fear of numbers. We all know that some numbers might be “unlucky”, like 13 or 666. As a trained accountant I’d be in serious bother if I had such a phobia. Thankfully, I don’t and I have actually stayed in a room number 666 in a hotel in Cologne, Germany some years ago and had an enjoyable stay. I often hear people saying they hate accounting and tax because there are too many numbers. Is this a phobia or just putting things on the long finger? Well, the latter might be the more common reason, particularly when the numbers look bad. In a NY Times article (21/11/2009), Jacob Soll says that anxiety about accounting and taxation often increases to the point of denial. He quotes a 2005 study by Lloyds TSB (UK) which reported that accounting anxiety has led to “balance denial syndrome,” in which bank customers so fear being in the red that they systematically ignore their bank statements. Not really a good idea! Let’s think back to what accounting is about. Its purpose is collect, collate and communicate information (usually of a financial nature). As an example, let’s assume a small business keeps poor records or worse, none at all. In such a case, a bank statement might be the only indicator of how a business is performing. So to ignore it is to cut-off the only source of communicated accounting information a business has. In practice, letting records fall behind is more common than none at all. And, we may let things fall behind because we can’t face the bad story the records tell – especially in the current economic climate. However, this is big mistake. Having the courage to face the books and realise they don’t tell a good story is the first step to solving the problem. As Soll says, “It might be that the first step to balancing the books is finding the courage to face keeping them”. So hands up, admit it and get down to solving your problems. If you’re too busy putting out other fires, call your accountant and ask them to help.
Accounting and Innovation
Innovation is the life-blood of any business. New products, services and ways of doing business all lead to sustainable longer-term profits. Sometimes innovation comes at a substantial cost, for example in research and development costs. In these recessionary times, budgets for things like product research and development are often slashed. Of course accountants are blamed for this. But can accountants play a role in injecting innovation into businesses in these tough times. According to Richard Young, writing in Financial Management (September, 2009), accountants can inject a dose of realism in to innovative ideas and projects. They can be a ‘wet blanket’, which although has a negative tone, may actually be exactly what is needed in lean times. With a smaller pot of money to be spent on product innovation, accountants can help determine the longer-term profitability of new products or services, preventing great ideas becoming poor sellers. Accountants also bring structure, based on their expertise of the many business processes involved in getting innovative ideas afloat. For example, accountants can ensure that the costs of any new product are minimised – production costs, marketing and distribution costs etc. They can thus help take the innovation to something which is based on costs and profits, something which investors and managers readily understand. Innovative and creative people are often uncomfortable with such language.
Accounting and HR
In the July 2009 (July 30th) edition of People Management, the journal of the Chartered Institute of Personnel and Development (CIPD), Claire Warren provides an example of the importance of accounting information to HR professionals. The article touts the often cited expression ‘people are our greatest asset’, but questions how many HR professionals appreciate the full costs of people in an organisation.
According to Vanessa Robinson of the CIPD, HR professions shouldn’t ‘merely say “people are our greatest asset”, but look at the profit and loss account and see what they cost!’ The problem is that many HR professionals may not have sufficient basic accounting knowledge to understand basic accounting principles. They need to be familiar with the basic financial statements – the profit and loss account (income statement), balance sheet and cash flow statement. What this article tells us is something we as accountants already know – that accounting is a communication medium, a language indeed, that not everyone understands. Having said that, while HR professionals may not think they require fluency in accounting, they do need to make business decisions which are underpinned by sound financial information. Having an understanding of accounting information (rather than just accepting it from the accountants) will benefit HR and other professionals in an organisation. The article in People Management is a great start for anyone who wants to know the basics, so take a few minutes to read it.
Breaking even in your business
It’s always a good to know the costs of your business. But how can you be sure you sell enough to cover costs. The answer is relatively simple, using the notion of breakeven.
First, you need to know the fixed costs of your business. These are the one you incur even if you business is not selling e.g. rent. Then, you need to know the cost of one of your products or one delivery of your service. This might not be as easy as it sounds, but try you best. Now you can deduct these costs from you selling price and work out a profit per unit. You can then work out the sales level at this profit which is needed to cover the fixed costs. Anything beyond this and you’re making a profit. You can apply this same principle to new products too. Being a relatively simple technique, been able to calculate a breakeven point is a very useful tool for any entrepreneur.
