Key Post Is my struggling business viable? (Work in progress)

Brendan Burgess

Founder
Messages
38,389
This is very much a work in progress. Suggestions and corrections are very welcome. If anyone would like to post a "Money Makeover" question for limited company that would be very useful. In particular, links to relevante online resources would be welcome.

For simplicity, this thread assumes that the business is operating through a limited company. I may compile a version of it for sole traders later.

A lot of people are faced with the decision on whether to keep a loss-making business going or to shut it down. Most of the people I have spoken to who face this decision said that their accountants were of little use to them. They just prepare the accounts and do the tax returns. This article is to help you to decide if it’s worth keeping a struggling business going.


Analysing the true profitability of a business

The management accounts should show profits before directors’ salaries separately from profits after directors’ salaries.

Example 1

Turnover €900k

Gross margin: €400k
Staff salaries: €200k
Rent: €50k
Overheads: €100k
Profit before director’s salary: €50k
Director’s salary :€90k
Loss after director’s salary: €40k

If the company is making a profit before paying the directors a salary, then it could be an indication that the company is viable. If you close down Company 1, then the director will be losing a salary of €40k

The right strategy in the above company is to reduce the director’s salary to the profit generated by the company.

Many companies have been bankrupted by the directors taking salaries in excess of the profits of the company.

Is it a real profit?
Don’t leave it to your accountant to calculate the profit. Make sure you understand all the assumptions made. Profit is the net result of a series of estimates. Issues which can affect it significantly include depreciation, provisions for bad debts, valuation of stocks.

It is best to be conservative when estimating profits. If you are taking legal action against a debtor, then that debt should be written off. You can always write it back again if you get paid.

Profit versus cashflow
It can be difficult to understand why a profitable business has an ever increasing overdraft. Get your accountant to produce a cashflow statement for you.

If you are paying your creditors quickly but your debtors are slow to pay you, you may be profitable but your cashflow is suffering.

How profitable has the company been in the past?
If the company has been struggling during the economic boom, it’s unlikely to survive in the current depression.

Has competition increased or decreased?
In some cases, the market has changed dramatically with new technology or new entrants making the business less viable.

Can the business be restructured to make it viable?
Which parts of the business are profitable? Are all product lines profitable? If some result in a lot of management time and high capital requirements, then maybe they can be discontinued.

Are you stuck with a high level of overheads? Can they be reduced?

Can you move to a more suitable premises?

If you are stuck in your current premises, can you sub-let part of it?

Can you sell any surplus assets which you no longer need?

You can get a good basic tutorial on understanding financial statments here
 

Brendan Burgess

Founder
Messages
38,389
Where to get advice

It can be very difficult to get good advice.

Of course, you should speak to your accountant first. Discuss the viability of your business with them. Ask them what measures do you need to take to protect yourself if the company does go to the wall.

Some accountants are glorified bookkeepers and have little business sense. if your accountant is no good, find someone who can help you.

Sometimes the owner or a similar business who is not in direct competition with you will discuss matters with you. This might well help to improve profitability.


Check out your local Enterprise Board

Any other suggestions?
 

Brendan Burgess

Founder
Messages
38,389
Property issues which affect the viability decision

If the company is paying rent to a third party...
Have you guaranteed the rent personally? If not the decision to close is less complicated. It's just like any other expense.

If you have guaranteed the rent, then you may not be savng €50,000 a year by closing the business. You may be better off keeping the business open.

You should let the landlord know the situation and see if you can come to a deal with them. Maybe try to renegotiate the rent. Or negotiate a surrender of the lease.

If you own the property personally and are renting it to the company...

Example 2
Turnover €900k

Gross margin: €400k
Staff salaries: €200k
Overheads: €100k
Profit before rent and director’s salary: €100k
Rent: €50k
Director’s salary :€90k
Loss after rent and director’s salary: (€40k)

Now the rent and Director's salary are both arbitrary figures.

When estimating the true profit, you should use the correct market rent.

If you are deciding whether or not to close the business, you have to consider whether you will be able to get the same level of rent from a new tenant.

If the property is owned by the company...

Example 3
Turnover €900k

Gross margin: €400k
Staff salaries: €200k
Overheads: €100k
Profit before director’s salary: €100k
Director’s salary :€90k
Profit after director’s salary: €10k

As the company owns the property, there is no rent in the accounts.

If a company which owns a property is just barely profitable, then it raises a different set of questions. For example, the company might well be more profitable by closing down its trading and just letting the building. Some property rich companies tolerate loss making trading businesses for too long and end up having to sell the property to pay for big accumulated losses.
 

Brendan Burgess

Founder
Messages
38,389
Can you earn more money elsewhere?

Some owners of small businesses are generating profits before director's salary much lower than they could earn if they got a job elsewhere.

So if you can earn €70,000 in a PAYE job, but your business is only generating enough to pay you €20,000, then this would suggest that you would be better off closing your business.
 

Brendan Burgess

Founder
Messages
38,389
Repay loans from directors before paying them salaries

If your business is struggling and you have lent money to the company to keep it going, make sure to repay the loan before paying yourself a salary.

If you pay yourself a salary, it will be subject to PAYE, PRSI and levies. Repaying a loan from a director does not have any tax implications.

The exception to this principle, would be to pay yourself a salary which would use up your personal tax credits. For example, a single person can pay themselves €9,150 without incurring any tax liability.
 

Brendan Burgess

Founder
Messages
38,389
Steps to take if you are concerned that your company might fail...

In most cases, you will not be personally responsible for the debts of the company.

However, if you trade while insolvent, you could be restricted by the courts from acting as a director. If you trade fraudulently, you could become personally liable for the debts of the company.

1) Reduce the number of directors to two
If you have more than two directors you should encourage some to resign as directors. This does not affect their employment rights. This does not affect their shareholding. But it may well protect their personal interests if the company does go into liquidation.

2) Make sure to have regular formal board meetings to discuss the financial situation.
All directors must act responsibly. This includes but is not limited to regularly reviewing the financial situation.

3) Get advice from your accountant or a specialist insolvency practitioner
Again, this would show that you are acting responsibly.
 

Brendan Burgess

Founder
Messages
38,389
And if you do decide to close the company

If the business is able to pay its creditors, then you should cease trading, collect in your debtors and pay off your creditors. It is much easier to liquidate a company with a simple balance sheet.

If the business is unable to pay its creditors in full, then you should attempt a Section 279 arrangement with creditors. You offer to pay your creditors, say 50 cents in the euro in exchange for them writing off the balance. This allows you to end up with a company with no assets or liabilities and you can have it voluntarily struck off cheaply.
 

NumbrCrunchr

Registered User
Messages
44
Potential tax refunds for salaries

Repay loans from directors before paying them salaries

If your business is struggling and you have lent money to the company to keep it going, make sure to repay the loan before paying yourself a salary.

If you pay yourself a salary, it will be subject to PAYE, PRSI and levies. Repaying a loan from a director does not have any tax implications.

The exception to this principle, would be to pay yourself a salary which would use up your personal tax credits. For example, a single person can pay themselves €9,150 without incurring any tax liability.

Depending on how much money a director has lent to the company it may be worth exploring the option of amending prior year P35s and getting a tax refund. The accounting would reduce down the balance of the directors account for the salary foregone
 
Top