[Opinion] Saving a Bootstrapping Business

[cindyreuben]

I have a client with a really profitable business. I have just taken over his books. He has been trading as a Sole Proprietor for two years. Unfortunately through lack of knowledge and not the right guidance he has made the typical new business owner mistake of processing and paying just about everything through his business including personal expenses that are not allowable or deductible by even the remotest stretch of the imagination.

Here is the current situation:

- really profitable company
- high output VAT
- low input VAT (as a result of at least 50% of his cost of sales being VAT exempt)
- high shareholders loan account (non business expenses)

Sitting with a VAT liability and a poor cash flow - see the above, but great business potential. He has paid up his VAT by borrowing money (Luckily from his wife) so the VAT liability is current (thankfully), and has regular high profit business coming in monthly that is guaranteed. In addition he will be taxed on the profit of the business in his personal capacity through his provisional tax so will have that debt to SARS as well.

I have visions of the Receiver rubbing his hands gleefully. (and rightly so)

I want to advise this client on the best legal way to get himself out of the hole he is digging, (obviously after a stern conversation about personal expenses and living the high life) and have some ideas, but would like to hear from you all with more experience in this type of thing.

[Dave A]

Some quick ones for now -

1. Separate business from personal.
For the sake of your financial and mental well-being, do all you can to separate your business life from your personal life.
Separate bank accounts.
Separate primary contact phone numbers.
Even a separate space.

2. Keep accurate, up-to-date financial data.
Even if you're a sole proprietor, you can't manage and plan your business financial affairs if you don't have good information to work with.

3. Businesses don't fail whenever they make a loss - they fail when they can't pay the bills in time!
Turnover is vanity.
Profit is sanity.
Cash flow is reality.
Make no mistake - bad cash flow management is fatal.

[Marq]

Sounds like his biggest mistake is not collecting his debts or not structuring deals correctly.
Turnover without payment does not equal turnover.
Receiver rubbing hands gleefully is never acceptable or rightly so.
You do not work for sars, you have been hired by your client - take his side first.
Borrowing money from wife to pay the receiver.........no comment.
Good luck

[Basment Dweller]

This is what I do...

Use three accounts to manage cashflow and provisional tax.

All business income and expenses flow through account A

Whatever's left over at the end of the month after expenses pay out as a salary to account B

BUT before doing so transfer 35% (assuming a high tax category) to account C

Account A- Business

Account B- Personal

Account C- taxes

Use the FNB pocket account to hold back tax money and pump any surplus into a fixed deposit.

In the mean time he'll have to k@k that tax money out from somewhere and pay the milk man!

[cindyreuben]

Thanks so much guys, I basically had structured it as you all suggested and am so happy you confirmed for me. I feel a lot better knowing that you thought the same - and Basement Dweller....... he will have to perform the necessary excretory efforts (LOL!!!) to pay the milkman.... I have informed him and have already got them to set up an account for him to move all extra cash into in preparation for the verdict at the end of the financial year! I believe he has a good year coming