Tuesday, February 14, 2017

THE VALUE OF DOING THE RIGHT THING


Last year a friend of mine was approached by tax collectors who looked over her business and determined that she should pay a presumptive tax of sh30m.

A presumptive tax is what the revenue collectors guess is due to them, in the absence of financial records, after a cursory look over your business.

Thankfully my friend had been diligent in keeping receipts of all expenses and she quickly had an accountant arrange her affairs. The books showed she had actually made a sh20m loss for the year, which means she owed the tax man nothing.

If anything the taxman owes her.

How many businessmen in this town, think they are “shrewd” by evading taxes but are actually shooting themselves in the foot.

When they are eventually caught, as they always are, they end up paying the sh30m assessed, this is on top of the sh20m loss. Which business can survive under such circumstances?

Another friend who suffered such a visit by the tax man a few years ago, formalised his business and started playing by the rules. Interestingly my friend now finds himself in the enviable position of getting more business because he can now show a tax clearance certificate – a requirement to do business with the more quality clients in town.

As if that is not enough the rigour to his record keeping that comes with being tax compliant gives him a better sense of the true worth of his business – than his ballooning bank account. As a result he could recently dismiss an offer of a few hundred thousand dollars to buy his business, because he knows it is worth a few million dollars instead, a fact he would not have known had he not formalised his accounts.

But it is not only the small businessmen suffering.

 Last week from parliament we heard that telecom company UTL, is staggering under sh700b in debt. UTL protest that the sad state of affairs has come about because of the main shareholders – Uganda and Libyan governments, not keeping up with investment programs, not paying for services rendered to them and generally neglecting the business.

The closure of Crane Bank, the central bank suggests, became necessary when an inexplicable hole was found in the books that the bank’s shareholders were unable to fill.

Or the attachment of a local TV station and its eventual sale by URA for non payment of taxes.

We can go on and on and on.

"The funny thing in all these cases, is when the day of reckoning comes we shall blame government, we shall blame the economy, we shall even blame it on the rain...

But on closer scrutiny will often show that the management often did not do what they were supposed to do.

While the phrase “Good Governance” has not really caught fire, sounding like one of those rallying calls by NGOs and other do gooders business people will be best advised to look deeper into the subject.

How do you determine the value of a company? One rough and ready way is to deduct the liabilities from the assets to get the net worth of the company.

However the market may pay less or more than the company’s net worth. Why? To use an analogy buyers of companies are looking to buy a money making machine. One where they can put in resources down one side and endless streams of money come out the other side.

A company is more valuable if it does not rely on a single person to operate but its business is based on systems and processes that can suffer the exit of anybody and still continue to mint money.

The sum total of these systems and procedures is what is called governance, the better they are the better the governance systems.

"There other considerations of course but to the extent that a company’s governance is good is how much more they will get paid over and above the company’s net worth...

So good governance is more than a catch phrase you put in business plans and project proposals to impress, it has real value to companies.

The temptation of course is to cut corners by not filing your taxes or the “savings” you will have made from not hiring an accountant to track your books or keeping your workers’ salaries artificially high because you are not remitting NSSF and instead treating yourself to the four wheel drive. After all how will people know you are working?

But it catches up with you either by the tax man or any number of regulators making your life a living hell or the eventual closure of your business.

But you argue that if you were to comply with all the rules and procedures you would have nothing left over for yourself.

Maybe you shouldn’t be in that business then?

South African privae equity man Vusi Thembekwayo says there are only four reasons to start a business – to sustain or improve your lifestyle, to live something for the next generation, to eventually sale it or to fulfil a certain philosophy.

The chances of success of a business improve in the order in which they are listed.
If one is going to eventually sell the business the more formalised its likely to be.


It is wisdom as old as the hills “It pays to do the right thing”

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