Hi there accounting fans! Let’s talk about why you shouldn’t run your business like a charity.
It’s been a while since I last wrote a ‘Sam Says’ opinion piece. Mostly because I think opinion pieces are whingy and entitled. But boy, oh boy do I feel whingy and entitled today!
Let’s talk about businesses and charities. Businesses exist to make profit no? Gain more income than expenses and you make a profit. Easy right? Charities exist to serve a social need/issue. Spending money is not a problem for charities. Heck, all funders REQUIRE that a Charity spend money. In fact, if they don’t spend all their money, they get into trouble with their funders.
But yet, there is a subset of business owners out there who are happy running their business at a loss or near loss, like a charity.
What.
So there are some excuses for this – none of which are good though:
Excuse #1: The business like a charity owner genuinely wants to help the community
I’m all for charities and helping the community. I think this type of business owner has their heart in the right place. However, the world of business can be cruel and cutthroat and unfortunately ‘nice guys’ don’t get very far.
Even the most socially-minded enterprise (don’t all of them claim to be though?) have their bottom line in mind when making business decisions. Ultimately, if your business isn’t making profit, you basically help no one. With no profit, you can’t pay your wages, keep the lights on, pay your suppliers and service your customers. If you don’t have sales or profit targets, your business won’t survive long enough for you to even help those you want to help!
Unfortunately, this means having to make some tough choices. Let’s take the example of Sara Jane:
Sara Jane runs a food shop which employs individuals from marginalised communities to serve healthy food to low income families. She insists on paying her employees a living wage (which is above the legal minimum wage) and on using good quality ingredients from the finest suppliers for her customers. Her business also prices her offerings below market rate, so that it is affordable for her low income customers.
Sara is a good person. She’s got a great idea of:
- Paying a fair wage to workers from marginalised communities
- Feeding low-income families with affordable, nutritious food
Both are honourable ventures that on their own could possibly be profitable. However the nature of her business mean’s that she’s sacrificing income and increasing expenses. Somewhere, something has gotta give. This likely leaves Sara with little to nothing to pay herself. This can cause burnout in a short amount of time. And if Sara burns out, who will be there to continue her honorable venture of addressing very real social issues?
Sara can either employ marginalised community members at a living wage and sell premium, up-market food – allowing her to make fatter margins on sales. OR Sara can employ a team of low-cost part-timers to keep her nutritious food affordable for low-income families. Trying to do both is a herculean task that is not sustainable without external funding.
Excuse #2: The business like a charity owner is in denial
Ok, so you’ve poured all your effort into your business right? You’ve gotten an expensive website, spent a ton on ads, blown even more on business coaching and training and… your business isn’t even turning a profit.
SIGH.
It sucks. It really does. But not every business idea is profitable. Some make it, other’s don’t.
There are many reasons why a business idea doesn’t take off – the market timing is wrong, the product isn’t properly developed, the service is sub-standard or there could be a raging global pandemic that has severely impacted the way the business operates. As a business owner, it can be very difficult to acknowledge your business isn’t making any money – even if it has been loss making for a while.
This is why you need a good accountant to point out where you are going wrong so that you can take a step back and formulate some strategies.
Sometimes, you may have to acknowledge the way you do business just isn’t working. Either come up with a new business idea, or modify the existing one so it starts making money!
But please don’t run a loss making business simply because ‘I’ve put too much time and effort into it to give up now!!!,”
Be sensible, stop being in denial. Talk to your business coach or accountant and get some help to fix your business.
Excuse #3: The business like a charity is being used for tax fraud
Remember how I wrote about why you need to pay taxes?
Yeah.
Don’t do tax fraud. Just don’t do it.
Everytime I hear some anecdotal story of some client’s friend of a friend who owns three properties and somehow pays no taxes – I know something is amiss. I admit, there are business owners out there who will aggressively over-claim all personal, non-business expenses against their business income. Some even go so far as to understate their income (not declaring cash sales, falsifying invoices etc.) and overstate their expenses (falsifying records, claiming GST on non GST expenses, paying themselves a salary but not declaring it in their personal name) for their business.
These people are not entrepreneurs. They don’t deserve to be called business owners.
They are fraudsters. Robbing the nation of it’s money and depriving their fellow people what is owed to them. I have no respect and very little tolerance for these poor excuses for humans.
Yes, I am an accountant. I make a living helping my clients pay the most legally efficient amount of taxes. But. I. Will. Never. Condone. Tax. Fraud.
So to sum up this opinion piece:
“Sam says – stop running your business like a charity; run it like a proper business. Make profit. And pay your taxes,”
Stay positive team.