Many business owners make the annual trip to their accountant with a sense of fear. You don't know what tax bill you will face and are uncertain if you will have enough funds to pay it. Your accountant will hand you their bill at the same time. Often you don't get your accounts and taxes done until the last minute. For you visiting your accountant is like visiting the dentist. You know you have to do it but you look forward to it like getting a filling done!
In the blog we will look at some of the ways your business is losing money. You could be paying too much tax and you may not be operating with one eye focused on retirement.
1 My Tax bill is very high compared to my drawings
I don’t take that much money out of the business but my tax bill is very high! A sole trader or a partner in a partnership pays tax based on the profits that they make. Profits do not always equal cash in your bank account. Take an example of Boris Trump who had a good 2019 in his public relations business and made a profit of €100,000. Boris purchased a very smart new office building in January 2019. He got a large loan from the bank, the repayments for which started in February 2019 at €4,000 per month. Boris’ drawings [the money he took from the business on which to live off] were €2,500 per month. He wasn't happy to find out that his tax bill was €30,000 for 2019. Despite his good year he was in overdraft and was struggling to get the money together for his taxes. The big problem for Boris is that his tax bill was the same as the money that he took from the business. He was very unhappy about that. Boris’ had used a large chunk of his profits to repay the bank. Loan repayments are not tax-deductible. €44,000 of his €100,000 profit went to the bank and he then had to use the balance of €56,000 for drawings and the tax bill. Hence the constant position in overdraft!
2 My spouse works in the business but has no Social Insurance contribution
Boris’ wife Trudi works in his business on a part-time basis and is on a small salary of €10,000. As this is a legitimate employment Boris gets a tax deduction for this expense to reduce his profits. This employment is not covered by PRSI [Pay related Social Insurance]. Trudi doesn’t pay PRSI. She hasn’t paid social insurance contributions since starting work with her husband. As she hasn't made any contributions for a few years it will impact the state benefits that she can claim. She may not qualify for Maternity Benefit, in case they decide to start a family. She is also worried about the State pension when she hits 66. She is aware that to qualify for a state pension she has to have enough PRSI contributions. She would like to know a potential solution
3 I have no pension set-up and now think it could be too late to start
There is a great uncertainty among many people about pensions. There is a level of mistrust about the people involved in selling and advising in this area too. The sooner you start the better and of course the more you can put in the better too. Boris’ accountant tells him that he can put in 30% of his profits into a pension scheme to reduce his tax liability. This would save him €12,000 in tax. This news is as useful as a chocolate teapot as his funds are low, as all monies are being used up already. Boris’ plan is to have the property paid for by the time he hits pension age. Then he will either rent it or sell it so he opts not to make any pension payments and pays the full tax liability. If he was able to make a pension contribution of €30,000 for the next 20 years he would have put €600,000 into a pension. Tax relief at 40% is a saving of €240,000 so the net cost to him would be €360,000. This is before any investment growth in the pension which grows tax-free.
4 Business is expanding and am looking to take on more employees and bigger projects
Let's assume your business and profits grow over time.
If your profits increase then you are in a position to invest your money back into the business to grow it more. This will allow you to hire more people and work on larger projects.
If you are working on larger projects then you worry about protecting yourself.
You will have insurance and you think that should protect you, in most cases. But you have that nagging doubt in the back of your mind about protecting your personal assets. You have a family home and may have other personal wealth such as other properties or a share portfolio. You need to find out more about how to protect yourself better. You question your current structure and want to find out if there’s a better way to operate your business. You want a structure that gives you protections should something disastrous go wrong. Trudi mentions this to Boris so his list of questions and concerns are growing.
5 I don’t know my numbers except how close I am to my overdraft limit
A lot of articles that I read about being a business owner tell you that you should be on top of your numbers. This makes sense so that you can know how profitable or not you are during the year. You are now in a confident position of making business decisions based on up to date numbers. Over time you want to be able to delve deeper into your numbers so that you can see what trends are emerging. You can compare trends to see what product lines or services are more profitable than others. This will allow you to concentrate your efforts to become more profitable.
Do you do your Vat returns and bookkeeping? This is often after doing a hard day’s work. It is a struggle to keep up with the returns and make sure they are right. Have you got the skill to look into them in any great detail? Giving all your invoices to your accountant at the end of the year is not floating your boat anymore. You ask yourself the question what are the key numbers that are most relevant to my business? How did the numbers this week/month/quarter compare to the previous periods? What did I sell more of? What products have I got a higher margin on? Is there a promotion that I could do and how do I measure the success of that?
It’s time to change and move from the old to the new so that you have the confidence that you know your numbers. You know they are up to date and are going to make decisions that will benefit my business based on those numbers.
We have looked at some of the negative issues facing many business owners. Tax bills are too high and the experience with your accountant is uninspiring. Your spouse who is working in the business isn’t covered by social insurance. You have little knowledge of pensions and less funds to pay into one. You worry about protecting the assets you already have and you are not on top of your numbers. This leads to uncertainty and a lack of control.
Well there is something that you can do about this. You can
- take control,
- banish your worries
- work with an inspiring accountant
- reduce your taxes
- put more money into your pocket
- ensure that you protect your assets
- get on top of your numbers
We will look at some solutions to the above issues in our blog next week
If you have some of these pains and want to do something about them, please book a call with Colin or Ger. Just send a message to email@example.com and we will arrange a call. Let us know some of the issues you are having beforehand so we can use the time on the call well.