Supersonic your business by outsourcing your finance department. Or else your profits could slide away! Oh yes, get all the Oasis songs in here when they are in town this weekend. Roll on the big karaoke in Croke Park! I’ll tell you about Kirk James and how he used us as his finance department. We’ll see how that helped him grow. Next week, we’ll see how that helped him stay afloat when traumatic times came knocking. Let’s look at
- Call from Kirk
- Agree a Proposal
- Why did Kirk invest?
- Brenda gets stuck in
- Business structure
- Outlook
Call from Kirk
It was the summer of 2019. We were busy, and resources were stretched for a couple of months with holidays and study leave. We decided against taking on new clients for a while. To make sure we looked after our existing clients. Plus, we didn’t want everyone working around the clock. Ger and Dee went on the hols. Phone diverted. I took the call. My name is Kirk, and I’m looking for a new accountant. His current accountant was retiring.
Kirk had done his homework. He had checked our social media, website, spoken to the local bank manager, and even checked with clients. That all stacked up, so he was calling to do business.
Old School
Kirk’s business is IT. He had been doing things old school. No management accounts, but year-end numbers way after the year-end. Useful for taxes, but very historic by the time he gets them. Nothing wrong with the existing accountant. Taxes were up to date, and all liabilities paid. His personal taxes were all good too, but not much thought went into salary and other company benefits.
That was his system. It worked to a point, but Kirk was looking to change. He wanted a greater handle on the numbers and mentioned management accounts. A payroll service would be important for him, as keeping the staff happy and paid was key to his business. As he’s telling me this, I’m like Alanis Morissette, thinking isn’t this ironic! We’ve only decided that we’re not taking on new clients, and this could be an ideal client for us.
Agree a proposal
We meet Kirk to find out all the services he needs and get a proposal to him. He wants us to do his company’s
- Payroll and staff payments
- Bank reconciliation
- Debtors Control
- Creditor Control
- Creditor payments
- VAT returns
- Management Accounts
- CRO filings
- Annual Accounts
- Company Tax return
- Personal Tax return
It is an agreed monthly fee. He knows what services he’s getting and the cost of that. Kirk is happy as he signed the proposal, but unsure too, as we haven’t started the work for him yet. He loves the idea of using XERO and DEXT, which is the software we recommend. XERO for the speed of invoicing, and that it is a cloud-based accountancy solution. And DEXT to have a paperless store of his invoices, which syncs in very well with XERO.
Dedicated Manager
Brenda is Kirk’s dedicated manager. A qualified chartered accountant and a very capable lady. She’s his main point of contact in our business. While she may not do all the work, she will manage the client relationship. Although she does plenty of great work for Kirk, too. I’d better put that in there in case she reads this!
Kirk’s business
When he came to us, Kirk’s business was in a strong position. Retained cash, a strong pipeline of work, and a good team working with him. It was a growing business moving into the mature business category.
Why did Kirk invest?
Kirk knew he had a strong business with a very positive outlook. He was looking a couple of years down the line. There were two main business goals
- Purchase the office where he was trading from and
- Sell the business
Kirk knew that he’d need up-to-date numbers to secure finance to buy the office. He also knew that up-to-date management accounts would be needed for a successful business sale. Without them, his chances of selling were lower. He had to be on top of the numbers to show the sales growing and profits increasing. The old school way of getting accounts 8 months after his year-end wouldn’t wash.
Buy the office
Kirk didn’t have to buy the office, but the landlord was selling. His company had retained cash but didn’t want to use it all to buy a building. But buying it would get rid of the monthly rental cost, so boost profitability. Plus, it would give him security, and he could invest in the building. Have it the way he wanted it.
Sell the business
He wanted to sell the business so he could invest the sales proceeds in a niche high-potential business. Kirk would need our help on how best to structure that to minimise taxes.
Brenda gets stuck in
Roll on a few months from the Summer of 2019, and Brenda gets stuck in. She sets up XERO and DEXT for Kirk’s company. We are doing the payroll, sending payslips to the employees. and paying them too. Kirk sends us the bank statements in CSV, which we bring into XERO to reconcile. All his purchase invoices are going into DEXT. We can track the income and the payments against the invoices issued and received. See what money is owed to the business by customers and who the late payers are to chase.
She sends a list of bills to Kirk for his approval, and we pay them. The first VAT return is sorted on time, and the monthly PAYE returns are filed and paid on time. The first set of management accounts is done to the end of September 2019. Numbers are examined, and he gets a clear understanding of the business KPI’s.
- Monthly sales numbers
- Wage percentages
- Breakeven point
- Net Profit before Director’s pay
- Bank balance
- Amounts owed by customers
- Amounts owed to suppliers
Kirk plays his part
Kirk plays his part. For his outsourced finance department to be a success, he has to. After all, we are relying on him to be responsive and to get us the information and answers we need. He learns how to issue invoices on XERO and is blown away by how quick it is. He scans his invoices to DEXT. Plus, he contacts suppliers to stop sending invoices by post. They can now go straight into DEXT, and he still has full visibility.
Between them, they are laying the foundations for a supersonic bookkeeping system. September 2019 is the starting point. The next set of management accounts will be to December 2019. More KPI’s to analyse and to compare with the ones for the previous 3 months. His investment in the finance function is starting to pay off. He’s on top of the numbers, and his confidence is growing. The relationship between him and us is improving. We are ironing out the glitches and improving the processes to make things run better. Plus, he has saved the time and effort of hiring an in-house bookkeeper or finance person. He replaced that cost with an outsourced finance team.
Business Structure
What business structure should Kirk have if he sells the IT company? At the time, he owned 100% of the shares in the IT company. If he sells the shares, the money goes to him, and he pays Capital Gains Tax. He’s early 40s, so he wouldn’t get Retirement Relief, but he could get Entrepreneur’s Relief [ER].
On sale his main goal is to minimise the tax liability. Any monies saved in taxes can go into the new IT company he wants to set up. We advise him to set up a holding company above the existing trading company. We get this set up, and he swaps his shares in the existing company for new shares in the holding company. I’m not going to get into the advantages and disadvantages of holding companies. Only to say, in his case, the key advantage would be no CGT on that sale of the existing trading company. Correct, you read that right. No CGT. That’s on the basis that the structure is in place for one year before sale.
So, on a one million sale, that’s a saving of €330,000 or €100,000 if he gets ER. As Kirk no longer owns the shares in the trading company, the money doesn’t go to him. The holding company owns the shares, so the money goes into the holding company. Once the Holdco was set up, we set up another trading company [Newco] underneath the Holdco. This is for the new business. On a sale, his Holdco would have the funds to invest in the Newco. For now, Kirk owns 100% of the holding company, and that, in turn, owns 100% of Trade 1 and 100% of Trade 2.
Outlook
It’s the end of 2019, and Kirk comes into the office singing
I’m feeling supersonic, give me a gin and tonic
You can have it all, but how much do you want it?
All looks rosy in the garden for Kirk. Up-to-date numbers, business thriving, and an efficient structure to plan ahead. We all know that when things are going brilliantly, something can jump up at you and kick you where it hurts. We also know, although you’d like to forget, that COVID hit in 2020. That was the least of Kirk’s worries because things took a turn for the worse for him. I’ll tell you more about that next week.
You need to find out
‘Cause no one’s gonna tell you what I’m on about
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