Putting savings into Business

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pavb2

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Hi all have been running a business for 10 years had reasonable growth and 2-3 successful years up until about 18 months ago, turn over down to about 40% of what it was.

I've reduced overheads to about €230K per year, bank loan outstanding of €50K (restructured Mar this year).

Recurring maintenance work of €120K per annum (€40K net profit) mechanical installation work providing rest of turnover giving 25% contribution to overheads.

Creditors and debtors are same

Things are tougher than ever and we are struggling to compete I can't understand how our competitors can make any profit based on prices.
I thought if we got through last year the worst would be over but I feel this year will be as bad.

Anyhow cash flow is giving me major problems at present but I do have €25K of personal savings I could put into the business (previously put in €60k still owed to me by company) so should I put this money if because if the company goes I've lost this but It may be enough to take the pressure off and make a difference.

It's frustrating because I have €160K in pension which presumably I can't touch

Haven't looked at re mortgage or further bank loan but what do people think?

Any advice gratefully appreciated
 
Have you asked your accountant?

You have overheads of 230k and net profits contributing €60k towards them, so you are losing €170k? Is that before your own salary?

The key questions are:
1) Are you losing money before paying yourself a salary?
2) Is this likely to improve

It seems that you are losing money even before paying yourself a salary, so you should probably close the business.

Is it possible to suspend the business and wait until the market recovers?
Can you get another job?
Can your restructure the business and do it from home with no overheads?

Have you guaranteed the overdraft?

if the company owes you money, you should not be taking out any salary as it is subject to PAYE. You should be repaying the loan first. This may seem obvious but I have seen companies go bust while the owners are paying tax.

Maybe we should have a business makeover forum for questions such as these?
 
Your competitors could be digging them selves into debt to try and kill all competition. So on that level I wouldn't compete with them. The only thing thats important is if your business is sustainable for you. If its not you need to stop. If theres no longer profit in it, then increase your debt won't help neither will losing your saving. You might need to stop this business and go do something else and perhaps come back to this business if it becomes profitable again.

I think your instinct is telling you the same thing. Don't let it drag on through indecision.
 
Apologies just to clarify

No not losing money before directors' salary

Feel business will improve at moment though it's so unpredictable

€40k contribution to overheads from maintenance part of business

€190k contribution from installation part of business (which is becoming less profitable & more competitive)

Last year broke even with loss of €30K due to depreciation this year should be similar.

This is after my wife & my directors salaries

Haven't looked at suspending the business didn't realise this was an option

Rather than look for another job I could carry out maintenance side of business from home but taking into account insurance,bank loans, vehicle loans etc €120K (+ whatever installation work I could pick up) may or may not be enough to cover costs.
I need to look into this option in more detail.

I did guarantee bank loans.

Personal loan given to company was an equity release on home so I was always reluctant to touch this but may be we should now.


Just to clarify I'm not at crisis point yet, I feel I've still got a few options. But I'm trying to make a call sooner rather than before it's too late.

The frustration is that we're working harder than ever meeting potential clients throughout the country (installation side of business) and not getting orders due to competition or projects simply not going any further than quotation stage.

We are fine with competition and know there is a figure we won't go below but dont understand how they can remain in business, possibly your right and they are digging themselves into debt.

I feel my business is sustainable as 2nd half of year is always busier also if we can get through to spring 2011 hopefully things will look a bit brighter. putting a figure on it I'd say €50K would get me to the end of the year.

To discuss this helps a good deal so thanks again.

A business makeover forum would be good and I really appreciate the advice any other comments more than welcome.
 
Hi Pavb

Repay the directors loan before paying yourself salary
Do you understand this key point?

It makes no sense for you to lend money to the company to pay it back to yourself as taxable salary? Stop taking a salary until you have repaid the loan. Go back to the start of the year and treat net salary as loan repayments and adjust your paye and prsi bill accordingly.

If you borrowed money to invest in or lend to your business, you can claim the interest paid on that money against your personal income. Don't claim TRS on it in the normal way. You can claim it in full.

I would like to test the idea of a Business Makeover forum

Could you provide the following information, as a test;

Turnover

Costs excluding salaries to directors

Profit before directors' salaries

Directors' salaries

Profit after directors' salaries

Other information
Depreciation charge included in costs above;
bank loans outstanding:
Interst paid on these loans:
Any equipment on leasing or HP
Loans from directors
What salaries could the directors get as employees elsewhere
Current realisable value of assets in business - if you closed down
Value of premises owned by company
or
Annual rent paid. Length of lease? Is it guaranteed by director?
 