Taking stock – some tips for stock-taking
If your business involves the sale of products then you may be familiar with the concept of stock-taking (or doing an inventory count). Most of the time, businesses have computerised stock control systems which keep track of every product movement in and out. Well, in theory at least. No matter how accurate the stock control system, manual periodic stock counts are a must for any business. These stock checks verify what the system says should be in stock. Any differences can then be investigated and corrected.
The frequency and detail of a stock check depends on a number of factors. The value of items held in stock is probably the most important driver of the frequency of stock takes. Normally, high value items receive a lot of regular verification simply due to the financial loss which might be suffered by the business. Small items like pens and pencils, or nuts and screws, might be ignored in stock checks. A second factor is what I call ‘walkability’. For example, a high street newsagent might sell items like lottery scratch cards, pre-paid bus tickets or packs of cigarettes. All these are small, easy to conceal and readily saleable for cash. One high street retailer I know actually checks stock of lottery cards and bus tickets every night. It only takes a few minutes.
When deciding how often to do stock checks and what to check, try to keep these two factors in mind. You don’t need to count everything every time. It’s much smarter to be focused – it saves you time and, potentially, money.
Steering your business through a recession.
Managing your business is not an easy task at any time. In a recessionary environment, things get even trickier. Quite often, the best thing any business owner can do is get back to basics i.e. managing cash, managing costs and thinking about the future.
Tom Stewart from Booz & Company provides some sound advice. He suggests business’ owners and managers should concentrate on three things (1) liquidity, (2) operational costs and (3) planning for the future. Liquidity means having enough cash resources to pay for goods and services as required. Having enough liquid resources to survive the recession is essential. Focusing on operational costs is also very important. A lean, mean organisation has a better chance of survival. Finally, a view of the future helps business owners and managers identity how and where the business can grow as recession peters out.
It’s quite a difficult task to overcome the ‘paralysis’ of focusing on reducing costs now and not having a clear view of the future. According to Tom Stewart, overcoming this paralysis is a must, as if your business does not, another will and you will loose out. He suggests that business owners and managers while recognising the truth of the current economic climate, should also be optimistic and motivate staff to find ways to participate in decision making and planning for the future. One failure to avoid is cutting costs without a view of the future. This can result in an under-resourced business which will have difficulties as economic growth returns.
If you want to see the full video by Tom Stewart click here: http://bigthink.com/tomstewartmicrosoft/managing-and-thriving-in-a-down-market
Child friendly business?
I really need to turn off the accounting brain – at least sometimes!
As an accountant, when confronted with business situations my brain turns to costs and revenues. It’s a typical accountant’s problem. In my other life as a parent, there are many hills to climb as you do your best to ensure your child gets the best possible upbringing. And boy can it cost you! Sorry, there’s the accountant again.
After a recent visit to Finland the accounting brain and the parenting brain came together – cost conscious Dad, a dangerous phenomenon for my kids. That’s not how the two came together actually. During our week as a family in Finland, it became apparent that the country is very child-friendly. Restaurants typically have a small play area for kids equipped with table and chairs, colouring books, soft toys, wheeled toys etc. Even mainline trains have play areas on board. While in a restaurant, I observed one such play are. It probably took up the space of one normal dining table. What a great relief for Mum and Dad, as the kids can play with other kids and we can eat in some peace. Now the accountant’s brain kicks in. How much would this play area cost? Maybe £100 for the toys and equipment I’m thinking. But a table could be there, so how much profit is lost each (busy) night by not having a table. I’m not even trying to guess. Nor am I a marketing expert, but I think happy long-term customers is very important. Would this balance against the lost revenue?
The point in this example is that sometimes business decisions can be made which are at a minimal cost (yes, accountants love this) and provide long-term benefits which cannot easily be expressed in monetary terms (danger zone for accountants). So, sometimes it is good for accountants to switch off their well-trained accounting sense and see the broader picture.
If you’re a Dad like me, take a look at this website for some ideas to keep them occupied!
Martin's accounting blog 