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| Tuesday, 8 February 2005 |
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How to withstand business tsunamis - part 2 by R. A. Jayaweera Continued from 07-02-2005 So, why not utilise this cheap resource, which would still be cheaper even after spending for further improvement and advancement and this is one way of getting a direct return on taxes paid by you. That apparently is the only sensible approach that assures the society of the return on its huge investment in free education. When you spend for the best of everything lavishly disregarding social responsibilities (paying taxes, increasing wages, welfare of the society and many more) you are endangering the whole system. Because everything has to happen in a given social framework. This social framework has its own definitions and parameters for living standards. There is an acceptable upper limit as well as bearable lower limit. The moment these limits are exceeded the whole system tends to collapse. The 1971 and 1988/89 uprisings are not too far away in our memory lane. As a young businessman you must be proud to say so many are in your employment and your lowest category worker is earning even higher than this, and that and he lives in a good house and his children are getting good education. All this is because of you. You should be able to assimilate this thinking and be happy as if you were enjoying the best of everything. When this way of thinking finds residence in your mind-set, your business will prosper at a faster rate. Because it will act as an internal powerhouse fuelled by owners, managers and workers alike, raising the business to higher and higher levels. The results will be imminent and visible in a short period of time. Business growth is not possible without a loyal workforce and they should be paid their due share in an honourable way. Salaries and wages must be increased without waiting for the last moment till they show up in streets shouting slogans and protesting against your credibility and tarnishing the image of your business. Every year a percentage of the growth must be set aside for wage increases. It is a better way of planning your taxes too. If your tax rate is 35%, it is tantamount to government paying 35% of the wage increase. Because if not for the wage increase your profit will be higher by this amount and you will be paying tax on that amount. Make your workplace, factories, workshops and offices eagerly sought after and enthusiastically awaited places for the employees to step in every morning. Physical environment must be work-friendly, convenient, clean and comfortable. People in the organisation must be pleasant and internal relationships must be cordial. Creating this environment is no easy task. But if you have the will and determination it is not impossible. Salary is not the only factor that keeps employees happy. Many businesses fail because of their disability or negligence in managing human resources. The days are gone that the worker was considered a living working apparatus. The frequent complaints of the sort, "workers don't work, every minor point has to be explained otherwise they don't understand, they don't use common sense, unless carefully supervised they do blunders, they just want money, without overtime they don't work, they leave the workplace sharp on time although they have many excuses for late attendance, absenteeism destorts, all our plans and targets, they rob wherever possible, they are not interested in the company's future, they are selfish," are evidences that human resources are not properly understood, organised and managed. Another frequently heard complaint is that you cannot find trustworthy people as in the good old days. Sometimes you cite this excuse for your business failure and your inability to grow, expand and diversify. This common supposition is not factually correct. Variants of this statement are uttered in politics too. It is very often said you had good politicians and good administrators in the past. To find the truth you just have to ask a person who lived in the past, if you could. We simply tend to give credit to the past and worship the past. There is no absolute truthworthiness as such and everything rests on how you manage your business. Even the most trusted person would tend to rob if your systems are not geared to detect and prevent thefts and frauds. What would have happened in the past was that the businessmen had passed the cost of thefts and frauds comfortably to consumers by price increases, as the competition was slow. The situation is entirely different today and you cannot simply add to your prices the cost of bad management. You must meticulously manage your business with appropriate and adequate professional involvement and motivate and energise it as the major stakeholder group. Then the people will become part of the system and trustworthy. Don't expect a few high salaried executives alone to meet the challenge. One other phenomenon that hinders your business growth and development is the desire to do everything by yourself. This situation most probably is something to which you have been forced into. If you think that you should control everything and everything should happen with your knowledge the answer is both yes and no. "Yes" because it is your risk and your capital and your property. "No" because to get the answer "yes" you don't have to know every happening. You should be able to have a top of the mountain view. It may be that you don't find capable and loyal people to delegate duties to or have difficulty in managing people. This issue can be addressed and solved not very easily but cautiously. If you want to prevent others getting to know much about your dealings because you do things unethical and deleterious and want to hide things, then there is no way out. Whatever the definition given to tax by economists and accountants, it is a cost for you and naturally you try to minimise taxation. Correctly speaking what you should do is not minimising tax but maximising after tax profit. What is of interest is not even the after tax profit but the net cash inflow. At first sight one would tend to think that there is no difference between the two on the assumption that the moment you get your tax minimised the after tax profit would automatically reaches maximum. This is so if you can reduce tax while keeping the profit figure and also the net cash balance at the same levels. Many tax reduction programmes involved outflows of cash in non-productive schemes. Some get a feeling of satisfaction just because tax was reduced. Suppose you have a profit of Rs. 100,000 and cash balance of Rs. 75,000 at the year end. You go for a scheme to reduce taxes, which involves an investment of Rs. 50,000 in some kind of shares or leasing of machinery or vehicle or any other commercial instrument. Suppose your tax liability, which stood at Rs. 30,000, was thus reduced to Rs. 15,000. Your net cash balance would be as follows: Before tax After tax reduction reduction Programme Rs. Programme Rs. Tax computation Profit before taxation 100,000 100,000 Tax saving investment - 50,000 Balance taxable profit 100,000 50,000 Tax @ 30% 30,000 15,000 Cash flow statement Net cash at the end of the year 75,000 75,000 Tax saving investment - 50,000 Tax payment 30,000 15,000 Net cash in hand 45,000 10,000 (Chart -1) If the tax saving investment brings in additional cash inflows which when discounted at least keep up to Rs. 35,000 this could be a wise decision. Otherwise, it is not. In other words tax reduction should not be the only criterion for the investment decision. If the investment were on leased machinery, for example, the first step would have been to evaluate the economic benefits of the machine and the financial consequences of leasing versus other options of financing. If the return on tax saving investment is nil it would be better to pay the tax of Rs. 30,000 and keep the balance Rs. 45,000 rather than getting the tax reduced to 15,000 but at the same time losing another Rs. 30,000. You go wrong if an anti-tax mentality is haunting your mind, which would have been triggered by the so-called advisors surrounding you. Then in that case you are always prejudiced in making decisions. The tax is only another payment you have to make to be in business similar to your fuel bill without which you cannot run your car. You may find it comfortable in the company of the anti-tax advisors but this comfort is only short-lived. You must be proud to say that your tax file is at the Large Taxpayers Unit (LTU) and you are a Payer of High Taxes (PhT) in contrast to PHDs in the fields of higher learning. By being a PhT you become a Strong Supporting Pillar (SSP) of nation building. Surely then you must get due recognition in return and you can insist on good governance. Transparency and efficient utilisation of tax rupees as well a non-utilisation of tax rupees for uneconomic and wasteful personal political agendas are essential pre-conditions for you to make up your mind to become a PhT and an SSP. You will naturally expect that results of your hard work should not end up in wasteful and corrupt practices. So, we end up by emphasising and endorsing good governance as the need of the day. (Concluded) |
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