Thanks for reply Brendan I will give figures based on last year as we would expect to do the same if not slightly improve


I would like to test the idea of a Business Makeover forum

Could you provide the following information, as a test;

Turnover €588k

Costs excluding salaries to directors €581K

Profit before directors' salaries €5K

Directors' salaries €64k (2 directors)

Profit after directors' salaries -€59K

Other information
Depreciation charge included in costs above; €30K
bank loans outstanding: €24K balance from last year + €25K this year to reduce overdraft
Interst paid on these loans: €3K
Additional bank charges €4K
Overdraft Facility €32K
Any equipment on leasing or HP €10K
Loans from directors €43K
What salaries could the directors get as employees elsewhere-
not sure if would find employment but previous positions would probably have given €60 - €80K
Current realisable value of assets in business - if you closed down €20K
Value of premises owned by company Nil
or
Annual rent paid. Length of lease? Is it guaranteed by director?
€15K p.a.,9 months left on lease,no guarantee (landlord flexible and understands position)
 
The advice about taking money out of the business in the form of repayments on directors loans rather than PAYE income is very important. It is not only tax efficient but it reduces your companies liabilities.
Pavb, you need to take a long hard look at the medium term viability of your business. Keep the emotion out of it and keep your ego out of it as well; we all invest a lot of ourselves in what we do, never more so than when it’s your own business. Ask yourself if someone else owned your business and they asked you for cash in these circumstances would you give it to them?
You also need to ask yourself why you are in business. Many people get so wrapped up in the success of their company, their project, that they forget that it is there to provide them with a better income than they would get working for someone else. If you are not paying yourself as much as the people who are working for you and will not be doing so for the foreseeable future then you are working for them, not the other way around.

Nobody on this site can tell you if your business is viable; only you can make that assessment and it is that assessment that matters. If you can say beyond a hunch and some wishful thinking that things will improve next year then keep at it and pump in your savings or, if possible, get a bank loan but if you think your competition can bleed you dry before they bleed themselves dry then call it quits.

Talk to your accountant. Ask them to take a look at the accounts of your competitors on cro.ie and give an opinion on how they look in comparison to you. The accounts are always limited but it will tell you something.
 
OK

I agree with Purple's general approach.

Those numbers are very helpful.

You made €5k before salaries. However, you can add back the depreciation as it's really a cost you incurred a long time ago. So you should have generated cash flow of around €35k before salaries.

While that is a lot less than you have earned previously, believe it or not, it's not too bad in the current climate.

I am adding back depreciation because I assume that you don't need to buy any new capital equipment to continue trading?

How profitable was your business in the past?
When things are as low as they are now, it can seem that they will never recover. But they will for most businesses.

If you shut down, you will still have the loans to repay and you will lose the opportunity to make good profits when things recover.

It doesn't appear to be costing you anything to keep the company open.

If you had to find another more expensive premises when your lease expires or if you had to replace expensive machinery, then the decision might be to suspend the business and resume when your sector picks up.

Obviously, I am giving this assessment based purely on the numbers without knowing the industry.
 
Thanks for replies Purple & Brendan yes it's important to be objective I have 5 employees and it does seem at times we are working for them but they have had pay cuts of 15 - 25%.

I know things are difficult but there are companies out there in a worse position than ourselves. It's interesting and good for me that you seem to take a positive reaction to the figures given.

I try and think positive, every month we are repaying loans the alternative of winding the business up (I'm definitly not at this point yet) and a €50K bank loan is a worse scenario than what we're going through now.

Very good point that it's not costing me anything to keep the company going I didn't look at it this way.

For first 5 years of business we probably made small profit up to 10k, years 5-8, €60K, €100K, €100K which we put into pension (value now of €160K)

No equipment required other than a new van €10K (incl VAT)

Once again it's extremely good to get your objective opinions I think the problem is the daily struggle to keep the business going,the uncertainty and there doesn't seem to be any light at the end of the tunnel.

However I realise we have done well to survive this far although it doesn't feel like it so maybe it is a case of riding it out.
 
Also remember that being the last man standing during a recession can be very useful when things start to pick up.
 
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